China-made Polestar 2 set to challenge Tesla

Volvo, the Swedish carmaker that is owned by China's Zhejiang Geely Holding Group Co, is ready to battle market leader Tesla Inc in the electric-car market. This week at the Geneva Auto Show and recently in the US, the company's Polestar electric brand revealed its first all-electric model, the Polestar 2.

Polestar said the car is meant to compete with Tesla's Model 3 and will be produced in China and available for online ordering initially in China, Canada and the US as well as six European markets.

Tesla has stunned the auto industry with an electric vehicle (EV) lineup of the Model S, Model X and Model 3, which sold about 145,000 units in the US last year.

Polestar 2 is a five-door car that will have two electric motors. According to Polestar, the vehicle should travel up to 275 miles on a single charge. With about 408 horsepower, it can go from 0 to 60 mph in less than five seconds.

The base price for the Polestar 2 will be about $43,000. Like Tesla, Polestar will produce more expensive versions of the car at first. The launch edition of the Polestar 2 will cost about $63,000. Recently, Tesla unveiled a $35,000 version of the Model 3, which previously had a starting price of about $44,000.

"Similar to many luxury products, we think much of the allure of owning a Tesla is an image thing, and we're seeing fairly intense backlash from consumers following Tesla's decision to introduce a $35,000 mass market version of the Model 3. We think it's going to do damage to the brand and is one of the primary reasons we downgraded our rating on the stock," analyst Garrett Nelson of CFRA Research said.

Nelson said the decision to create the Polestar brand might make sense for Volvo because "we think there's a strong desire among EV buyers to own a unique product, and we've seen other automakers benefit by making similar moves in recent years. Hyundai's decision to separate the Genesis brand is one that comes to mind," he added.

"Perhaps they want to create something new and hip to be like Tesla or they want to experiment with EVs this way rather than only via the Volvo brand in case they need to kill this quickly," said David Whiston, industry analyst with Morningstar Inc.

Executives at Volvo and Polestar will be closely watching the unfolding trade talks between China and the US as the initial models will be exported from China. A lot of those cars may not come to the US if tariffs on Chinese imports are too high, Polestar CEO Thomas Ingenlath told the Financial Times.

"I don't see how vehicles can be imported into the US from China with a very large tariff on them, so their strategy has to assume tensions ultimately cool down," said Whiston.

Volvo opened a plant in South Carolina last year.

"If you don't have the opportunity to establish the market and the brand, then the decision to set up production there is a huge risk, and who would take that risk?" said Ingenlath, according to the website Teslarati.com.

"Volvo's success with the Polestar 2 will largely depend on how the quality and specs of the vehicle compare to a Tesla, which is a considerable challenge in our view," said CFRA's Nelson.

"The best way to compete with Tesla is to make great-looking EVs with range at least as good as Tesla's. You can't compete on a celebrity CEO basis, as Tesla will win that battle," said Whiston, alluding to Tesla's Elon Musk.

Tesla is likely to face competition besides the Polestar 2, as Porsche announced it will electrify its Macan sport utility vehicle, while Jaguar and Audi also have plans for EVs.

"We believe Tesla will face significantly increased EV competition starting with the 2021 model year from a variety of auto manufacturers," Nelson said.