EV residual values concern lenders

News

There are an estimated 46 new electric vehicles slated for production in the next three model years, according to Cox Automotive. While that number will be celebrated in some corners, it is generating concern among auto lenders that worry about residual values and incurring big losses similar to what happened during the financial crisis a dozen years ago.

The consternation comes from the fact EVs are commonly leased and captive finance companies dominate this space, meaning they will be taking a risk on EV resale values. If lenders get residual values wrong and off-lease vehicles are worth significantly less than predicted, that could generate significant losses when lenders resell them at auction.

This resale-value catastrophe last occurred in 2008 when fuel prices spiked and auction values fell for full-size trucks coming back from leases. Several lenders back then had to take special charges because of unexpected depreciation on off-lease vehicles. Ford Credit, for instance, took a $2.1 billion “impairment” in 2008 on top of another $700 million for higher-than-expected depreciation, according to government filings.

In 2019, EV sales accounted for less than 2 percent of U.S. light-vehicle sales. The smaller volume makes it less likely that resale values would adversely impact lenders. But as the number of EVs in production grows, so do the risks.

“Today they’re low volumes and probably not that big a deal, but what happens when it reaches that takeoff point and it’s 30, 40, 50 percent” of the market? Joy Falotico, president of Lincoln Motor Co. and chief marketing officer of Ford Motor Co., said at last month’s American Financial Services Association Vehicle Finance Conference in Las Vegas.

Consumer hesitancy over outright purchasing of EVs is part of why lease levels are so high, according to Alex Yurchenko, senior vice president of data science at Black Book, an analytics and insights company that helps auto lenders stress-test their portfolio for industry changes such as a recession or widespread electric vehicle adoption.

“Everyone expects lease penetration to be very high with electric vehicles at the beginning, much higher than we expect for luxury vehicles,” Yurchenko said. “That brings more risk to the captive.”

That’s because leasing is more expensive for automakers to incentivize, and for that reason, go-to-market strategies will vary among the captive lenders depending on the types of EVs they’re likely to finance, Yurchenko said.

Nonluxury brands are more likely to go for volume, he said, which means more emphasis on leasing incentives to increase penetration. Luxury brands will prioritize profits, and strategies will revolve around targeting the right customers at the right prices.

“For the mass markets, it’s a relatively new product, and leasing is one way to get that new product,” Yurchenko said. “We still have about a $10,000 premium for the EV compared to similar gas vehicles, in the current generation. To get to that mass market, that gap has to come down.
“People are not going to be paying that much extra for a similar vehicle.”

There’s a lot of work to be done for auto lenders, which need to determine factors such as pricing, what additional options and features the vehicles should be customized with and the mix of financed and leased vehicles in their portfolios before going to market.
But there are reasons to be optimistic about today’s EVs, Falotico said. The new generation of electric vehicles get up to triple the range of those a decade ago, potentially increasing their resale value down the road. The new Ford Mustang Mach-E, for example, gets up to 300 miles on a charge, she said.

“Increased battery range and the rollout of charging networks like we have done are showing a positive relationship to residual value for EVs,” said Falotico, former CEO of Ford Motor Credit and a past chair of the AFSA Vehicle Finance Division.

This was not necessarily the case a decade ago, when the first generation of mass-produced EVs — chiefly the Nissan Leaf — gave EVs a reputation for poor resale value and unpredictability that lingers to this day when it comes to estimating three-year residual values when they come back from a lease, experts said.

Eric Lyman, chief industry analyst for TrueCar’s ALG, admits that ALG’s predicted residual values for early EVs were too optimistic. ALG is a widely used industry benchmark for setting residual values.

In a word, the problem was range, Lyman said. Statistically, a claimed range of 100 miles between charges for early EVs was more than enough to cover the vast majority of daily commutes, he said. But emotionally, consumers couldn’t accept that EV range was so much less than that of a gasoline-powered car, and demand was far below expectations. As a result, the vehicle’s value at resale was dragged down.

“But the production ramp-up began and continued for many years as the factories sought to cover their fixed costs,” Lyman said.

Soon after introducing the battery-powered Leaf to the U.S. market in 2010, Nissan announced it would add capacity at its Tennessee factory complex to build up to 150,000 annually. But in fact, U.S. volume peaked in 2014 at 30,200, according to the Automotive News Data Center. In 2019, U.S. sales were 12,365, down 16 percent.

This resulted in a period of oversupply coupled with low demand.

“And guess what happens? In that situation, your residual values are no good,” Lyman said.

But he insists the situation today has changed. EVs are vastly improved, and ALG learned from its mistakes and has improved at predicting EV residuals over the past decade.

In the 2013 model year, Lyman said there was a 22 percentage-point gap in residual values between EVs on average and their internal-combustion counterparts. Today, that gap has shrunk to around 7 percentage points. In fact, according to Cox Automotive, Tesla used-car values as a percentage of suggested retail are actually better than the luxury-car average.

Zo Rahim, Cox Automotive manager of economic and industry insights, said non-Tesla EVs also are closing the gap, mostly because of greater range plus lots of sought-after high-tech features that tend to come with EVs, such as advanced driver-assistance systems.

“You’re starting to see retention values improve” for EVs, he said.

Based on wholesale auction data from Feb. 21-27 this year, excluding Tesla, EVs from the 2018 model year on average retained 53 percent of original suggested retail, Cox Automotive said. That was 5.8 percentage points below the average for the entire industry. In the same period, the gap between EVs and industry average for the 2017 model year was 8.3 percentage points. For the 2016 model year, the gap was 7.9 percentage points.

That means EVs from the 2018 model year are retaining value vs. their peers better than the two previous model years.

Improvements in residual value and range are starting to be felt at dealerships, said Joe Bizzarro, dealer principal at Interstate Nissan in Erie, Pa. — which offers the Leaf — plus two Mitsubishi dealerships in Pennsylvania and New York that sold the tiny Mitsubishi i-MiEV.

“When they first came out, like the Mitsubishi i-MiEV, the range was, like, 50 or 60 miles,” he said.

Nissan North America Inc. says the Leaf Plus, with a 62-kilowatt-hour battery, now gets up to 226 miles of range. It went on sale in the U.S. market in April 2019. Range for the standard Nissan Leaf, with a 40-kWh battery, is 149 miles, the company said.

Bizzarro said that lease payments for the standard Leaf are affordable, thanks in part to tax breaks for EVs. He said his dealership is advertising a monthly payment before sales tax of $290 for a 2019 standard Leaf, which he said has a suggested retail price of $33,925, including shipping.

But EV sales are low in his snowy market, Bizzarro said. He said the Nissan dealership probably sold only about 10 Leafs last year, although he expects to more than double that this year. Though small, it’s a move in the right direction that should make lenders happy.

“That 225-mile one, I think we’re going to see a lot of traction on this,” the dealer said. “The miles are really attractive.”

Products You May Like

Articles You May Like

Hyundai, Kia rebound sharply from pandemic low
Can the Rhine’s white gold power Germany’s green e-car race?
Green Deals: Greenworks 24V 22-inch hedge trimmer returns to Amazon low at $100, more
Meet the Hypothetical 2022 Honda Civic Coupe
US: Ford Sold Less Mustang Mach-E In April, Because Of Europe?

Leave a Reply

Your email address will not be published. Required fields are marked *