Volvo small SUV 'big part' of reaching 2025 goals

Volvo Cars aims to boost global sales more than 70 percent to 1.2 million by 2025, with half of those models being full electric and 50 percent of its transactions to be done online. CEO Jim Rowan said the Swedish automaker’s next model, a small electric SUV that even he now refers to as the EX30, will be a “big part” of achieving the targets. The former Dyson executive, who took charge at the automaker in March, also outlined why it is critical for Volvo to become an expert in software and silicon. He discussed this as well as Volvo’s plan to keep upgrading and selling its XC90 flagship SUV despite the arrival of its range-topping EX90 electric SUV with Automotive News Europe Managing Editor Douglas A. Bolduc.

November is nearly done, and you probably have visibility on your orders for the rest of the year and early 2023. Are you on track to match your 2021 full-year sales?
As we said during our last earnings call, we are tracking towards having lower wholesale and retail volumes than 2021. [Volvo sold 698,693 cars globally in 2021.]

Is there a chance of getting back into the 700,000-units-and-above territory in 2023?

We are not giving forward guidance on those exact numbers. What we have said is that we were affected this year more by the pandemic lockdowns in China than anything else. Yes, semiconductors were an issue, but we could fill in most gaps via the spot market. There was no way to avoid the impact that came from China being locked down for the better part of 60 days. It doesn't matter how much money you try and throw at that; you don't get the parts. This not only shut down our factories in China, it had a knock-on effect to us in Europe. We are very hopeful we can avoid a repeat of this in 2023. Will there be the occasional shutdowns due to COVID in certain parts of China next year? Probably. But I don't think it's going to be anywhere near as devastating as it was this year.

Are there any other positive indicators as we head toward 2023?

Yes. Demand is strong and our order books across the world are at record levels. That being said, we will keep a very close eye on consumer sentiment to see how that might change because of rising inflation. Right now, we don't see any cancelations in our order books in any parts of the world that concern us. However, one market that we are watching is the UK, which appears to be suffering from inflation a little bit more than elsewhere.

Volvo has said it will honor its sales contracts even if it has to cover higher raw materials costs. Doesn’t that come with a financial penalty?

Yes, that hurts us in the short term but in the long term, from a brand perspective, it's absolutely the right thing to do. We have to honor those contracts because we made them in good faith when the raw materials prices were lower. We can offset some of this with the adjusted prices we charge for our new orders, which factor in the higher materials costs. I saw that some others are trying to go back and say, "You ordered at 50,000, but due to circumstances beyond our control we need to charge you 60,000." I don't think that's the right way to treat customers.

The previous volume breakthrough for Volvo was provided by the XC40. Do you expect the small SUV due to debut next year to be the key to getting to 1.2 million sales by 2025?

It's certainly a big part of that. It's a really important car for us for so many different reasons. First, everybody talks about the price of EVs and how they are outside the reach of certain people. This car allows us to reach a different price demographic. They still want top safety equipment, a fantastic ride and high quality, but it will be in a smaller format, so we can take out some cost. We can also take out cost by offering it with different battery sizes so a customer can choose the range that best fits their lifestyle and their budget. Since we will offer the small SUV on a subscription basis via Care by Volvo, it will be available to a wider audience because this option allows a person to buy into the brand on a consumption basis with a three-month minimum commitment. This will bring us a much younger demographic who will buy online. I don't even think they will go to the dealership. They will look at an offer online, configure the car, then sign up for three months. And based on what we have seen from Care by Volvo, they will keep the subscriptions for much longer than three months because they like the flexibility.

Who will be your entry customer?

It’s that Gen Z person who is 18, 19 years old and coming into the car market for the first time and looking for the right price point plus the flexibility, the insurance and roadside assistance that Care by Volvo offers. What is also a big thing with that demographic is that they genuinely care about the authenticity of the brand's sustainability story.

To keep costs down would Volvo rent or swap batteries in the small SUV?

The whole idea of battery renting and swapping is not front and center for us, mainly because of safety. The location of the battery is an integral part of the car's crashworthiness. In addition, making sure the replacement battery is properly connected is crucial because they have a lot of power. If you're constantly putting them in and taking them out, does that add more risk? We favor giving the customer a choice of what size battery they want.

