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Volvo and the Hybrid, Electric Future

Jul 16, 2017
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SMITH BRAIN TRUST – For Volvo the decision to introduce only hybrid or all-electric vehicles starting in 2019 is about going green. But it's also about making green; changing the story that Volvo has been selling to investors.

It's about stealing some limelight from Tesla, and potentially about positioning the Sweden-based automaker for a possible initial public offering, says David A. Kirsch, associate professor of management and entrepreneurship at the University of Maryland's Robert H. Smith School of Business. It's about branding Volvo as a car company of the future.

"And it's pretty cool," says Kirsch, who anticipated the move in his 2000 book The Electric Vehicle and the Burden of History. A chapter of that book explored potential pathways to electrification, with hybridization being one of them. It's the notion that consumers would be able to choose from a widening array of hybrid formats.

Volvo last week announced that starting in 2019, every new model the Chinese-owned automaker rolls out will run, at a minimum, on a hybrid electric drivetrain. And it says it will debut five new electric and hybrid models between 2019 and 2021. Volvo chief Hakan Samuelsson called it "the end of the solely combustion engine-powered car."

The news came as formidable electric-vehicle rival Tesla began production of its new mass-market Model 3 electric battery-powered family car.

For investors, Tesla has come to symbolize the vehicle-electrification movement and Elon Musk a sort of prophet. In the process, Tesla's stock soared and in Kirsch's opinion, has become "grossly overvalued." Tesla's market capitalization this year briefly topped that of General Motors, Ford and Fiat Chrysler, among others, despite its comparatively low vehicle output and comparatively high vehicle prices.

Tesla has "this seemingly bulletproof investment narrative," Kirsch says. "I personally do not understand it." He's not alone. "The stock must fall," he says. "It's just a question of when, and of course that's a very difficult thing to time."

Kirsch says that given Tesla's stock price surge, it's not surprising that an established automaker would look to distinguish itself from the pack, as Volvo has done, and look to align itself with Tesla's valuation narrative.

"And so, even though right now Volvo is not publicly traded," Kirsch says, "I can imagine this setting the stage for an eventual IPO."

The decision, heralded as a death knell for the internal combustion engine after more than a century of dominance, comes with serendipitous timing, from a geopolitical standpoint.

France just last week pledged to ban the sales of gas or diesel vehicles by 2040 as part of an ambitious plan to meet its Paris climate accord targets. The Netherlands is striving for a 2025 ban for gas and diesel vehicles, and some states in Germany are looking toward a 2030 ban. And the U.K., less ambitiously, is considering a law requiring that all new cars be electric or low emission by 2040.

And, outside Europe, India is considering a measure that would end the sale of gas or diesel cars by 2030.

Samuelsson said last week Volvo was "determined to be the first" among premium car makers to embrace a ban of its own.

"Volvo didn't need to be the first," Kirsch says, "but it knew it didn't want to be the last. So why not be the first?"

Volvo, long known for its unexciting boxy designs and superlative safety record, has lately been on a roll. It has been turning heads in the U.S. market, introducing impressive new models that rev toward the upscale. Its XC90, a sport utility vehicle with a strong luxury feel, and its S90 sedan have been strong sellers.

"Now, they want to maintain some positive momentum around the story of Volvo," Kirsch says.

That's why it's taking aim at the electric-car market, looking to seize on the luxury and efficiency brand that's worked so well for Tesla.

"Teslas are notoriously expensive," Kirsch says. "Volvo is hoping maybe someone will say, 'Well, I can't afford an electric Tesla, but maybe I can afford a hybrid-electric Volvo.'"

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About the University of Maryland's Robert H. Smith School of Business

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and part-time MBA, executive MBA, online MBA, specialty master's, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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