Volvo Gives Tesla a Shock, As Others Plan Electric Push

By John D. Stoll and Tim Higgins Features Dow Jones Newswires

Volvo, the auto maker that spent 90 years polishing a reputation for safety, indicated Wednesday it is mounting an ambitious challenge to Tesla Inc.'s electric cars.

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But the even tougher news for Tesla's billionaire founder, Elon Musk, is that the Scandinavian company isn't the only deep-pocketed rival planning to compete with the Silicon Valley pioneer. Nearly all global vehicle makers are mounting their own electric-car push, powered by ever-cheaper prices for batteries, stricter emissions rules and lucrative government incentives for customers.

Tesla's shares fell more than 7% Wednesday, the steepest decline in a year in which the company passed both General Motors Co. and Ford Motor Co. in stock-market valuation.

The Volvo announcement is "the hard-reality case that Tesla will face intense competition by next decade from legacy [auto makers] expanding their electric options," Barclays auto analyst Brian Johnson said in an investor note. "Tesla may have a lead in battery costs," he said, but the "scale advantages" of multinational car companies likely means Mr. Musk's lead isn't as sizable as often believed.

Investors also were reacting to Tesla's news Monday that second-quarter sales of its luxury Model S and Model X sport-utility vehicle were lower than analysts had projected because of a supply issue with battery packs, raising new fears the company will have trouble meeting ambitious production targets for its cheaper Model 3, which starts at $35,000.

Several analysts also questioned whether demand for Tesla's two niche products is waning as it scrambles to make the leap to the mass market. The Model S, which sells for about $100,000, "is getting a little long in the tooth," said Dave Sullivan, an analyst for AutoPacific Inc.

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Owned by China's Geely Holding Group, Sweden-based Volvo on Wednesday outlined ambitious plans to transition its entire lineup to vehicles powered either by batteries or hybrid electric-internal combustion engines by 2019.

While representing potentially the biggest bet yet against gasoline and diesel cars, the announcement follows a blueprint being drawn up by Toyota Motor Corp., Volkswagen AG and Daimler AG. Those companies plan to sell millions of electric cars by 2025 -- evidence the auto industry's incumbents believe the internal-combustion engine has an expiration date.

While Mr. Musk is broadly credited with making electric cars sexy, regulations and financial incentives in the U.S., the European Union and China are the driving force pushing most auto makers to look to batteries as the industry's silver bullet for reducing emissions.

Strict fuel-economy mandates are in place in the world's largest vehicle markets, often matched by tax breaks that can cut up to 50% off the price of an electric vehicle.

In the U.S., Mr. Musk's Tesla is the face of the electric-car movement, outpacing all-electric offerings from GM and Nissan Motor Co. that are cheaper but considered dull by comparison.

A new class of electrified vehicles will soon challenge Tesla's thrust, however, with nameplates as exotic as Aston Martin, as rugged as Jeep's Wrangler or iconic as Ford's Mustang. As with Teslas, many will offer buyers a $7,500 federal tax break.

Investors have prized Tesla's focus on technologies, including semi-autonomous driving and over-the-air software updates -- but Volvo and others are looking to match them.

Car makers in the U.S. are threatening to edge in on Tesla's turf, pressured by Obama-administration rules mandating a steep increase in miles-per-gallon performance over the next eight years.

Auto executives say a broad shift toward electrification -- whether hybrids that pair high-powered batteries with conventional gasoline engines, or full-blown electric cars -- will be needed to meet those regulations.

The Trump administration is reviewing federal emissions rules, but any rollback could take several years and may not address mandates at the state level. California, and several states that subscribe to its clean-air rules, demand that 15% of vehicle sales by 2025 be zero-emission cars.

Yet Americans continue to shrug off electric vehicles. While all but two states have regulations or incentives designed to promote their sales, cheap gasoline means car makers are investing in a technology that today offers meager returns.

Ford, for instance, is spending $4.5 billion to revamp its U.S. portfolio with electric or hybrid trucks and SUVs, including a hybrid version of its F-150 pickup, the best-selling vehicle in America. Meantime, Fiat Chrysler Automobiles NV's rugged Jeep lineup will soon offer battery power to tackle off-road challenges.

But less than 1% of the record 17.5 million-plus vehicles sold in the U.S. in 2016 were all-electric, says WardsAuto.com.

In Detroit, electrified vehicles have long been panned as "compliance cars" because they help the makers comply with clean-air rules -- even if they don't excite many customers or turn a profit. These cars may be good for the environment, but bad for the bottom line.

Often priced significantly higher than a conventional car, vehicles like GM's Chevrolet Volt or Fiat's 500e are niche vehicles that get a fraction of the marketing support or consumer interest that profit-rich pickup trucks and SUVs achieve. Fiat Chrysler Chief Executive Sergio Marchionne has even asked buyers not to purchase the Fiat electric subcompact because the company loses thousands of dollars on each sale.

To get electrification into the mainstream, analysts say gas prices likely need to rise while government subsidies remain in place or increase, and charging stations for the vehicles become much more numerous.

In a report published earlier in this year, McKinsey & Co. noted that "auto makers face a difficult challenge" when it comes to how quickly to move away from internal combustion engines. The consulting firm estimates 30% of U.S. buyers would consider an EV purchase today, but car companies must boost consumer-education initiatives and marketing campaigns at a time when overall demand for automobiles is slipping.

"They must strike the right balance between selling enough EVs to comply with tightening regulatory fleet emissions and fuel economy targets, while also preventing the incremental cost of adding battery packs from cannibalizing corporate profits," McKinsey said.

The consulting firm estimates battery-pack prices have fallen about 80% since 2010, and an electric car and comparable gasoline-powered car could hit cost parity within a decade.

Write to John D. Stoll at john.stoll@wsj.com and Tim Higgins at Tim.Higgins@WSJ.com

(END) Dow Jones Newswires

July 05, 2017 19:51 ET (23:51 GMT)