Volvo’s EV Announcement Means Competition Is Heating Up

in Market Commentary by

Market Digest – Week Ending 7/7/2017
It was a short week for U.S. markets given the July 4th holiday, which was marked by a number of geopolitical events, including North Korea’s missile launch and President Trump’s private meeting with Vladimir Putin. Domestic and foreign stocks were modestly down through Thursday, but a stronger-than-expected U.S. jobs report on Friday sent equities higher. Virtually all major asset classes ended the week lower, including bonds, real estate, gold, and commodities.

Weekly Returns:
S&P 500: 2,425 (+0.1%)
FTSE All-World ex-US: (-0.5%)
US 10 Year Treasury Yield: 2.38% (+0.08%)
Gold: $1,213 (-2.3%)
EUR/USD: $1.140 (-0.3%)

Major Events:

  • Monday – Tesla announced second-quarter sales were negatively impacted by production shortfalls
  • Tuesday – The United States celebrated its Independence Day
  • Tuesday – North Korea successfully tested an Intercontinental Ballistic Missile (ICBM), which landed in the waters between Korea and Japan
  • Wednesday – Volvo announced that by 2019, all cars in production will be fully electric or hybrid
  • Friday – U.S. non-farm payrolls increased by 222,000 in June, well ahead of the 174,000 estimated by economists. The unemployment rate ticked up to 4.4% as more people joined the workforce
  • Friday – President Trump and Vladimir Putin held a highly anticipated meeting at the G20 in Germany

Our take:
An interesting announcement was made by Volvo this past week. The company stated all new cars from 2019 will either be fully electric or hybrids. This is somewhat of a landmark moment, as Volvo is the first major automaker to totally abandon internal combustion engines – at least as the sole powering mechanism for cars. It seems only logical that other automakers will follow suit. And while this broader trend will have a significant global impact (in numerous ways), it puts another carmaker directly in the crosshairs: Tesla.

Tesla has been revolutionary in its development of pure electric vehicles (EVs), and it still enjoys a technological advantage over other pure EVs in the market. But with Volvo’s announcement, the competition is clearly heating up. The situation is a bit reminiscent of Apple’s iPhone and its impact on the mobile phone market. When it debuted in 2007, it was ground-breaking technology with respect to its design, touchscreen interface, and user-friendly software. And within a relatively short number of years, it experienced mass adoption.

However, its success also came with a downside: it lured every major phone maker into the touchscreen market. Soon enough, companies like Samsung were producing phones that were just as attractive and capable. In fact, Samsung has retained the lead in global smartphone sales in almost every quarter since 2014.

This is not to say Apple was crushed by a tidal wave of competition. Quite the opposite, in fact. Its first-mover advantage helped entrench a broad customer base that has loyally stuck with its brand. It also has a deep network of content through its iTunes and App store. Along with numerous design upgrades, these factors helped Apple maintain a leadership position in the smartphone market and significantly grow its business over the years.

But does Tesla enjoy the same advantages as Apple? Tough to say. It’s still a relatively small fish in the global automotive market. Much will depend on the firm’s ability to produce cars at greater scale, particularly its more affordable Model 3. If it stumbles, the competition is more likely to close the technological gap and erode its lea

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Brendan Erne, CFA
Brendan Erne serves as the Portfolio Management Team Leader with Personal Capital Advisors. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-managed a large cap growth portfolio and co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.

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