Volvo’s electric shift gives Tesla a shock

Volvo has just given Tesla a shock. The Sweden-based carmaker on Wednesday said it will stop producing new gasoline-only engines from 2019 and shift to a variety of hybrid and all-electric models. That may not appear too significant at first – the company, after all, accounted for just 0.6 percent of global vehicle sales last year. But its plan sums up the challenges faced by Elon Musk’s firm.

Granted, Volvo is over-revving its engine by proclaiming it’s going “all electric.” It has no plans yet to drop existing gasoline vehicles. And it will keep the combustion engine in two of the three options it will introduce starting in two years’ time – a plug-in hybrid, which can use either gasoline or electric power, and what it calls the mild hybrid, like Toyota's Prius, which converts braking power into electricity.

The industry sells more cars with these engines than pure electric-powered ones. That’s especially true in the fast-growing Chinese market, where around half the world’s electric and hybrid cars are sold and where Volvo’s owner, Geely, is based.

Tesla accounts for just 3 percent of electric vehicle and hybrid sales there, Barclays points out. Local players selling cheaper cars dominate; meanwhile, the likes of Daimler and General Motors are bulking up. That’s likely to bring down the cost of batteries even further, robbing Tesla of one of its major advantages.

It’s emblematic of the growing competition Tesla is facing around the world. Virtually all carmakers have electric and hybrid offerings of their own, whether smaller vehicles like the Nissan Leaf or BMW’s high-end i3 and i8.

That doesn’t mean Musk’s company is driving down a dead-end street. But it once again calls into question his aggressive target of selling 500,000 vehicles by the end of next year – five times this year’s run rate and just shy of what Volvo currently delivers - and 1 million by 2020.

Moreover, Tesla is still suffering from growing pains. The latest slip-up was a lack of batteries, which kept production 40 percent below demand for much of the second quarter, the company said just before the July 4 holiday.

That and Volvo’s news took more than 7 percent off Tesla’s stock on Wednesday. Even so, Musk’s carmaker trades at 25 times estimated 2020 earnings, compared with Toyota’s multiple of just over 10 times 2017 earnings. More pain lies ahead.

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