In the global race to bring electric cars to market, the German carmakers have woken up from their slumber. The contest is finally getting interesting.

Who stole the show at this year’s Paris Auto Salon? Perhaps it was the Mercedes-Benz EQ, introduced to the gawking motor press by Daimler CEO Dieter Zetsche as one of 10 new plug-in electric cars that the carmaker plans to have on the road by 2025. It might have been the muscular Audi Q6 e-Tron, an all-electric SUV with a range of 500 kilometers that will hit showrooms in early 2018. Or maybe it was the Volkswagen I.D., set for delivery by 2020. Volkswagen says the I.D. will have a powerful 168-horsepower engine, drive almost twice as far as the planned Tesla Model 3 and come at the price of a mass-market Golf.

The message from September’s elite car fest: The Germans are coming for Tesla. In Paris, the major German automakers unveiled an unprecedented flurry of new e-car models, battery upgrades and concept cars. Porsche added a fresh version of its Panamera plug-in hybrid to the mix; BMW’s i3 will get a long-awaited battery upgrade next year; and Opel, General Motors’ German unit, showed off the 2017 Ampera-e, a Chevy Bolt that’s been redesigned for the European market. Amid all the futuristic technology, there was even a concept car for the retro-minded; Volkswagen is morphing its hippie-era microbus into a 21st-century all-electric van.

Never have electric cars dominated a major auto show like this, and never have so many eyes been peeled on German carmakers’ plans. Their model offensive comes none too soon. Tesla founder Elon Musk has been stealing the Germans’ most profitable customers ever since he launched his Tesla Roadster in 2008 – showing the world, for the first time, that an all-electric car could be cool. In the United States, German luxury carmakers’ strongest foreign market, the newer Tesla Model S has outsold every German luxury sedan, including the BMW 7 series and Mercedes-Benz’ venerable S-Class. Lately, sleek Teslas are even showing up on the autobahn and on the streets of Berlin. Worst of all, the established brands, once known for their market savvy and technological leadership, are starting to look old, grey and slow. To observers everywhere, it seemed that Audi’s legendary advertising motto, Vorsprung durch Technik (advancement through technology), was suddenly referring to California.

Since then, the German carmakers have been on the defensive, with Tesla beating them at their own game. Worldwide, e-car sales jumped 49 percent in the first six months of 2016, ten times as fast as the overall market (though they still represent less than 1 percent of sales). The Germans’ early e-car strategies seemed to be floundering. BMW’s i-Series, a technological marvel with its carbon-composites body, never took off as expected, hampered by a minuscule, short-range battery just as Tesla was introducing cars with a 400-plus-kilometer range. Once again, it was Musk who proved to customers that they need not worry about running out of juice on the road. Volkswagen produced a plug-in hybrid version of its popular Golf with a range of only 50 kilometers – not much more than an ecological afterthought. Until now, the German models like the i3 “didn’t have any distinctive advantage other than being an electric vehicle from BMW,” says Jürgen Pieper, auto industry analyst at Bankhaus Metzler in Frankfurt.

Volkswagen executives were still telling anyone who’d listen that diesel was the future of green driving. That strategy crashed into a wall last year, when American regulators caught the Wolfsburg-based company in a massive scandal over rigged emissions.

Paradoxically, it was the Volkswagen fiasco – involving millions of cars and leading to a company leadership shakeout – that seems to have given the entire industry a jolt.

Volkswagen’s business strategy, especially, is in the midst of a revolution. The emissions scandal that erupted in September 2015 was an ethical, financial and marketing disaster for the company – but also a “catalyst” to accelerate Volkswagen’s self-reinvention as an e-car producer, says Tim Urquhart, an analyst at IHS Markit in London. After plummeting sales, costly recalls and record-breaking fines, the company is now keen to prove to its global customers that it has changed its ways and is embracing a cleaner future. Fazed not only by the diesel scandal, but also by Tesla’s inroads among former Audi and Porsche customers in the U.S., new CEO Matthias Müller has put electric cars front and center of Volkswagen’s turnaround. At the Paris Motor Show, Müller and his I.D. vied for attention with Zetsche and his EQ. Both preached an electric future for their companies. Together, they amplified each other’s message: The slumbering German giants have finally entered the race.

At Volkswagen, Müller’s first step was to take a page from Tesla’s playbook, and design an electric car from scratch, not as an afterthought to an older model. The I.D. will be the company’s first car on a new electric-only platform that allows larger interiors than a combustion-engine car. It’s just one of 30 new pure-electric models Volkswagen plans to release by 2025. By then, says Müller, e-cars will account for 20 to 25 percent of the company’s sales. Volkswagen is investing heavily in batteries and reportedly working on its own factory. In September, the company also confirmed it was in talks about a new venture with China’s Anhui Jianghuai Automobile to develop mass market e-cars for China, Volkswagen’s most important foreign market.

With Volkswagen’s namesake brand working fast to enter the mass market, the company’s luxury brands are pushing into the high-priced segment where Tesla has been poaching customers. Porsche – whose Panamera hybrid plug-in version has only done so-so in sales – announced this summer that it was hiring 1,400 specialists to roll out its first all-electric sports car by the end of the decade, the 630-horsepower Mission E. Porsche also unveiled plans for its own charging network to compete with Tesla’s. Audi will enter the luxury market even sooner with the long-range Q6 SUV, which will go head-to-head with the wing-door Tesla Model X.

Even if the new Volkswagens, Audis and Porsches aren’t yet on the road, the barrage of models shows the California start-up it is not alone. As Musk plans to enter the mass market with Model 3 by the end of 2017 – at $35,000 it will be the cheapest Tesla yet – he will definitely leave his comfort zone. It’s one thing to build small-volume luxury cars, but mass manufacturing is a notoriously cyclical and low-margin business, and one that plays to the traditional carmakers’ strengths. Across the industry, mass-car production generates only around 3 percent, compared to profits in the IT sector of 30 to 40 percent.

