08-03-2022 13:26

Volvo Cars: All-electric by 2030

Volvo Cars CFO Björn Annwall discusses the carmaker's plans to transition from fossil fuel to electric propulsion, and how the shift will transform the nature of the company's investments.
Electric-car-charging-socket.jpg

Volvo Cars aims to be the industry’s fastest transformer to electric propulsion. CFO Björn Annwall (BA) talks to Nordea’s Johan Trocmé (JT) about how this was a natural choice for a niche premium player with a brand and values focused on safety and sustainability. The transformation is changing the nature of the company’s investments and requires partnerships with technology players as intelligence will shift from components and subsystems to become more centralised in the electric vehicles. In addition, the company targets zero emissions by 2040.

JT: Your ambition of selling 50% electric cars by 2025 and 100% by 2030 arguably makes Volvo Cars a pioneer in the car industry. What made you decide to pursue this strategy? How does your ability to invest in this transition compare with that of other car OEMs?

BA: I think, to be fair, Tesla perhaps most deserves the label of ‘pioneer’ for electric vehicles in the car industry. But we aspire to be the fastest transformer in the industry, among incumbents who will make the transition to electric cars. There is a vast difference between starting with a clean sheet and having a legacy business in fossil-fuelled cars. We have high conviction in our ability to make this transition faster than many of our competitors. We are helped by being a relatively small player, in the premium segment, and addressing a customer category that has always considered safety and values to be very important, and which cares about the planet’s safety and sustainability. Our strategy is not dependent on the whole car industry going electric in 2025 or in 2030. We address a fairly small part of the market, but that is sufficient for us to be able to transition completely by 2030.

JT: You have also decided that all new electric Volvo models will only be sold online, which is a radical change from the traditional car distribution model based on dealerships. What is your thinking regarding your relationship with customers and how they will use cars in the future?

BA: It is a radical change, but also a change that has happened in almost all consumer goods categories. Consumers today expect to be able to make purchases online in a simple and convenient way. We need to be able to live up to these expectations in the car industry, too. Our vision is that that you should be able to buy and arrange to have your car serviced with a few clicks on your smartphone, but then get as much personal interaction with the service as you want. Some customers want a lot, and some want none at all. We should, together with our dealership partners, be able to cater for both groups. We need to adapt to what customers want, and use technology to offer them this with a smart and efficient e-commerce setup.

There are some challenges with the legacy distribution model. It is great to have 2,500 dealership entrepreneurs around the world who support us in driving our business. But each of them set their own prices for our products. Each have their own inventory management. This makes price discovery complex for customers, who have to contact several different dealers for quotes and sales negotiations. This is not what car buyers want to do in 2022. And needless to say, 2,500 different inventory management systems worldwide is not the most efficient setup. With our new approach, we are aiming for improved customer experiences, better industrial efficiency and lower costs, which should benefit both us and our customers.

We also note that more and more customers do not see a car as a capital good to be owned. They want access to a car without having it on their personal balance sheet. There has been strong interest in company cars and private leases for years, and we are now seeing more focus on subscription-based solutions, which we are also working hard to develop. Car-sharing services, such as our own ‘M’ concept, is particularly suitable for urban areas, where car ownership can be inconvenient and cars are not used daily. Historically, you have not been able to rely on these services to have cars available. And it may be so important to have access to a car even on one day or a few days per week, that you opted to own a car after all. But if car sharing works properly, for many city residents it is a better alternative to owning a car.

And then there is the aspect of autonomous driving, which will become available in the not too distant future. For us, it will be implemented gradually and in a safe manner. It will be a premium feature in your car where in certain use cases in some locations in the world, Volvo will take over responsibility for driving your car and you can lean back and enjoy the ride. But in time it will become available for bigger use cases, such as driving you between Göteborg and Stockholm while you sleep in the vehicle

We have ceased development of combustion engines and diverted resources entirely to electric propulsion.

Björn Annwall, CFO of Volvo Cars

JT: What is your thinking around electric vehicle batteries? What is the rationale for the SEK 30bn investment in a joint R&D centre with Northvolt and a new battery factory in Europe?