What is the future for the XC90 and when will it be discontinued?

It will continue to be a great car for us, especially since we have added the extended range version of the plug-in hybrid variant. That gives you the option to have more electric range while still having the added level of certainty that comes with the gasoline engine. So, the XC90 will stay in the range for a while. That means it will get the attention it needs to make sure it remains a relevant part of the lineup. What we have found in the U.S. and China is that the coastal areas are electrifying very quickly while the interior of the U.S. and the interior provinces of China are taking longer. This is partly because they don't have the same infrastructure and partly because they have longer commutes. These customers like having the backup of a combustion engine. We also find that people who have a plug-in hybrid XC90 are very comfortable buying a second car that is full electric. That seems to be the way that electrification is progressing in some of the more rural areas of the U.S. and in the interior provinces of China.

You believe Volvo can reach price parity for full-electric and combustion cars by 2025. What factors are slowing this process and which ones are speeding it along?

The unforeseen one was the war in Ukraine, which pushed up a lot of raw material prices. By and large, most of those prices are now back to where they were, other than lithium, which has remained doggedly high. That is pushing up the price of BEVs. But I still think we are very much on track for price parity, because prices will come down pretty quickly when supply starts to meet demand again. In addition, we are starting to see some really interesting things when it comes to anode and cathode materials and battery chemistries such as the use of LFP (lithium iron phosphate) in certain cases. That's all going to bring down the cost to price parity.

Why is this essential?
Because no industry can rely on government subsidies to be successful. It's good that some countries leaned in to get the electrification journey started. But, let's be honest, governments have other things to spend their money on these days, such as high energy costs, inflation and rising health care costs. Therefore, we need to get to price parity by the middle of the decade.

You said at Volvo’s Capital Market Day last month: "What will change global mobility is the companies that understand software and silicon." Could you elaborate on why you feel this way?

Coming in as a non-automotive person one advantage is that you look at the industry with a different point of view. I saw that most cars were constructed with a lot of ECUs [electronic control units] that were outsourced to a lot of the Tier 1 suppliers. We had no control over the silicon or the software that was inside and others controlled a lot of the IP [intellectual property]. So, you're basically beholden to them. When you go to a core compute architecture and you understand the software that can then connect directly with the application layer, that makes a huge difference for us both in terms of the cost, but more importantly in terms of the control and how we can now constantly update the car to make it better. Having so many ECUs resulted in a bad architecture. What makes more sense is buying silicon from a company like Nvidia, which understands silicon better than Volvo or any car manufacturer does. Nvidia also can spread out its cost not just over the auto industry but across the entire electronics industry. They make a good partner for us because they really understand how much computational power they can actually get out of their chipsets.

How is this an advantage?

We get this massive computational power layer. That means we don't need to make the lidar, radars, cameras and sensors. We just need to understand how we stitch into them and use their APIs [application programming interfaces]. What this allows us to do is that if someone comes out with a better camera, radar or sensor, we are in complete control. We can swap to another supplier because we are writing the software that takes us all the way down into the silicon. That's a profound change. But it's difficult and it does not happen overnight if you are a car company that's been used to buying in all this stuff. With a core computer architecture, you really need to understand all the different layers of software and how they interact.

With the EX90 did you eliminate roughly half of the ECUs in its platform, SPA2, compared with the SPA underpinnings used on models such as the XC90 and XC60 because of the move to core computing?

That's about right, and when we get to the next platform, we will be much closer to a pure core compute architecture, which will take out more cost and give us more control, but that means that we need to invest in some more software talent.

What platform will this next generation of core computing be on?

It will be an evolution of SPA2 [upgrading what is being used to underpin the EX90]. There will be additional stuff going into the evolution of SPA2, but we haven’t spoken publicly about that yet.

When will full core computing by ready?

That will be 2024-25.

Last year at CES, Volvo said it was confident that it could win approval in California for Ride Pilot, which allows hands-off, eyes-off driving, much like the Mercedes-Benz system that won limited approval in Germany. What is the status of Ride Pilot, in both the U.S. and potentially for Europe?

