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.
You may also like to watch:
“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.