Volvo announced on July 5 that beginning in 2019, all of its models will have an electric motor, either as a hybrid engine or completely electric engine. The announcement builds on last month’s announcement that Polestar, the performance arm of the Volvo brand, will split off into its own completely electrified brand.

Five fully electric vehicles are planned to launch between 2019 and 2021, including three Volvo models and two Polestar models. The remaining models will consist of gas and diesel plug-in hybrids or mild hybrids.

Cheap gas stalls hybrid and EV adoption in the US

Alternative energy vehicles are still a fraction of the overall automotive segment and currently account for less than 5% of all vehicle sales in the US. Volvo currently offers plug-in hybrid variants on the XC90, XC60 and S90 models. According to hybridcars.com, Volvo sold 202 XC90 hybrids in June 2017, which accounted for 7% of XC90 sales and 3% of all Volvo sales for the month.

One quarter of US car shoppers would consider a hybrid/electric vehicle for their next vehicle purchase

Interest in alternative energy vehicles is evident, with Mintel’s report on perceptions of auto brands in the US finding that one quarter of car shoppers would consider a hybrid/electric vehicle for their next vehicle purchase. However, it appears that car shoppers care more about their bank accounts than the environment, and the increased price point on hybrids and EVs could turn consumers away in the current cheap gas environment.

Using Volvo as a specific example, the XC90 starts at $45,750 on Volvo’s website, while the XC90 Plug-In Hybrid starts at $67,800. With an average price of $2.46 per gallon of gas in the US currently, it would take over 8,900 gallons of gas to break even. At 26 miles per gallon, XC90 drivers would need to drive more than 230,000 miles before even matching the MSRP of the hybrid model. The 48 volt battery planned for Volvo’s mild hybrid models are a fraction of the voltage on a Toyota Prius, so costs shouldn’t increase significantly on their mild hybrid models. Volvo is also a premium auto brand, so sales will be less sensitive to modest price increases.

Economies of scale can pave the road for electric vehicles

If large increases in production can reduce the price of hybrids and electric vehicles for Volvo and keep them competitive with other premium brands, Volvo should see success with the move. According to Mintel’s US report on the car purchasing process, two in three car shoppers plan to research fuel efficiency before their next vehicle purchase, and more than three quarters would consider maintenance costs. Since electric vehicles require less maintenance than standard internal combustion engines, the maintenance aspect of electric vehicles will be appealing to car shoppers. A competitively priced hybrid or electric vehicle will save car shoppers money in the long term on gas and maintenance costs. Brands can also gain inroads with parents on hybrid and electric vehicle models as nearly a third of parents want a vehicle with better fuel economy.

Increased adoption of hybrids and electric vehicles across the board will further spur consideration during the purchasing process. High profile luxury brands like Tesla and BMW have put a spotlight on the luxury electric segment, and car shoppers will become more familiar with plug-in hybrids and fully electric vehicles. Volvo’s announcement puts them ahead of the curve as electric vehicle adoption rates are expected to increase in the next few years, and if gas prices should rise by 2019, Volvo will be poised for success.

Buddy Lo is an Automotive Analyst at Mintel. He is responsible for researching and writing reports on the Automotive Industry within the US.

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