Analysis
22 Jun 18

Unplugged: used car buyers wary of electric vehicles

Manufacturers, leasing companies and fleets need to start building demand for new and used electric cars to avoid heavy depreciation.

With sales of new electric vehicles set to soar over the next few years, concerns persist over their future resale values.

In almost every portfolio of vehicles, electric cars retain a smaller percentage of their new price than any other powertrain, with only Tesla and the BMW i3 bucking the trend.

The sharp depreciation of EVs is due in part to their more expensive initial list price, and even with grants and subsidies they remain more expensive to buy in most markets than petrol or diesel equivalents.

Danger of obsolescence

Moreover, the rapid pace of technological development risks making current models obsolete by the time they reach the used car market. This leaves fleets and leasing companies in a quandary: should they operate EVs on a short-term basis, such as 12 or 24 month contracts, to avoid the danger of obsolescence; or should they opt for extended holding periods to amortise the depreciation over a longer time?

Dylan Setterfield, global senior forecasting editor, cap hpi, said the longer holding periods currently make better financial sense, with the depreciation curve becoming much shallower after two years.

He also reported that the first generation of electric vehicles have suffered low used prices, due in part to poor remarketing strategies, and warned that there will be a significant difference between vehicles available today and those on manufacturer drawing boards, particularly in terms of range.

“There will still be a buyer for a shorter range vehicle, but you will have a premium for vehicles that will travel further,” said Setterfield.

Arguably the biggest market distortion, however, are the discounts and subsidies to encourage new car buyers. 

“That doesn’t encourage anyone as a second buyer. It’s an artificial sitiuation,” said Setterfield.

BMW’s successful strategy

He identified BMW’s strategy for the launch of the i3 as a blueprint for success for manufacturers and leasing companies trying to bolster EV residual values.

“BMW worked very closely with leasing companies to keep those first vehicles within the dealer network when they came back to market,” said Setterfield.

Any leakage of i3s into the wider used car market was minimal, which allowed BMW to achieve residual values in excess of cap hpi’s already optimistic forecasts.

As volumes of electric cars rise, however, controlling the supply of used vehicles will become much more difficult. On the positive side, their lower fuel bills and maintenance costs should bring total cost of ownership parity with internal combustion engine cars by 2021, according to KPMG.

But in today’s market there is still a shortage of sufficient robust data to forecast the residual values of EVs with any confidence, according to Sonja Nehls, head of car to market at Autovista Group. 

Build demand for second-hand EVs

She said manufacturers and dealers have to start growing demand for new electric cars among private buyers – the majority of early adopters have been fleets – in order to stimulate demand for these cars in the secondhand market where customers remain cautious. 

“As in the new car market, private demand will only slowly gain speed, and even this will be with a delay of at least three years as the vehicles flow through,” said Nehls. 

Building a demand for secondhand EVs will be a challenge, she added, because OEMs are under pressure to meet CO2 targets, which means they are likely to maintain attractive offers to support sales of new electric cars.

“These will directly compete with young used cars and put residual values under further pressure,” said Nehls.

She also suggested that the prices achieved by secondhand electric cars could be bolstered by dealer offers such as a fixed price to install a charging point; free-of-charge software updates; and even the offer of a rental car being made available for longer journeys.

“Ultimately, carmakers need to become advocates for the future used EV buyer through a combination of developing used car product packages with product marketing, defining the EV buying process with dealerships and pushing new EV sales to private customers,” said Nehls.
 

Authored by: Benjamin Uyttebroeck