December 12, 2018
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electric car

Volkswagen has committed to spending tens of billions of dollars as part of a dramatic shift to electric and autonomous vehicles.

The Germany carmaker said Friday that it would invest €44 billion ($50 billion) by 2023 to develop electric cars, self-driving vehicles and other new technology.

Speaking at a press conference following a meeting of the company’s supervisory board, CEO Herbert Diess described the company’s strategy as an “electric offensive.”

Diess acknowledged that increased spending on new technology could initially harm earnings growth. The investment is roughly €10 billion ($11.4 billion) above what the company set aside for new tech in last year’s budget plan.

“Volkswagen must become more efficient, more productive and more profitable in order to finance the high expenditure in the future and in order to stay competitive,” Diess said during the press conference.

Volkswagen’s stock, which declined roughly 12% so far this year, dropped another 1.3% on Friday.

Volkswagen and Ford

Diess said that talks with US automaker Ford (F) about working together were “progressing positively.”

So far the only alliance firmly in place between Ford and Volkswagen involves an agreement to work together on commercial vehicles. But Diess sees potential in more cooperation.

“We can solve the transformation of our business more easily with partnerships,” he said Friday.

Automakers are spending billions of dollars as they try to develop the electric and self-driving vehicles they believe are the future.
They’re also facing more competition from tech companies, including Uber and Google parent Alphabet (GOOG). Upstarts like Tesla (TSLA) have proved formidable too.

Production changes

Volkswagen said that the first model built under its new strategy, the ID, will begin rolling off the assembly lines in 2022. Diess said the car will have a range of up to 550 km (340 miles) and cost the equivalent of its current diesel Golf.

Volkswagen

The car group, which owns the Porsche and Audi brands, said it would attempt to increase the productivity of its plants 30% by 2025. It plans to build vehicles from different brands on the same production lines as part of the effort.

It will also relocate production of the Passat from Germany to the Czech Republic.

Diess said that Volkswagen (VLKAF) was considering whether to build its own battery cells, a key component in electric vehicles.
China shift

The carmaker also announced leadership changes in China, the world’s largest car market.

Diess now has direct responsibility for the China business, a move that Volkswagen said reflects “the growing importance of the Chinese market and the high pace of technological development in China.”

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The trade war is pushing business

The trade war has made more than $250 billion of Chinese exports more expensive for Americans — from leather belts to refrigerators to motorcycles. The disruption to the world’s biggest trading relationship has electronics manufacturers, industrial machinery makers and fashion brands working on shifting some of their assembly lines.

“We are flooded by inquiries,” said William Ma, group managing director of Kerry Logistics, a Hong Kong-based firm that helps companies around the world manage their supply chains. “It all happens after the trade war.”

Many firms are keeping much of their operations in China, which offers a giant domestic market and advantages that businesses struggle to find elsewhere. But those that are moving aren’t flocking to the United States. Instead, they’re looking to transfer work to other Asian countries.

In a recent survey by two American chambers of commerce in China, one third of the companies who responded said they were looking to switch to production outside of China as a result of the trade war. Only 6% said they were considering moving business back to the United States.

Asia, not America

In some industries, the tariffs have accelerated the shift of manufacturing from China to countries in Southeast Asia, where labor is cheaper.

Steve Madden (SHOO), whose handbags have been hit by a 10% tariff, says it’s moving a significant chunk of its production to Cambodia and other countries.

The company currently makes about 85% of its handbags in China, a figure that could drop to 50% or 60% next year.

Lo said that TV and gaming device makers have been particularly interested in relocating. He declined to name individual companies.

Big industrial suppliers have been hit hard, too, with many of their products subject to the new tariffs.

Toshiba Machine said it’s moving some of its production of molding equipment in Shanghai overseas, and machinery maker Komatsu (KMTUY) told CNN that it plans to shift some of its assembly lines to Japan or Mexico.

Leaving China isn’t easy

A lot of companies are unwilling to leave China, which has a range of advantages for manufacturing industries that are spread across Asia.
Many of the products US firms export from China have to fit exact requirements, necessitating specialized equipment and highly trained workers, according to Harley Seyedin, president of the American Chamber of Commerce in South China.

The trade war is pushing business

His company is rushing to help businesses move their supply chains to other Asian countries.

“We definitely need to hire more people, rent more warehouses, buy more trucks,” he said.

Businesses that want to move their orders outside China face another problem: finding factories in the region that can accept them. “I have factories that we work with in Vietnam that are booked up for the next year,” Resnick said. “Their production lines are full. And so you really do, at times, have to hunt and find factories that still have capacity.” But when it comes to switching to US-based suppliers, there’s little interest. “That’s not even been a consideration for any of the companies that we work with,” said Resnick.

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