The transition from traditional combustion engine vehicles to electric cars is encountering a significant challenge that could have substantial financial implications for the automotive industry.
The reluctance of consumers to purchase used electric vehicles (EVs) is contributing to a decline in the overall market for new EVs. In the $1.2 trillion second-hand car market, prices of battery-powered vehicles are experiencing steeper drops compared to their combustion-engine counterparts.
Several factors contribute to this trend, including the absence of subsidies, a wait-and-see approach for advancements in EV technology, and persistent gaps in charging infrastructure.
A fierce price war ignited by Tesla and competitive Chinese models is further exacerbating the devaluation of both new and used electric cars. This trend poses a threat to the earnings of major industry players such as Volkswagen and Stellantis.
In Europe, where a substantial portion of new vehicles are leased, car manufacturers and dealers financing these transactions are grappling with the challenge of recovering losses from plummeting EV valuations by increasing borrowing costs.
Consequently, this is impacting demand in European markets that were initially at the forefront of the shift away from fossil fuel-powered vehicles.
As the issues surrounding second-hand EVs persist, the potential for substantial financial losses looms large over the industry. The situation is anticipated to intensify in the coming year as a significant number of the 1.2 million EVs sold in Europe in 2021 will reach the end of their three-year leasing contracts and enter the second-hand market.
The industry’s response to this challenge will play a pivotal role in determining financial outcomes, consumer confidence, and the broader decarbonisation efforts, including the European Union’s plan to phase out sales of new fuel-burning cars by 2035.
Despite efforts to divert battery-powered cars into mobility offerings and ride-sharing startups, there is limited demand from these sectors. Unwanted combustion engine cars often find their way to African markets, contributing to pollution issues due to a lack of charging infrastructure.
The cautionary tale from China, where abandoned EVs became a challenge despite lucrative subsidies, raises concerns about potential eyesores in Europe or the United States. Such scenarios could strengthen calls from conservative politicians to reconsider support for the EV industry, especially with key elections approaching in 2024.
Early warning signs emerged when Tesla aggressively reduced prices to boost sales, triggering a broader price war that impacted profitability for many manufacturers.
According to iSeeCars.com, a website that tracks car sales, second-hand EV prices experienced a notable decline, approximately one-third, compared to a mere 5% decline in the overall used car market.
In Germany, Europe’s largest car market, the slowdown in orders for new EVs is leading to an increasing inventory of used models, resulting in prolonged periods on car lots and categorisation as “risk inventory.”
One of the challenges stems from the industry’s relative inexperience in dealing with second-hand EVs. Unlike combustion-engine cars, the valuation of EVs is complicated by the lack of standardised tests to determine battery quality, which constitutes around 30% of an EV’s value.
Although some EVs demonstrate robust performance over the years, consumer hesitancy towards used EVs persists. Manufacturers are actively exploring new battery technologies, such as solid-state batteries, to address concerns and enhance affordability, range, and charging speed.
The industry is also witnessing commitments from major players like Mercedes-Benz, BMW, Volkswagen, Stellantis, and Renault to introduce next-generation EVs with competitive pricing.
In response to the uncertainty surrounding EV technology, fleet management companies like Ayvens predict an increased preference for leasing over direct purchases. This shift signifies a broader transition from car ownership to a more prevalent trend of using vehicles on a fee basis.
Addressing these challenges will be crucial for the automotive industry, not only in safeguarding financial interests but also in fostering consumer trust and supporting the global transition to sustainable transportation.
