Volkswagen Follows Tesla Into Battery Business

Volkswagen is following Tesla ’s lead into the heart of the battery industry. The move carries huge risk, but the German auto giant has no other choice.

VW announced a roughly $1 billion investment in battery production Thursday. Part of the sum will go into forming a new joint venture with Swedish battery startup Northvolt to make cells—the core component of electric-vehicle batteries. The approach echoes Tesla’s partnership with Panasonic at the so-called gigafactory in Nevada, which makes batteries for the Model 3.

The rest of VW’s investment will buy a 20% stake in Northvolt itself, as part of an equity capital raise by the company. VW led the funding round together with Goldman Sachs and various smaller partners including BMW . Alongside a European state loan, the new equity will fund a production plant in Northern Sweden as well as the new JV with VW.

Founded in 2016 by two ex-Tesla employees, Northvolt has a wildly ambitious plan to take on established battery giants like Samsung, LG Chem and Tesla-supplier Panasonic. It will try to be different by making its batteries as “green” as possible, including by using Sweden’s plentiful supply of hydro-electric power for the energy-intensive manufacturing process.

Many car makers have set up units to study battery production or package cells into battery packs, but most have stopped short of making the cells themselves. The conventional wisdom has been that cells are a capital-intensive, commoditized business best left to South Korean conglomerates that are happy with lower returns.

That may be changing, at least for big mass-market players like VW and Toyota, which in January announced a battery joint venture with Panasonic. The main reason is the sheer volume of cells required. VW expects two-fifths of its sales to be electric by 2030, equivalent to more than four million cars at its current production rate. South Korea’s battery giants have plenty of suitors and are investing cautiously. The only way VW can guarantee supplies is to take some of the risk itself. The JV with Northvolt, fulfilling just 5% of Volkswagen’s expected cell needs in 2025, is a small piece in a much larger puzzle.

VW is also getting into cell production for political reasons. European leaders are becoming vocal about not letting East Asia dominate electric-vehicle technology. French Finance Minister Bruno Le Maire even made participation in a European battery project a condition of approving Fiat Chrysler’s merger proposal for Renault, before the Italian-American company withdrew it last week.

The German state of Lower Saxony owns 20% of VW’s voting stock. It comes as no surprise that the VW-Northvolt JV will probably be based in Salzgitter, a district of Lower Saxony that is currently home to one of the world’s largest engine factories. As electric vehicles replace conventional cars, battery jobs will replace jobs related to internal-combustion engines.

The risks for VW’s more financially motivated shareholders are substantial. The company is investing big sums in and alongside an unproven battery player at a point when the technology is changing fast. Toyota, which has a far more experienced partner in Panasonic, unveiled an expansive new electric-vehicle strategy this month, which made much of solid-state batteries, an alternative to the lithium-ion types that power today’s smartphones and Teslas.

But VW can’t afford to wait. Any delay to its electric-vehicle rollout would land it in trouble with European and Chinese emissions regulators. The diesel scandal cost the company roughly $34 billion. By that yardstick, batteries don’t seem such an expensive bet.