“Volvo’s unique advantage is that its two home markets — Sweden and China — are among the countries with the most generous government incentives, even though both have cut them slightly in recent months.” —Leonid Bershidsky
Over the next ten years, the automobile industry will face profound changes. These changes will have a massive ripple effect on many other industries. Electric self-driving cars will radically alter the way we work, play, and live. All of these changes are occurring at a pace that seems to be accelerating. Last October Tesla announced that all new models would be equipped with the built-in capability to eventually be self-driving. This week the auto media was abuzz about Volvo’s landmark announcement that by 2019 (a short two years from now) the Swedish automaker will only be designing and manufacturing hybrids or fully electric vehicles. This announcement pertains to any all-new vehicles introduced by the company starting with the 2019 model year. Gasoline-only models designed before 2019 will continue to be produced by Volvo until they are replaced by next generation platforms.
Joseph Schumpeter’s “Creative Destruction” is upending the automotive world. A gut wrenching period of change is now confronting the global automobile industry. Disruptive technologies in propulsion and navigation are radically altering the future of the entire industry. These changes pose existential threats to giant businesses both inside and outside of the automotive world. As a result of rapid advancements in battery technology and increasing consumer adoption of electric vehicles, many energy analysts are beginning to contemplate if we are entering a period of permanently depressed oil prices. Starting in 2016, ExxonMobil’s cash flow did not cover its dividend. As a result of sustained low oil prices, ExxonMobil now supports its dividend with debt. Earlier this year, Turtle Garage published a piece on how autonomous vehicles will soon impact the commercial real estate market. While the future opportunities may ultimately eclipse the current threats, it is anything but clear how these trends will unfold. Many industries are in for a rough ride. Aside from healthcare, I don’t see another sector that will face more change in the next ten years than the automobile industry.
The two articles that follow were recently published in the New York Times and Bloomberg. Both chronicle Volvo’s decision to discontinue the fully traditional internal combustion engine for totally new models conceived of after 2019. The Bloomberg article articulates the rising challenges facing Tesla.
REPRINTED FROM THE NEW YORK TIMES JULY 5TH 2017
By Jack Ewing
Volvo Cars on Wednesday became the first mainstream automaker to sound the death knell of the internal combustion engine, saying that all the models it introduces starting in 2019 will be either hybrids or powered solely by batteries.
The decision is the boldest commitment by any major car company to technologies that currently represent a small share of the total vehicle market but are increasingly viewed as essential to combating climate change and urban pollution.
While most major automakers offer hybrids and battery-powered options, none of them have been willing to forsake cars powered solely by gasoline or diesel fuel. On the contrary, United States automakers have continued to churn out S.U.V.s and pickup trucks, whose sales have surged because of relatively low fuel prices.
Yet Volvo’s move may be the latest sign that the era of the gas guzzler is slowly coming to an end. Tesla, which makes only limited numbers of electric cars, surpassed Ford and General Motors this year in terms of stock market value, despite making significantly fewer cars than those automotive giants — a clear indication of where investors think the industry is headed.
“Our customers are asking more and more about electric cars,” Hakan Samuelsson, the chief executive of Volvo, said in a telephone interview on Wednesday. While Volvo’s strategy has risks, Mr. Samuelsson acknowledged, “a much bigger risk would be to stick with internal combustion engines.”
Though based in Sweden, Volvo is owned by Geely Automobile Holdings of China, which already produces battery-powered cars for the Chinese market. The decision by Volvo to focus on electric vehicles could ultimately give it and Geely a head start if, as many analysts expect, sales of battery powered cars begin to take off. China is already the largest market for electric vehicles.
Volvo’s battery-powered vehicles will be produced initially in China, but eventually also in Europe and at a new factory the company is building near Charleston, S.C.
Hybrids, which combine battery power with gasoline or diesel engines, accounted for about 2 percent of passenger car sales in the United States last year, a number that has been declining because gasoline prices have fallen.
And cars that run solely on battery power are still rare in most countries because of high purchase prices, lengthy charging times and limited ranges.
Still, most carmakers expect the share of electric cars to grow quickly as the technology improves, prices fall and public charging stations become more commonplace. Rapid advances in self-driving cars will also encourage a shift to battery power: It is simpler to link self-driving software to an electric motor than to a conventional engine.