BA: Since we are going all-electric in our product line-up, it is critical for us to have a very efficient electric propulsion platform, including the battery, the engine, the battery management system, and how they are all integrated in the vehicle. It a key parameter for how our customers rate our performance, and for our costs. We have ceased development of internal combustion engines and spun off our two engine plants into a minority-owned company which has a contract to supply us with such engines for as long as we need them. And we have diverted our efforts into building our competence in electric propulsion systems. We already have a lot of knowledge, but battery cell chemistry is not yet a core competence of ours. We could build that up organically from scratch. This would take time. We could buy it in from a supplier, but then we would have to pay a premium for the chemistry, and we may miss out on the optimisation benefits from integrating engine, battery management and other vehicle systems with the battery technology. If you source the chemistry from a supplier, you don’t work end-to-end and receive the chemistry in a something of a black box.

We have two JVs with Northvolt: we will build a battery plant and we will establish an R&D unit to develop the battery cell chemistry. We intend for this unit to work with completely open books towards our own development engineers, to create a steep learning curve for this technology. Both Northvolt and Volvo should benefit greatly from being able to develop and implement this technology on an end-to-end basis.

We are also completely aligned with Northvolt in ensuring that our battery production footprint, including its supply chain, is sustainable. For fossil fuel cars, 60% of the environmental impact is from tailpipe emissions, roughly 30% from our manufacturing supply chain, and 8% from our own manufacturing. For electric cars, we lose the 60% from emissions, but we get a supply chain that uses more raw materials. And this makes it critical for our battery manufacturing to be fossil-free.

JT: In the past three years, Volvo Cars has invested roughly SEK 20bn per annum. How do you think your transition to electric vehicles will affect your future investments, beyond the SEK 30bn investments you expect until 2025? Is there an investment phase with greater needs? Could long-term investment levels be different? Which are the key areas requiring investments?

BA: If we were to try to develop electric vehicles in addition to maintaining our fossil fuel car business, we would have a completely different investment profile than in our past. But our strategy is ‘instead of’ rather than ‘and’. We are ceasing to invest in combustion engines and shifting our resources into electric propulsion. Our investment profile should be generally similar to what it has been in the past. We have investment cycles peaking when we develop new car models and build manufacturing capacity. Our capital expenditure to sales has in recent history ranged between perhaps 6.5% and 11%, and should stay broadly in that sort of range.

The three key drivers of the changing nature of our capex are:

  1. The shift from combustion engines to electric propulsion.
  2. The shift to more centralised intelligence in the vehicle, with less intelligence and value-add in sourced components, which means more and heavier software development for us.
  3. Investments in direct sales solutions, including having vehicles on our own balance sheet during development and ramp-up.

We have no wish for vehicles to be on our balance sheet in the long term, and we are working on fund-based off-balance sheet financing structures. With these we still achieve what we are after: direct contact with our customers, vehicles returning to the Volvo flow, and subscription access based on our global digital platform. We want to take the residual value risk for the vehicles. No one should be better placed than us to manage that risk. We know the performance of our vehicles. We can update the software. We invest in our brand to support interest in our used vehicles as well. Even with structured finance solutions, some customer risks and residual value risks will be on our balance sheet going forward.

Many of our car industry peers have built up substantial customer finance businesses in the past decades. We have historically not had the resources to do this on a global level, and have teamed up with a number of different partners to offer solutions for various markets worldwide. Going forward, with one global digital platform for interacting with our customers, and with rapid technological development in banking and finance, there are more sophisticated and efficient ways of bringing customer finance into the equation.

Going forward, we will disclose in our reporting how our investments are split between fossil fuel and electric propulsion, and you will see that we have, by and large, completely shifted our focus to electric. We are spending some SEK 10bn on marketing, and obviously this is essentially for our electric capabilities. And we rely on our partners to help us make this transition, as we can’t do everything ourselves. They are also making huge investments, and we support them through contracts and volume commitments, and the pricing for the parts we buy from them. In a major transition like this, you simply cannot be best at everything. We will rely not only on tier-one auto component suppliers, but to a great extent on new technology partners. We will aim to work with open books and a strong focus on coming up with good new technological solutions quickly, rather than micro-managing the division of future IP rights. We have a good culture and mentality for this, which makes us an attractive partner for technology players. We are more flexible and light-footed than many of our bigger car industry peers.

Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance.

Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.

 

Björn Annwall, CFO at Volvo Cars

 
 
 
 
Capex to sales should remain in the historical range, but with different focus areas.

 
 
 

If you are a corporate client and want to access the full Nordea On Your Mind report, please contact viktor.soneback [at] nordea.com (Viktor Sonebäck).

Insights
Nordea On Your Mind