Tesla, which has recorded only one profitable quarter since going public in 2010, has yet to prove it can succeed in this penny-pinching segment. “Tesla’s next step will bring the company into the position of a traditional carmaker, where it faces issues of manufacturing costs and product cycle,” says Kristina Church, head of the automotive industry desk at Barclays in London. “The time will come when the German carmakers can show their advantages.” That time may come sooner than anyone expected. Perhaps they were simply tired of getting snickered at. “They were sick of people saying how they’d missed the boat, and how the entire German auto industry risked falling behind,” says Peter Schmidt, an analyst at Automotive Industry Data (AID) in Warwick, England.

It’s a combination of deep pockets and global reach that will make it easier for automakers like Volkswagen to develop true mass-market e-cars. For a start-up like Tesla to scale up massively and go global will be comparatively harder. Daimler, Volkswagen and BMW together spend some €22 billion on R&D per year – of which they’re devoting a growing share to electric models. Compare that budget to Tesla’s $720 million. The German auto juggernaut might move slowly, but once it does, analysts say, it has the resources and experience to charge ahead. After all, it has weathered many disruptions in its 130-year history.

As much as Tesla bills itself as a disruptive force, it has no technology or business model that others can’t easily copy – in fact, look inside a Tesla and you will find a lot of German and other suppliers’ parts, from Infineon semiconductors to Bosch sensors for self-driving. Batteries are a commodity once production is established. German carmakers’ autopilot technologies – involving cameras, infrared, radar and more – are at least as advanced as Tesla’s, according to industry analysts.

With its start-up DNA, Tesla has had a great advantage in speed. “Tesla is probably a bit bolder when it comes to bringing cars on the road,” says Thomas Gronemeier, auto-industry analyst at Commerzbank in Frankfurt. “German producers are more preoccupied with quality and security.” But that strategy may be difficult for Tesla to maintain. Testing beta versions on customers might be a standard part of the Silicon-Valley business plan – but a car is not a smartphone app, as Tesla’s first self-driving road death demonstrated in May. When beta-testing customers start having deadly accidents, the Germans’ slower approach may turn out to save not just customers’ lives, but carmakers’ reputation and sales. The Germans, too, are working feverishly on autonomous driving. Volkswagen plans to have truly self-driving cars (not just assisted) by 2025, as do the other German automakers. Last year, they teamed up to buy Nokia’s HERE, a digital mapping service crucial for driverless cars. Volkswagen’s Müller says he does not want to be dependent on digital services companies in the fast-growing market for self-driving technology and mobility services. “We want to be in control of our destiny,” he told Handelsblatt in June.

The bigger question, for both Tesla and the Germans, is where the whole market is going – and when. In size, the e-car market is still a speck on the automakers’ windshield. Tesla is a minuscule player by any standard; it sold 50,000 cars last year, compared to around 14 million for Volkswagen, BMW and Daimler. If numbers are rising much faster than the overall market, that’s to no small extent the result of lavish subsidies, rebates and tax deductions from governments. (At 15 percent, Norway has the highest market share of electric vehicles and is planning to outlaw fossil-fuel cars by 2015, but also has the world’s highest subsidies.)

Sales are also juiced up by the carmakers themselves, who take substantial losses on each electric vehicle. And while owning a Tesla makes for great conversation at Whole Foods or the golf course, car buyers in Western Europe have recently been giving thumbs down to all-electric cars. Sales across all brands have fallen for three months straight, according to a new report by AID. “True underlying consumer demand is almost too low to measure,” says AID’s Peter Schmidt. Nor have plug-in sales ever taken off in Japan. The most generous explanation is that consumers are still waiting for the newer, longer-range models.

If there is one market that may determine the future of electric cars, it’s China. Already, it’s the largest and fastest-growing in the world, with 127,000 cars sold during the first half of 2016, more than double the previous year’s figure. Beijing is desperate to cut urban pollution, and is fast building up it’s own e-car industry. (In fact, China’s BYD is the world’s best-selling brand, even before Nissan and Tesla.) German car brands, which have been extremely successful in China, have a good chance of dominating the electric-car market there as well. Hence Volkswagen’s plans to set up a Chinese e-car venture.

As much as the companies are pressing ahead, however, they still don’t seem entirely convinced that this technology is the future. And they seem to be hedging their bets. In the European and Japanese carmakers’ engineering labs and design departments, parallel work is being done on fuel cells, a different type of electric-car technology that runs on liquid hydrogen. More than two decades in the making, fuel cell technology circumvents the need for heavy batteries, and the cars can be tanked up quickly. Germany, Britain (and even more so, Japan) have been building out their networks of hydrogen filling stations. With much less fanfare, Audi is developing a fuel-cell model that gets 600 kilometers per tank of hydrogen and emits nothing from the fuel but a few drops of water.

But even if the German car industry’s plans for widespread electric driving in less than ten years’ time may be wishful thinking, their investments now are smart. If they are to survive this change in the industry like they’ve survived so many other changes, they need to learn how to navigate a post-combustion-engine world. In the long term, all agree, the future will be electric – whether plug-in, hydrogen or some other technology. The automakers need to learn how to design the new cars, how to listen to customers like Tesla has done – even if they, like Tesla, stand to lose a lot of money on these cars for many years. Think of it as the price to pay for learning these lessons – and for being contenders again for the lead.

This article is from the Fall 2016 issue of Handelsblatt Global Edition Magazine. Stefan Theil is the magazine's managing editor. Gilbert Kreijger contributed reporting for this story. To contact the author: [email protected]