Although no other traditional carmakers have declared their intention to bury the internal combustion engine, virtually all of them are investing in hybrid and battery technology.
Daimler, the maker of Mercedes-Benz cars and trucks, said on Wednesday that it would invest 5 billion renminbi, or $735 million, in a new battery factory it will build in Beijing with its Chinese partner, BAIC Motor.
The major American automakers are moving forward with their own electrification strategies, albeit on a much smaller scale than Tesla and now Volvo.
General Motors, for example, this year introduced the Chevrolet Bolt — a battery-powered model that sells for about $35,000 before government incentives are applied. The Bolt can travel 238 miles on a single charge and will be the basis for other electric models that G.M. expects to add to its lineup.
Ford has sold electric versions of a few mainstream models, but it has not yet developed an all-electric vehicle from the ground up. That is changing, however. The company has said it will introduce a battery-powered S.U.V. by 2020 and will add other electric models thereafter.
The third big domestic automaker, Fiat Chrysler, has lagged. It sells an electric version of its Fiat 500 subcompact car and a hybrid gas-electric variation of its Chrysler Pacifica minivan. But the company has yet to announce any plans to build a new vehicle that is available only as an electric model.
Even though consumer demand for electric cars is so far small, carmakers view it as a way for them to meet stricter fuel economy and pollution standards. The pressure is particularly acute in Europe, where an emissions cheating scandal at Volkswagen has set off a sharp decline in the sales of diesel cars, which account for about half the auto market in the region.Carmakers including Volvo have depended on diesel to provide better fuel efficiency and lower carbon dioxide emissions. But the Volkswagen scandal has raised awareness of the health effects of diesel exhaust.
Diesel engines burn fuel more efficiently than gasoline motors, but they produce far more nitrogen oxides, which cause asthma and are considered a carcinogen. The cost of the equipment needed to neutralize diesel fumes is becoming prohibitive.
“The diesel engine is getting more expensive,” Mr. Samuelsson said during a news conference in Stockholm on Wednesday. “We would prefer to talk about the alternatives.”
The changing political landscape in the United States has somewhat muddied the outlook for electric cars on the other side of the Atlantic. The Obama administration was highly supportive of electrified vehicles, which could help companies meet tougher federal fuel-economy standards.
But, so far, President Trump has not pursued policies that encourage the development of electric vehicles.
Moreover, the persistence of low gasoline prices continues to push American buyers toward bigger vehicles — trucks and S.U.V.s — and has made the fuel economy of electric or hybrid vehicles less potent as a selling point.
Volvo’s transition will be gradual. It plans to still produce existing models with conventional engines after 2019, but it will no longer introduce new models with the older technology. Depending on demand, Volvo will completely phase out cars powered solely by gasoline or diesel by around 2024.
But by focusing on electrification, Volvo can concentrate its limited research and development resources on new technologies rather than continuing to invest in fuel-powered motors that may become obsolete. With sales of 534,000 cars last year, Volvo is dwarfed by companies like Toyota, Volkswagen, and General Motors, each of which sold about 10 million vehicles in 2016.
Volvo will be able to draw on technology developed by its parent company, Geely. The companies can also save money by purchasing components such as batteries together.
Analysts said Volvo’s decision to pursue a lineup dedicated to electric and hybrid vehicles is motivated, in part, by the Chinese government’s efforts to reduce harmful emissions from internal combustion engines.
“Chinese ownership of Swedish-based Volvo likely played a role in the automaker’s announcement today,” said Michelle Krebs, an analyst with the auto-research site Autotrader.com. “China’s air pollution problems have prompted a more serious push toward cleaner automobiles.”
Volvo said on Wednesday that it would introduce five models from 2019 to 2021 that would run solely on electric power. That includes two models sold under Volvo’s Polestar brand, which the company is marketing as a maker of high-performance electrified cars.
Other models will include plug-in hybrids, which can be charged from power outlets and run for short distances solely on batteries, and so-called mild hybrids, which charge their batteries from the car’s conventional engine or by recovering energy from braking. Hybrids still require gasoline or diesel fuel, but they are typically more efficient because the batteries share the load.
Mr. Samuelsson said the company also wanted to encourage suppliers to invest in battery technology and charging stations.
“It’s important to make a clear statement,” he said.
