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Thinking big: Volvo and Tesla’s quests to build luxe brands

Tesla Model STesla Model S
Tesla Model SCourtesy of Tesla

There is an old rule that economists follow: In making a forecast, give a number or a date—but not both. It is a rule that executives in the auto industry ignore with surprising frequency. In instances involving Volvo and Tesla (TSLA), two companies whose names are seldom spoken in the same breath, the lack of caution in setting future sales targets may cause them more trouble than a mere fender bender.

After years of drift, Volvo Cars is trying to rebuild its product line under its Chinese owners Geely Motors. No longer content to be solely identified as a maker of boxy station wagons, Volvo has set its sights on becoming a full-fledged luxury manufacturer—on the same level as the industry’s top producers.

Its goals are ambitious, aggressive, and yes, audacious. Leading the effort to reach them is CEO Håkan Samuelsson, who came to Volvo from Munich-based truck maker MAN in 2009. In an interview with Automotive News, Samuelsson set unexpectedly steep targets for Volvo’s recovery. Among the highlights:

  • A return to annual U.S. sales of 100,000 plus by 2016;
  • Arrival in the “elite pantheon of global luxury brands” in three to four years;
  • Achievement of 800,000 in global sales in 2020.
  • The all-new Volvo XC90
    Courtesy Volvo

    If Volvo can hit just one of those targets, Samuelsson would be honored like a Norse god back in Sweden where Volvo’s headquarters remain. But even with Geely’s backing, Volvo doesn’t have the scale, depth, or wherewithal to make a serious challenge to the industry’s upscale leaders. Competition in the car business has only tightened in the past several years while Volvo has been sidelined, and it is starting anew from well back in the pack.

    While Volvo’s targets have mostly been set out of the public eye, the same can’t be said about the sales goals facing Tesla Motors. CEO Elon Musk might as well have tweeted his to the world at large. From around 20,000 cars sold last year, he has let it be known that he wants to be selling more than ten times that number—250,000—in the U.S by 2020, and 500,000 worldwide. We’ll take a longer look at his chances further on in this column.

    Developing a true luxury brand that commands a premium price on the strength of its name can’t be done overnight, as Volvo should know. When he was running Lincoln, Jim Farley, who now heads Ford Europe, used to estimate that 15 to 20 years would be required to elevate Lincoln into the ranks of luxury players. Mercedes-Benz, BMW, and Audi, the only three authentic members of the group (excluding exotics like Ferrari and smaller makers like Jaguar) have been at it for decades and have earned their pedigrees with achievements in racing as well as in engineering and technology. Even Lexus doesn’t qualify for this elite grouping because of its weak standing outside the U.S and its lack of any racing credentials.

    Getting to the top tier requires a financial commitment that Volvo hasn’t made. Cadillac has invested billions of dollars in new models since 2000 in a bid to regain its luxury standing and still has more to do; it is now developing a V-8 powered flagship sedan for 2016. Volvo’s flagship is the 2015 XC90 sport utility, which is powered by a far-less imposing inline four-cylinder engine.

    Volvo hasn’t made its quixotic quest any easier with its recent performance. While it claims a long list of safety firsts—three-point seatbelts, rear-facing child seats, air bags—Volvo cars have always been positioned as sub- luxury or “entry luxe”, marketed to body of devoted fans who favor practicality over prestige and performance. Volvo was neglected during its years of ownership by Ford (1999-2010), as its product cycles stretched out longer and longer and other makers caught up on the safety front. 2007, and so far this year its sales have reached only 47,823 (vs. 52, 112 for the same period in 2013).

    Samuelsson is pinning his hopes on the belief that Volvo’s squeaky-clean reputation, which served it so well in the past, will resonate with a new generation of buyers. “If you look at what is happening in society, our brand promise is in line with developments,” he said in the interview. “People want to show that they are taking responsibility for safety and taking responsibility for the environment. I think in the future that will more and more be a premium value.”

    But Samuelsson overlooks changes in the market that will squeeze Volvo from both the bottom and the top. The German Three have been rolling out more and more new models, many at price points that used to be considered entry-luxe. Buyers shopping for a European brand can now choose between, say, Mercedes three-pointed star and Volvo’s ring and arrow emblem (a symbol for iron in Sweden but representing male sexuality in the U.S). That’s a tough comparison for Volvo.

    At the same time, volume brands like Toyota and Hyundai have been steadily adding upgraded features and entertainment, safety, and performance options that used to only be available on luxury models. That leaves very little space in the middle for brands like Acura, Infiniti, Lincoln – or Volvo. ” “Volvo’s goals aren’t completely unattainable but even if Volvo’s decisions are perfect, the competitive landscape is extremely challenging to thrive and grow in,” says Jessica Caldwell, senior analyst at Edmunds.com., the car-shopping web site.

    Tesla finds itself in a different, if not equally difficult, dilemma. Worries are growing that there is a large novelty element attached to the appeal of his $80,000 battery-powered car that will be difficult to replicate as its sales volumes grow. Consumer Reports added fuel to the worries when it reported that the company has about 2,300 remaining 2014 Model S cars, including showroom display cars, which the company is selling at a discount.


    One Seeking Alpha blogger figures that more than half of Tesla buyers are what he describes as essentially opportunistic. The Model S became an unexpected addition to their fleet of cars, and if it hadn’t been available, they wouldn’t have bought another luxury sedan of any description. “In subsequent years,” he reasons, “there will be lower numbers of purchasers deliberately modifying their normal purchase behaviors in order to get a Model S.”

    For Musk to reach his outsize targets, he will have to accomplish three things that he hasn’t tried before.

  • He will have to develop a robust distribution system that can offer test drives, provide service, and handle trade-ins. State franchise laws are currently limiting Tesla to the establishment of showrooms that are capable of displaying cars but do little else.
  • He will have to scale up his production capacity at a rate that the auto industry has never seen before. Musk wants to double output by the end of 2015 and make five times as many cars by 2020.
  • He will have to successfully launch his third all-new product, the more affordable Gen III, and make it profitably for less than half of what the Model S sells for. New models are demanding. He’s already delayed the introduction of his second car, the Model X, several times, and now it isn’t due until 2015’s third quarter.
  • Musk’s Tesla and Geely’s Volvo are two vastly different companies with attached narratives that bear little resemblance to each other. But at this point in time, they find themselves in the same predicament: Living up to dates and numbers that give new meaning to the term “stretch targets.”