Volkswagen’s current share price, trading at just 3.5x forward earnings, reflects investor concerns that the company is facing significant challenges. This isn’t unique to VW; the entire European automobile industry is under pressure. The sector has been slow to transition to electric vehicles (EVs) and has struggled to adapt to falling demand in Europe, where the market still hasn’t recovered to pre-COVID levels. Compounding these issues, VW is losing market share in its largest market, China, as consumers there rapidly shift towards EVs.
This situation is a classic example of the **”Innovator’s Dilemma”**. Established companies, like VW, which focus on maintaining their current products, often struggle to adopt disruptive technologies. These innovations, such as EVs, are initially seen as unprofitable or irrelevant to mainstream customers, so they are overlooked.
Disruptive technologies often start as simpler (e.g., electric motors vs. internal combustion engines), cheaper, and initially less capable alternatives. They typically cater to niche markets, but over time, they improve and eventually displace established products. A prime example is Tesla, which was dismissed by the auto industry a decade ago as a bit of a joke—much like the emerging Chinese automobile industry was.
Today, **50% of new car sales in China** are electric, and companies like BYD not only lead in EV production, but others such as CATL also dominate the core technologies within these vehicles. In Europe, however, many EVs produced by traditional automakers are too expensive and are not able to compete with the offerings of Tesla, BYD, or the other Chinese manufacturers with their European brands (MG, Lotus, London Taxi, Volvo, Polestar). Moreover, both Tesla and BYD are deeply embedded in the EV value chain, positioning them to reduce costs further and make EVs more accessible to the masses. Meanwhile, European manufacturers seem to be stalling, pushing back earlier targets to phase out internal combustion engine production rather than leading the charge into the EV future.
