VW targets higher returns as batteries, software boost sales

Volkswagen Group ratcheted up its mid-decade profitability goal as it hones plans to become the electric-car leader and cash in on what it expects to be a massive new revenue stream from software.

Europe's largest automaker will target an 8 percent to 9 percent operating return on sales in 2025, up from 7 percent to 8 percent previously.

After wooing investors with a Tesla-style briefing in March, CEO Herbert Diess is elaborating further on VW Group's plans to phase out combustion engines and equip cars with software systems that can update automated driving capabilities and other features over the air.

"We set ourselves a strategic target to become the global market leader in electric vehicles -- and we are well on track," Diess said in a statement. "The next much more radical change is the transition toward much safer, smarter and finally autonomous cars."

Key stakeholders backed Diess' action plan last week when the supervisory board extended the former BMW Group executive's contract through 2025.

He's been retooling the sprawling industrial behemoth to meet stricter emissions rules and keep Tesla and other new competitors at bay, plotting half a dozen battery factories in Europe alone and switching assembly lines globally to build the broadest range of EVs.

Highlights of the 2030 strategy Diess will brief investors on Tuesday include:

• Seizing a share of 1.2 trillion-euro ($1.42 trillion) software-enabled sales that VW expects to expand the overall global mobility market to 5 trillion euros by 2030, from 2 trillion euros today
• Increasing the share of total investment that goes to electrification and digital offerings; VW already has budgeted 73 billion euros for those areas from this year through 2025, half of overall spending
• Spending 800 million euros on a new research facility in Wolfsburg -- where the German company is based -- that will design a new EV platform open to other automakers
• Building small EVs in Spain, with final decisions dependent on securing subsidies and other factors.

VW's namesake brand already has said it plans to stop selling combustion cars in Europe between 2033 and 2035, followed by the U.S. and China at a later stage.

Audi sees continued demand for combustion engines in China beyond 2033, but intends to fade them out in other markets by then.

Even as EVs take center stage, Diess has repeatedly said that software and self-driving functions will bring about an even deeper transformation of the industry with cars becoming sophisticated connected devices.

VW plans to offer autonomous driving in major markets worldwide, aided in part by cooperation with Ford Motor Co. and affiliate Argo AI.

In China, VW's largest market, the automaker has sought partnerships with local tech companies to be among the first to offer autonomous driving, mostly in private cars.

Autonomous shift

The manufacturer remains on solid footing to finance the shift. First-half operating profit rose to 11 billion euros, ahead of pre-pandemic levels, VW said Friday in a preliminary earnings release, with 10 billion euros in net cash flow.

However, fallout from the global semiconductor shortage may be more pronounced during the second half of the year.

Analysts also have warned about a slowdown in VW's business in China and tepid early demand for the VW brand's electric ID family of cars there.

"For now, VW's ID product still has too many serious teething issues," Sanford Bernstein analyst Arndt Ellinghorst said Friday in a report. The company's internal combustion-engine business "needs to be managed down in a socially acceptable way whilst battery manufacturing and software capabilities are internalized."

Separately, Volkswagen's electric vehicle charging unit, Electrify America, said on Tuesday it planned to more than double its charging infrastructure in the United States and Canada over the next four years.

The company said it expects to have over 1,800 fast-charging stations and 10,000 individual chargers installed by the end of 2025.

Charging infrastructure has attracted several sectors, including utilities, carmakers and big oil firms, all hoping to cash in on rising demand for electricity amid ambitious global EV plans.

Tuesday's announcement also comes after Reuters reported last week that Volkswagen was looking to sell a stake in Electrify America to gain access to outside funds for building infrastructure for battery-powered cars.

Electrify America, which counts ChargePoint and Tesla's Supercharger among its competition, has 635 charging stations up and running, according to its website.

Reuters contributed to this report.