Why Residual Values are increasingly volatile

In the last two years, lease companies have benefited massively from higher used-car prices. Those days are ending. And dynamic pricing means predicting RVs is getting more complex, not more straightforward. 

New car shortages led to such a high demand for used vehicles that, in some cases, they gained value instead of depreciating over time. That was good news, especially for leasing companies, who had set the RVs for their de-fleeting vehicles in times before the supply chain problems. 

Setting RVs

The ideal RV setter is a half statistician, half fortune teller. The latter skill is in short supply because nobody predicted a pandemic, a war in Ukraine, and massive supply chain issues a few years ago. Those shocks to the system can now be taken into account, however. The supply situation is improving, and RV predictions have taken the new macroeconomic realities on board.  Huge RV-based windfalls, as experienced by lease companies and other major “de-fleeters”, will disappear. 

Which other RV trends to optimise cost should fleets be aware of? Here’s a surprising one: the RVs of vehicles with internal combustion engines (ICEs) will align with those of EVs, not vice versa. 

Electric

Here’s the conventional wisdom: as electrification becomes more widespread, economies of scale will cause the price of EVs to drop below that of ICEs. But actual figures show that for a host of reasons – new emission standards, mandatory equipment, shorter life cycles, and demand exceeding supply – ICE prices are rising faster than EV ones. This means that price parity will be achieved by ICEs becoming as expensive as EVs, not vice versa. 

This has consequences for the RVs of EVs, but not for all in the same measure. Experts say that Full-electric BEVs will have consistently higher RVs than ICEs over time. The situation is more complex for PHEVs precisely because these hybrids are a transitional motorisation type. Much depends on government support for PHEVs. Where it is absent, they could fall out of favour reasonably rapidly – both new and used. 

Dynamic Pricing

A new factor complicating RV setting is the dynamic pricing of new vehicles. Tesla is the prime example, having lowered and increased specific models’ prices in the last few months. Used Teslas are in high demand, so this brand’s RVs will likely remain safe. But the rest of the market may be forced to follow, which could have dramatic and unforeseen effects on RVs – a crucial but increasingly volatile element of your fleet’s TCO. 

Dynamic pricing has a direct effect on the P&L forecast of the leasing company but also adds a layer of complexity to the customer’s budget management. Lease budgets drive policies, policies drive budgets, and budgets drive POs. Moving from steady and predictable RVs (even if they’re high) to variable RVs generates a ripple effect across the ecosystem.

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Authored by Frank Jacobs

Image: Shutterstock 173716073