The VW alternator is internally grounded, according to the electrical guru "Speedy Jim". This means that one end of the circuit after the internal regulator is screwed to the case internally. The main windings in the alternator are the fixed outer windings - these go through a "full wave bridge rectifier" (the basic circuit has four large diodes in a diamond pattern with input at one set of opposite corners and the output at the other set of opposite corners), then to the regulator, then the negative side is grounded internally and the other lead comes out at the main terminal post.
It's a fascinating difference with the generator. In the alternator, the spinning windings just create the magnetic field, and so carry a smallish current. This means the slip rings and brushes can be small, and also smooth - not segments. This means much less arcing, so the rings and brushes last much longer. But this method produces alternating current at the main windings, so it needs a rectifier to convert to DC.
In the generator, the outer windings generate the magnetic field and the spinning windings carry the main current. The rectifying (conversion from AC to DC) happens mechanically - the commutator is segmented so the brushes keep moving to a new set of windings to keep the current moving in one direction. This creates arcing as the brushes move from segment to segment, and so the generator brushes and commutator need more frequent changing, and the voltage is a little spikey (less smooth).
In both cases you need a battery connected so you get a current in the field windings to create a magnetic field for the main windings to cut (generate). Disconnect the battery whilst the engine is running and you risk damaging the alt or gen, as the current produced by the main windings is now un-absorbed by the battery and so tend to spike upwards in voltage. The battery acts as a smoothing agent in an electrical sense. It's a neat arrangment.
Interestingly enough, radios and such which work off AC need smoothing circuits too - after the current has been rectified into "bumpy DC". Usually electrical devices called capacitors are used, but battery cells would be better. Trouble with THAT is after the radio is turned off it would continue to work - the batteries would continue to power the unit. So they don't use batteries. Capacitors are very short term storage devices, and are able to give up their stored energy in a very short time. That's why they are so useful in camera flashes and CDI ignition systems. Take a couple of big capacitors, fill 'em up over a few milliseconds with a lot of amps at low volts, and then trigger them to release a high voltage pulse in microseconds. Send that to the coil primary winding, and the transformer effect of the coil (that's all it is really, a transformer) gives you 38,000 volts to the plugs in lieu of about 20,000.
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