July 12, 2017 01:00 AM

Electrifying: Volvo's new strategy has shock value

Volvo's future hybrid/EV lineup will follow the S90 plug-in hybrid's footsteps.

In a week that could have been dominated with news about Tesla's Model 3 introduction, Volvo stole the electric carmaker's thunder by announcing it will fit every new model launched with an electric motor, starting in 2019.

The announcement came a day before France said it would ban gasoline engines in new cars starting in 2040, and generated enormous press coverage.

"It's a great PR coup and quite clever from Volvo," said Tim Urquhart, principal analyst at IHS Markit. "It was half a PR exercise and half quite an impressive statement of intent."

The Swedish company boldly claimed that its new strategy heralded "a new chapter in automotive history" after more than a century of domination by the internal combustion engine.

Samuelsson: "We need to take serious action."

"This announcement marks the end of the solely combustion engine-powered car," said Volvo CEO Hakan Samuelsson in a statement.

The company will split its offerings between pure electric vehicles, plug-in hybrids and 48-volt mild hybrids, which use a starter motor to both capture lost energy and help the combustion engine with brief bursts of electric power.

Volvo, which is owned by China's Zhejiang Geely Holding Group, will launch five fully electric models between 2019 and 2021 — three badged Volvos and two from its newly announced Polestar standalone premium brand.

All of Volvo's global factories, including its new U.S. plant in Charleston, South Carolina, will be used to produce electric cars, Samuelsson said in a press conference last week. He gave no indication which electrified models would be built in the automaker's plants. The CEO did say that all the pure-electric Volvo cars will be built on the company's two existing platforms and will be made on production lines alongside standard variants.

This strong focus on electrified models represents an about-face for Volvo, which had previously said full-electric cars didn't make a great business case. Volvo even said in its 2016 company report, published in March of this year, that market projections for EV ownership were "extremely uncertain" and that "battery costs need to drop significantly".

But progress is happening that affects those calculations. Battery costs have dropped dramatically, and electric vehicles are predicted to cost the same as internal combustion engine cars in 2018, according to a study by investment firm UBS.

And Toyota said last week that 40 percent of its European sales in the first half of this year were regular hybrids, the first time the it has reached that mark.

"Things have changed and we can change our mind," Samuelsson said. "Battery costs have come down, and there is some movement on the charging infrastructure."

He acknowledged the success of Tesla and declared that Volvo's announcement marked the moment that the company becomes "the second premium carmaker in the world that is becoming all electric."

"Tesla is a tough competitor we respect," he said.

Volvo already builds plug-in hybrid versions of the XC90 large crossover and S90/V90 large cars — called Twin-Engine in Volvo's badging strategy — but those vehicles' penetration is very low. Just 2.4 percent of Volvo's 82,726 sales in the U.S. last year were hybrid models, according to figures from analyst and research firm AID. In Europe, Volvo's biggest market by far, its hybrid share was 4 percent of its 290,004 sales in 2016.

Emissions standards

Volvo said the decision to focus on electrification was made partly in response to ever-toughening legislation on carbon dioxide emissions in its three largest markets of Europe, the U.S. and China. Europe needs automakers to reach an average of 95 grams per kilometer of carbon dioxide by 2021, equivalent to 57 mpg. China requires an equivalent of 47 mpg by 2020 and the U.S. Corporate Average Fuel Economy standards mandate a 54.4 mpg average by 2025.

"That is one of the main reasons we're doing this," Samuelsson said.

Volvo would struggle to meet increasingly tough targets without electrification for its range of mostly larger cars, according to IHS analyst Urquhart.

"They've looked at the targets, and thought, we need to take serious action," he said.

Volvo is particularly vulnerable from the recent rapid decline in diesel sales in Europe, said Matthias Schmidt, automotive market analyst for AID.

Diesel cars produce about 15 percent to 20 percent less CO2 than gasoline models, but the backlash against the fuel after the Volkswagen Group emissions-cheating scandal has turned consumers back toward higher-CO2 gasoline engines.

"Diesel was their main weapon of choice to hit these regulations. Now they have to come up with a Plan B," Schmidt said.

Volvo sales were 83 percent diesel in 2016 across Europe, according to AID data, compared with 73 percent for luxury rival BMW, 70 percent for Mercedes-Benz and 68 percent for Audi. Only Land Rover and Jaguar had a higher diesel share at 96 percent and 84 percent, respectively.

"Don't be surprised to hear a similar announcement to Volvo's coming from JLR," Schmidt said.

German diesel sales were down to 39 percent in June this year, from close to half in 2015, figures from Germany's KBA motor transportation authority show.

Volvo won't develop another new diesel engine again, Samuelsson said last week.

The luxury makers are all pursuing aggressive electric strategies. Audi has said it will launch three all-electric cars by 2020, with the first, the e-tron Sportback, arriving next year. VW Group has said a third of all its sales will be either partially or fully electric by 2025. Mercedes said it will start selling 10 new electric cars by 2022, starting in 2019. JLR will launch its first electric car, the Jaguar I-Pace, at the Frankfurt auto show in September.

Mostly mild hybrids

Many of the headlines about Volvo's plan mistakenly made it seem like Volvo was moving toward a pure-electric strategy, such as Tesla. But Samuelsson said he expects sales will be split between fully electric vehicles, plug-in hybrids and 48-volt mild hybrids. The bulk of sales will be mild hybrids, he said.

The mild-hybrid system will use a 48-volt starter-generator that makes a standard combustion engine more efficient by storing energy lost to braking in a battery and returning that to boost engine power at certain times. It can't run on pure electric power alone. Supplier Continental predicts 4 million vehicles will be produced worldwide with mild-hybrid systems in 2020.

Mild hybrids are the "next generation of personal mobility" and offer a stepping stone on the way to EVs, said Christoph Stuermer, global lead analyst at PwC's Autofacts unit.

Mated to Volvo's forthcoming three-cylinder gasoline, the mild-hybrid system will create "a cost-efficient and a very attractive alternative to a diesel engine," Samuelsson said at the press conference.

Volvo will be looking to source parts for its new electrified systems at a local level, including the U.S. and China, Henrik Green, Volvo's head of r&d, said at the press conference.

Green admitted that it could be still selling cars without electric motors up to 2025, when model cycles of cars launched before 2019 might finally end.