Why is Volkswagen investing 1Bn in renewable energy?
How climate change, related regulations and changes in consumer behaviors/demands are creating all sort of new risks on manufacturers such as Volkswagen
What is Volkswagen currently doing to tackle climate change risks?
One of the key consequences of climate change is an increase in the frequency and severity of natural disasters such as floods, hurricanes and wildfires. Resources such as water become scarcer and pricier thus causing volatility in input availability and input prices for manufacturers and service providers that require those resources for the flow of business. Also, to tackle climate change, regulations are put in place to limit the usage of fossil fuels and other heavy carbon fuels thus increasing the cost of energy usage and even sometimes restricting the usage of certain type of fuels which could disrupt the operations of businesses.
One of these businesses is Volkswagen, and an input price volatility risk it faces is rising fossil fuel prices which are highly used across its production facilities. Regulations that limit the usage of fossil fuels or impose a minimum requirement of clean energy risk to be stipulated as well. To mitigate those risks, Volkswagen is heavily investing in renewable energy (~1 Bn) and is targeting to power its production factories solely using on-site production.
With awareness on climate change and its detrimental consequences increasing continually, consumers are more and more demanding from companies and thus more and more selective about their products and the source of their products. Major changes in demand are witnessed in several industries including the car industry where consumers are asking/expected to ask for more sustainable cars. In response to that, Volkswagen plans to spend $11.2 billion to create more than 30 electric car models by 2025, develop autonomous vehicles and move into the ride-hailing business.
Other climate change risks Volkswagen should be mitigating:
Besides the risk of rising fossil fuel prices, Volkswagen should assess the availability risk of all other inputs necessary to build its cars. Any input that is mainly sourced from a single location should be flagged and questions should be raised around how prone the geographical area is to natural disasters thus impacting availability of the resource and what should be done to minimize risk and avoid interruption of production schedules. By using the help of climate modelers Volkswagen should thus forecast impact of climate change in all the geographies that play a major role in its supply chain and unveil which parts of the business are vulnerable and put in place preemptive strategies.
Also, beyond input availability and input price variance risks, Volkswagen should assess the potential risk of complete disruption of operations in its manufacturing plants due to natural disaster potentially destroying complete factories. Although historically none of the location where Volkswagen factories are located have been hit by such a disaster this does not discount it from happening in the future specially if emissions and hence climate change are not controlled. Its factories whether in China, India or Germany could be hit by natural disasters leading to major losses. The recommended solution is to develop in-house natural disaster prediction software or outsource it and based on results build appropriate preemptive strategies.
Finally, a major risk that Volkswagen is especially prone to (given the emission scandal: Volkswagen was caught in taking fraudulent measures to manipulate in its favor emission tests done on its cars) Is reputation risk. With climate change and its effect being one of the main concerns of all people around the world today, all eyes are open on sustainability. Volkswagen should put down a strategy that aims to fix its reputation, and even heighten the reputation of the firm on this front in order to maximize market share in a world of “sustainability caring” consumers.
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Sources:
Los Angeles Times: “After emissions cheating scandal, Volkswagen steers toward electric vehicles”
The Guardian: “Volkswagen’s lost opportunity will change the car industry”
McKinsey&Company: “How companies can adapt to climate change?”
I agree that the regulatory push on renewable energy is a major factor for Volkswagen moving forward, and this especially true because they are headquartered in Germany. I just read that the government had expressed an intention to ban all gasoline and diesel cars by 2030 (https://www.wired.com/2016/10/german-auto-industry-finally-maybe-done-gas/). Do you think this is a good move? On the one hand, it would force its historically strong automotive company to pivot to where the market is moving, yet on the other hand these regulatory pressures may pose challenges for the future of the German automotive businesses if they are not able to innovative in the electric vehicle market.
It is interesting to understand VW’s approach to renewable energy in its manufacturing. Although they should, of course, be interested in how their manufacturing impacts climate change / the environment, couldn’t they have a much greater impact by developing more fuel efficient vehicles and / or enhancing electric vehicle technology? Additionally, VW is currently in the midst of a massive emissions scandal for intentionally programming turbocharged direct injection diesel engines to activate certain emissions controls only during laboratory emissions testing. While their approach to manufacturing is interesting, what do you make of these other climate issues? Should VW prioritize those initiatives over your suggestions?
I think that it is an interesting perspective to drive sustainability from manufacturing process in the auto industry. Many auto companies are investing in electronic vehicle and I am not sure if VW is working towards the same goal. Even if auto company, like VW, moves to build electronic cars, would battery used in the electronic cars produce similar amount of climate damages?