Swedish car maker Volvo has announced that it is reining back on its strategy to only produce electric vehicles by 2030, as demand for EVs slows in Europe.
The move is an indication of how many carmakers are downplaying their commitments to electric vehicles ‘amid demand and profitability uncertainty’, a new ING report has claimed. At the same time, however, short-term decisions like Volvo’s ‘won’t change the overall direction of EVs’.
Volvo decision
Rico Luman, senior sector economist, transport and logistics at ING, was commenting following Volvo‘s announcement that it plans to sell more hybrid sustainable transport vehicles, instead of focusing only on EVs, as it announced three years ago.
“We are resolute in our belief that our future is electric,” Jim Rowan, chief executive of Volvo, was quoted as saying by the BBC. “However, it is clear that the transition to electrification will not be linear, and customers and markets are moving at different speeds.”
According to Luman, “The shift to EVs is a non-linear journey with many uncertainties, as we have seen over the last couple of years. But it’s increasingly putting European carmakers under pressure while total new car sales fail to return to pre-pandemic levels in their home markets.”
Luman cited Volkswagen’s CEO, Oliver Blume, as noting that the market environment is becoming tougher, which in turn “emphasises the importance of focusing on production costs and competitiveness as the group’s global market share has started to erode with the uptake of EVs.
“At the same time, Volkswagen, as well as several other European carmakers, including Ford and Mercedes, have announced plans to push back earlier targets to phase out sales of internal combustion engines (ICE-)vehicles in Europe.”
So what’s going on?
According to ING, the margins on Battery Electric Vehicles (BEVs) remain slim due to high production costs and fierce competition, making them less profitable than other vehicle types like Plug-in Hybrids (PHEVs), conventional Hybrids (HEVs), or petrol-powered cars.
A rapid push towards BEVs risks hurting short-term profitability, as automakers struggle to absorb these higher costs, ING noted.
At the same time, while there’s broad interest in electric vehicles, demand has plateaued in Europe. Middle-class drivers, a critical demographic, are reluctant to switch to BEVs due to concerns over affordability, range, and infrastructure. Additionally, lease and rental companies are dealing with lower residual values on electric vehicles, which affects their ability to sustain the business case for BEVs.
The European EV supply chain is still maturing, with many parts, including batteries, heavily dependent on Chinese imports. The falling prices of lithium-ion batteries, driven by Chinese production dropping below $100 per kWh, are putting pressure on emerging European battery facilities to compete, which increases the risk for manufacturers.
Many automakers had already committed to phasing out internal combustion engine (ICE) vehicles before the European Union and UK settled on 2035 as the deadline. While this gives manufacturers more time compared to the original 2030 proposal, the extended deadline has created a need for more strategic flexibility in managing the transition.
‘Direction of travel remains clear’
“Amid all the short-term interests and uncertainties, carmakers realise they can’t afford to miss out on EVs, and the direction of travel remains clear,” Luman adds, noting that the European Union is unlikely to soften its CO2 reduction targets.
“The decision to temporise the shift is very much intended to maintain profitability and preserve flexibility in a highly uncertain environment. Western EV sales are slowing for several reasons, but this is a temporary development. The direction of travel has not changed, and investments in the makeover of product portfolios still need to continue to secure long-term positions in the market over the next decade.” Read ING’s report here.
Read more: How the EU’s tariffs on Chinese electric vehicles could impact its environmental targets
