Tesla and VW are friendly rivals, but they’re unlikely to become partners

In September, two of the auto industry’s movers and shakers had a friendly meeting to compare notes on the progress of electrification. Elon Musk was in Germany to visit the site of Tesla’s Berlin Gigafactory, and he met up with Volkswagen Group Chairman Herbert Diess for a test drive of Volkswagen’s new ID.3 at Braunschweig Airport. In a brief video, we hear the two auto execs sharing some friendly banter. Musk praised (or, some would say, damned with faint praise) VW’s flagship EV, calling its handling “pretty good” for a non-sports car. 

Above: VW's Herbert Deiss and Tesla's Elon Musk connect in Germany to take a drive in VW's ID.3 (Linkedin: Herbert Deiss)

In a world in which opposing groups too often demonize and scorn their adversaries, it was encouraging to see the leaders of two competing firms advertising their mutual respect. Justin Bariso, in an opinion piece posted on Inc.com, called the execs’ chummy chat “a brilliant lesson in emotional intelligence.”

Another term for this sort of constructive engagement is coopetition. This was the title of a popular book first published in 1996, but the word has been around much longer, and has often been used to describe situations in which rivals cooperate for the good of their customers and themselves—the entente between Apple and Microsoft is a good example. 

Elon Musk has encouraged other automakers to join the EV market since the very beginning. “Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day,” he wrote in 2014 when Tesla announced the decision to make its EV patents available to other automakers, and he has expressed the same sentiment in other words many times.

Of the world’s legacy automakers, the Volkswagen Group is by far the most forward-looking when it comes to electrification, so it’s only natural that Musk and Diess would have a lot to talk about. In 2019, Musk tweeted, “Herbert Diess is doing more than any big carmaker to go electric. The good of the world should come first. For what it’s worth, he has my support.” Shortly thereafter, Diess responded in kind, telling a reporter that Tesla should not be considered a niche automaker. “The Model 3 is a large-series model, and they are one of the biggest manufacturers of electric car batteries,” Diess added. “We have a lot of respect for Tesla. It’s a competitor we take very seriously.”

So, did the two vehicle visionaries discuss a deal that day in Braunschweig, after the cameras were turned off? Diess felt compelled to deny it. “Just to be clear: We just drove the ID.3 and had a chat - there is no deal/cooperation in the making,” Diess posted on Linkedin shortly after the meeting.

Of course, the denial only provided grist for the rumor mill. Musk has reiterated many times that Tesla is “open to licensing software and supplying powertrains & batteries.” A partnership between Tesla and a major auto brand could be good news for consumers and the planet, accelerating the process of bringing EVs to the mass market. Mr. Bariso believes that, of the legacy automakers, VW has “the greatest chances of striking just such a deal.”

Anything could happen in this crazy world, but there are a couple of good arguments against the likelihood of seeing a Tesla-powered Volkswagen, Audi or Porsche on the Autobahn anytime soon. For one thing, it’s been tried before.

Above: VW's ID.3 is being 'benchmarked' against Tesla (YouTube: Reuters)

In 2008, Daimler signed a $70-million contract for Tesla to supply batteries for the smart electric drive. The following year, the German giant acquired a 10-percent equity stake in Tesla for a reported $50 million, and Daimler’s Herbert Kohler took a seat on Tesla’s board.  The deal worked out well for both parties. In fact, Daimler’s money probably saved Tesla from bankruptcy. “It was the Daimler investment that saved Tesla,” Musk said later. “There were a couple of near-death situations.”

In 2010, Tesla struck a similar deal with Toyota—the Californians provided the Japanese automaker with battery packs for its upcoming RAV4 EV, and Toyota purchased a 10-percent chunk of the company. This deal was another grand coup for Tesla, which acquired its Fremont factory from Toyota for the bargain price of $42 million (one source had valued the plant at $1 billion), and also learned a lot of valuable lessons about mass production.

However, as Tesla grew, the major automakers began to see it as a competitor, and quietly ended their cooperation with the company. The Daimler and Toyota EVs were compliance cars which the companies sold in small volumes and discontinued after a couple of years. Both firms developed their own sources of batteries, and terminated all ties with Tesla. Both realized enormous profits when they sold their stakes.

(For more details on the Toyota and Daimler partnerships, including the highly entertaining story of how a Tesla team smuggled a bag of cash into Mexico to buy a smart car, and converted it to an electric powertrain in a caffeine-fueled round-the-clock marathon, see my newly revised book, Tesla: How Elon Musk and Company Made Electric Cars Cool, and Remade the Automotive and Energy Industries.)

Back when EVs were a curiosity, and Tesla was a guerilla-style startup, Toyota and Daimler found it advantageous to be associated with the hip young company, and borrow some of its bad-boy mojo. However, once EVs began to be seen as a viable product, the companies couldn’t be seen to depend on a sketchy startup for their technology. To preserve their image as tech leaders, they had to be seen to develop their own electric powertrains.

That’s why a Tesla alliance with the VW Group (or any of the other majors) is unlikely. The German automakers jealously guard their image as technological trendsetters (Audi’s motto is Vorsprung durch Technik, which translates as “Leadership through Technology”). Around the world, car buyers tend to be loyal to their local brands, but Tesla’s brand is a monster, and beating it will require convincing consumers that the home team’s offering is a better vehicle (not a rebadged version of the same thing). Let’s put it this way: German car buyers will happily choose an Audi or a Porsche over a Tesla if they’re convinced that it contains better technology, preferably locally-developed.

It’s also worth noting—and Elon would surely agree—that the best cars are designed as integrated systems, in which all the components are optimized to work together. Dropping a Tesla battery pack or motor into a VW or an Audi doesn’t sound like the best way to build a world-class vehicle.

Let’s not forget what Herbert Diess said in 2017: “Anything Tesla can do, we can surpass. We are confident that in this new world, we will become a market leader.”

Things have evolved. According to Electrek, after recently announcing VW's accelerated electrification efforts, Deiss sounded a bit more humble: "Yes, it is going to be a race with Tesla."

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Written by: Charles Morris