We continue to invest in that. We build that software ourselves from ADAS [advanced driver assistance systems] to full AD [autonomous driving], taking into consideration all of the different regulations around the world as well as all the different road signs, street signals, lane markings and more. So, we will continue to build that. But we don't release specific information about California versus what we are doing in Sweden versus Germany or whatever. Suffice to say that you need to have a flexible enough software development platform that will allow you to meet all the different regulations in the different parts of the world where you want to operate. Right now, we are fully focused on ADAS and the next generation of ADAS. Volvo Safe Space Technology is what you get in every single car. On top of that, you have Pilot Assist. We will continue to develop Pilot Assist to provide better governance of lane changes and being able to do them faster and more accurately. Of course, lidar will be added to the ADAS in the EX90.

So, the key is being able to keep upgrading the same system, right?

Yes, because you don't want to be trying to develop and maintain five different software tracks. That becomes slow, cumbersome and very costly. Having as few software tracks as possible makes for a better architecture.

Are your customers telling you they are in a rush to have fully autonomous capability?

I think on AD the narrative maybe three or four years ago was that you needed to have it to be relevant in the market. That narrative is tapped out now. Everybody understands that the journey toward full AD is going through the valley of ADAS. You need to be able to understand full ADAS and continue to develop your ADAS capabilities. It will still be “hands on,” but with a lot more capability such as operating at faster speeds, offering faster lane changes and providing more accurate visibility. Eventually we’ll come out the other side of that. And certain places like California, like China and like Germany will probably be faster than other parts of the world. But I think this will be in controlled lanes in select parts of each country. I think urban AD is still a while away.

How do you see AD capability being sold to the end consumer?

Customers will likely have the option of a one-time purchase, which would give them access to continual upgrades, or to subscribe to the service for a set period to see if they like it and if they don’t they can cancel. That would be the natural way to offer this service as it becomes more mainstream within the industry.

You want half of all sales to be online by 2025. Where are you now? Where do you want to by the end of next year and when do you expect the breakthrough to come?

We are only in six markets [Germany, the UK, Sweden, Norway, the Netherlands and the U.S.] because we want to test it to make sure it works properly and that we can scale up because when we go online, the customer is going to deal with us directly as opposed to through the dealerships. So, we need to make sure that all that back office stuff and the customer service capabilities and infrastructure are there. But here's the thing. The demand for online sales is absolutely there already. You see that with carwow in the UK, which we made an investment in this year. Carwow is not only a big player in used car sales, it is also increasing its role in new car sales. They are making people more comfortable with buying a car online. Therefore, the move to online sales is only going to accelerate because the younger demographic, anyone 25 or younger, and people who are digital natives are very comfortable with this. So, once the infrastructure is ready and we have a strong digital backbone and once we have enough supply of cars, then we can plug in more countries very quickly. Then we will have the inflection point and the gradient of the growth curve will change quite dramatically.

Volvo has plants in Chengdu, Daqing and Taizhou. Will Volvo keep all three plants in China running in the future?

That's the plan. The EX30 will be manufactured in China so that's going to keep those factories pretty busy. We see tremendous growth potential in China. The reason for that is because I think we understand the dynamics of the market. The move to electrification in China is going quite quickly and infrastructure is quite good as well. So, we will manufacture there for the local market as well as other parts of the world. In summary, we plan to keep those factories full.

What modifications have you made or might be considering to the product roadmap shared with North American dealers earlier this year?
Nothing that we have not already released. Anders [Gustafsson] and the team in America constantly updates those teams. They will have the latest information. There's nothing really that comes from a central perspective that we would change. We give that responsibility to Anders as the president of the Americas. I know he's been on a road show updating the dealership network there on what is coming and when it is going to come. They were heavily involved in the EX90, which we got some really great engagement from the U.S. on. That was very encouraging. We kind of expected it to be honest, but it was above expectations, which is really good to see.

Anything new on your U.S. battery and raw material sourcing plans?

That continues to be a work in progress.

Does Volvo still plan to leave Europe automaker association ACEA by year-end or will there be a reconsideration of the exit? If not ACEA, what groups are vying for Volvo’s membership? Would Volvo join an EV-focused group that could include Tesla, Aiways, Nio and others?

We don't have any plans at this time to jump into any other association or group. When it comes to ACEA, we will still work with them on projects where we think there is alignment, but we as we previously said, we plan to exit the group and we don't plan to go back on that.