REPRINTED FROM BLOOMBERG VIEW JULY 5TH 2017:
By Leonid Bershidsky
Volvo’s announcement that it intends to starts phasing out purely gasoline- and diesel-powered cars starting in 2019 in favor of electrified models appears strategically timed to coincide with the start of production of Tesla’s Model 3, which should be hitting the streets by the end of this month. It’s scary news for Tesla: The market for electric cars is largely government-driven, and Chinese-owned Volvo is taking advantage of especially generous government support.
Volvo’s model cycle is about seven years. This means it’ll keep making purely gasoline- and diesel-powered cars for some time past 2019, but the new models will be, at the very least, hybrids; all of them will have electric engines. “This is about the customer,” the company’s press release quoted Volvo chief executive Hakan Samuelsson as saying. “People increasingly demand electric cars.”
That, however, is not quite true. Most electric and hybrid vehicles are sold in countries where government incentives are the strongest. There aren’t many countries where fully electric vehicles and plug-in hybrids amounted to more than 1 percent of new cars sold in 2016, and in most of them, government stimulus — of both the stick and the carrot variety — is strong. As soon as the stimulus drops off, so do electric car sales. That happened in Denmark last year, where an attempt to phase out tax breaks resulted in a 71 percent drop in battery-powered vehicle sales and a 49 percent reduction in hybrid sales in 2016, according to the International Energy Agency. It happened in the Netherlands, where tax breaks on hybrids (but not on battery-powered cars) were cut and sales plummeted by 50 percent.
“Electric car market mechanisms are still largely driven by policy support,” the International Energy Agency has concluded.
Volvo’s unique advantage is that its two home markets — Sweden and China — are among the countries with the most generous government incentives, even though both have cut them slightly in recent months.
Sweden — where 6 percent of all cars sold last year were electrified, the third biggest share in the world after Norway and the Netherlands — offers a rebate of up to $4,500 with the purchase of fully electric vehicles and about half that much for plug-in hybrids. The latter are often bought by corporations because they’re incentivized to do it by the government. In China, the central government subsidizes the purchase of electric cars by a maximum of $6,300, and provincial governments are allowed to add up to half as much to the subsidy. It’s also easier to register an electric car than a traditional one in large Chinese cities. These incentives will stay in place in China at least until 2020.
In the U.S., meanwhile, the federal government offers tax credits of between $2,500 and $7,500 per electric car (and states can add to that), but they will be phased out for each manufacturer as soon as it sells a total of 200,000 cars — something that should happen to Tesla quite soon if everything goes to plan with the Model 3.
Tesla sells cars in China, but isn’t a major player. In 2016, it supplied just 7,548 of the 257,000 battery-powered vehicles sold in that country. The reason is that the Chinese government taxes imported cars at 25 percent. In the European Union, which includes Sweden, the tariff on car imports is 10 percent. A U.S. manufacturer faces an instant disadvantage, especially with a mass-market car, compared with a firm that makes vehicles in the world’s biggest and third-biggest markets, China and the European Union. The import duties ruin the effect of electric car incentives.
Because suppliers capture a bigger share of the profit from electric vehicles than from traditional cars, large volumes are necessary for production to make economic sense for companies even when each individual car is sold at a profit (something that BMW says is true of its electric models, but Tesla can’t say of its pre-Model 3 range). Automakers that produce electric cars in China and Europe are more likely to achieve large volumes than Tesla, with its U.S.-based production. In January through April 2017, 126,000 plug-in vehicles (hybrid and battery-powered) were sold in China and Europe, compared with 41,000 in the U.S.
No wonder Tesla is talking to the Shanghai provincial government to set up a factory. It will, however, take it longer than Volvo, the German automakers — Volkswagen, BMW and Daimler — or General Motors, which are already building cars in China and investing in electric vehicle production there.
Besides, these companies, unlike Tesla, aren’t hung up on making battery-powered vehicles only. Volvo doesn’t intend to drop gasoline and diesel engines for all new models — it will merely supplement them with electric motors. That way, consumers for whom battery-powered vehicles aren’t practical because of shorter range and longer charging times can get more choice.
Now that the established manufacturers are playing in the electric vehicle space, their greater versatility, geographic reach, and financial resources make the world a dangerous place for Tesla. Soon, it’ll be tested by the kind of competition to which “legacy” carmakers have long been accustomed, and it will be attacked from commanding positions.
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