Volkswagen's (VLKAY) big bet to roll out a series of new battery electric and gas-electric hybrids and curtail diesel in the U.S. looks sensible, though the risk could be substantial unless consumers start buy the new models in greater numbers.
Moderating gasoline prices and U.S. consumers' preference toward large, multipurpose models such as crossovers, have made electrics and even popular hybrids like Toyota's(TM) - Get Report Prius gas-electric hybrid a tough sell.
The cloud over diesel has gotten murkier by the day, with state attorneys-general lining up to sue VW, following last year's disclosure that the automaker cheated on U.S. emissions testing for 2.0-liter and 3.0-liter diesel engines.
Silicon Valley automaker Tesla Motors (TSLA) - Get Report commands a great deal of attention from investors and media with its battery technology, though it doesn't yet sell a mainstream electric model, pending rollout of its Model 3 next year. Tesla forecasts it will sell 500,000 cars annually by 2020.
VW's Audi division was set to roll out an aggressive plan to its top managers in Germany on Wednesday, according to the German business daily Handelsblatt. Under the plan, Audi intends to ramp up production from relatively few at the moment to least 450,000 electric cars annually by 2025.
European and U.S. consumers have remained largely indifferent to battery-powered cars. According to the European auto association ACEA, only 186,170 electrics and 234,170 hybrids were registered last year out of 14.2 million new cars. This year the growth rate in the category was slowing. In the U.S. through the first six months of 2016, sales of electrics and gas-electric hybrids amounted to about 100,000 from an industry total of about 8.2 million passenger cars, according to Kelley Blue Book.
Rupert Stadler, VW board member in charge of Audi, was expected to tell 2,000 top managers that the division will invest roughly a third of its research and development budget on electric cars, digital services and autonomous technology. In 2015, Audi spent about $4.7 billion on R&D.
VW and the rest of the German auto industry have spent billions and many years on improving diesel engines to make them cleaner, more efficient and quieter for use in passenger cars. But with VW's regulatory, legal and financial difficulties -- on top of cheaper energy prices -- the tide may have turned against the technology for at least the short and medium term.
Switching technologies will be costly. Yet VW is showing signs that despite the diesel scandal it retains impressive earnings power. On Wednesday, the automaker announced its best second-quarter operating profit in history, though much of the gain was neutralized by costs related to its diesel problems. VW shares, which lost a third of their value in the wake of the diesel crisis, rose 6% on Wednesday following the strong pre-earnings announcement.
Doron Levin is the host of "In the Driver Seat," broadcast on SiriusXM Insight 121, Saturday at noon, encore Sunday at 9 a.m.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.