This past week, VW Group brand Audi confirmed an end to the development of new combustion engines, as well as an overarching strategy to give the company an edge in the fierce battle for electric vehicle (EV) battery.

This past week, Volkswagen Group brand Audi confirmed an end to the development of new combustion engines, as well as an overarching strategy to give the company an edge in the fierce battle for electric vehicle (EV) marketshare. The future for automakers is all about batteries: lowering costs, improving performance, and increasing production capacity.

Besides their visionary CEO Elon Musk, Tesla’s TSLA -6.5% greatest advantage over competitors is its advanced batteries and accompanying software. Not only are the packs they utilize are more cost efficient than those used by rivals, Tesla has also invested billions into Gigafactories with a goal of producing more than 60% of the world’s supply of lithium-ion batteries.

It’s no surprise that the world’s second largest carmaker is racing catch up. Volkswagen made its strategy clear to investors at a March 15th event they dubbed Power Day. As early as 2023, VW plans to introduce new “unified” prismatic batteries cells to achieve a maximum of 50% cost savings, with the goal of driving costs down to under $100 per kilowatt-hour (kWh) by the end of the decade. This sweet spot in the internal combustion engine versus battery competition will make EVs cheaper than gasoline-powered cars. It’s no surprise plenty of research is going into optimal battery designs.

For the potential maximum of 50% savings, VW attributes 15% to the cell design, 20% to the less-costly cathode/anode material mix, 10% to production process, and 5% to the battery-system “concept” itself. Success would put VW EVs into cost parity with traditional internal combustion engine (ICE) counterparts. It remains to be seen if this new design will perform as expected.

The new strategy would make battery production a core business of VW. Plans are already underway for the construction of six massive battery manufacturing plants across Europe and the US. When all is said and done, VW will boast some 240 GWh of battery-making capacity, or enough to supply 4 to 4.5 million EVs each year. Tesla struggled to produce 500,000 cars in 2020.

Not a moment too soon considering California plans to restrict the sale of non-EVs by 2035.

But right now, Tesla has the advantage in cost effective battery tech. Li-ion batteries are still an expensive means of power, with the industry standard hovering around $137 per kilowatt-hour (kWh) in 2020. Tesla’s cutting edge lithium-nickel-cobalt-aluminum (NCA) battery packs are rumored to be closer to $110/kWh. Volkswagen’s hopes of dropping the kWh price under $100 would boost them into the lead, but all that depends on the technology meeting the promise of its developers in practice.

There are two industry tipping points leaving companies no choice but to accelerate the production line of their EV fleets: 1) government demands for emission free or low-emission vehicles and 2) the shrinking price of batteries. Together these who drivers will usher out the age of the combustion engine for every day transportation.

The other component of VW’s strategy involves mirroring Tesla’s Gigafactory six times over, bringing battery production somewhat in-house. Their previous supplier, SK Innovation, a Korean company with a factory in China, was forced from the domestic market by the The U.S. International Trade Commission (ITC) after being accused of intellectual property theft by rival and fellow Korean battery giant LG Chem.

The first Volkswagen two battery factories are to be in Skellefteå, Sweden and Salzgitter, Germany, with the locations of the remaining four subject to ongoing negotiations. VW will still depend on partnerships as it navigates the supply line, especially to secure shipment of Nickel and Cobalt. In the meantime, the U.S. is falling behind in the global competition for critical minerals, and domestic manufacturers should be eager to catch up.

If all goes according to plan, VW’s new factories and innovative cell design should drive down battery prices for its fleet over the long-term, leaving the automaker well positioned against other low-cost EV and ICE competitors.

I’ve written before on solid-state batteries as the likely future of the industry, more cost efficient and enjoying faster charging times than their lithium-ion cousins. A breakthrough there could represent yet another tipping point, driving the cost of EVs well-below parity with ICE engines.

VW agrees. The Volkswagen Group has invested heavily into solid-state storage research and is currently backing EV battery maker QuantumScape in a joint venture. QuantumScape is pursuing solid-state lithium metal batteries, which are considered “the holy grail” of the battery industry. If VW’s financial bet pays off, they have the potential to surge ahead of Tesla on a wave of reduced manufacturing costs and lower sticker prices for their vehicles.

Of course, they aren’t the only company seeking to do so.

Ford is likely also considering its own battery plants after the ITC’s decision against SK Innovation. The company has been slower to react than VW, content to purchase batteries from outside suppliers for is relatively small fleet of EVs. But this is not sustainable. If Ford wants to remain one of the big names in auto manufacturing it must develop a strategy for designing and producing high quality EV batteries.

General Motors GM -1.6% is planning a $2.3 billion investment into an Ohio battery factory, partnered closely with LG Chem.

There also remains the possibility of a relatively new name catching everyone by surprise. Chinese EV manufacturer NIO – whose stock has seen a wild ride over the past year – has claimed a breakthrough in solid-state battery technology. If successful the batteries could reach a range of 1,000 kilometers (over 600 miles) on a single charge. NIO’s innovative business model includes an option for customers to buy a vehicle without owning the battery pack – the most expensive component of an EV. The proposed model, called “battery as a service” (BaaS), allows driver to purchase a vehicle at a substantially lower price-point but pay a monthly rental fee for use of the batteries. The cheapest NIO car after subsidies is now an ES6 sport-utility vehicle (SUV) priced 273,600 yuan ($39,553) without ownership of the battery pack, versus 343,600 yuan including the pack. No doubt VW and other Western counterparts are paying attention to see if China’s strategy and technology are the real deal.

Thus, the EV transformation and the battery race at this early stage have several leaders: the U.S.’ Tesla, with Ford and GM following suit; the European/German VW; and a number of the Chinese companies. The ones with the best technology, innovation, marketing, and the “cool” factor will win. Let the games begin!


Originally Published at Forbes