The cost of a new electric vehicle today is strongly influenced by its residual value tomorrow. But when that number is a moving target, what’s a fleet manager to do?
When it comes to its cars, the City of Vancouver has long been a proponent of driving electric. It introduced EVs into its fleet in the 1970s — “little cart things,” says Amy Sidwell, the city’s manager of equipment services — bought a few more in the 1990s and it now has 120 EVs in its 1,900-vehicle fleet. It wants to cut fleet emissions by 50% by 2030 and 100% before 2050, which means many more EVs are on the way.
“We’ve had great success so far,” Sidwell says. “People really like using them and they cost the same or less than [internal combustion engine cars] to operate.”
The city is now buying EVs in earnest — it recently got approval to buy 44 medium- and heavy-duty electric trucks — but there is one unknown around the cost of these cars: their resale price. The city hopes to recoup some of its investment when it eventually sells these rides, but it’s hard to know how much they’ll get for an EV after about 10 years of use.
Residual value unknown
“We haven’t sold any yet, so we don’t know what kind of residual value we’re going to get,” she says. “Once we do, we’ll take that information and include it in our estimates.”
A lot is bound to change in 10 years, but according to Moody’s Analytics, in the current market their cars would sell for less than the internal combustion engine (ICE) autos in their fleet. Moody’s data indicates that EVs lose 88% of their value after nine years compared to 79% for gas and 68% for diesel, in part because vehicles with better EV technologies keep coming to market, making older models obsolete. These lower prospects — along with overall uncertainty due to the rate of change — are a problem for companies that want to incorporate EVs, whether through lease or purchase, into their fleets.
For lessees, lower residual values can make monthly payments more expensive as the lessor has to charge more for the lower resale rate, while car buyers will recoup less of their initial investment when they eventually sell. “This is a really difficult problem,” says James Carter, principal consultant with Vision Mobility, a Toronto-based consultancy. “Taking one look at the monthly payments shocks anyone with a modest budget. If you select a top spec Bolt or Kona, you’re well into BMW 5 series territory — a serious lease payment in almost anyone’s language.”
Driving outdated technology
Every car, whether electric or not, loses some of its value the minute it leaves the dealership lot. After that, though, cars depreciate at fairly predictable rates, with resale values depending on factors like the number of kilometres driven and wear and tear. While the same issues apply to EVs, there are some other determinants that make these plug-in rides more vulnerable to price depreciation.
First of all, while ICE vehicles tend go the same distance on a tank of gas, and most have the same parts, EVs are rapidly improving. For instance, the Kia Soul EV, first released in 2015, had a range of about 150 kilometres on a single charge. The new, 2020 version, with a list price about 15% higher, will go close to 400 kilometres.
Speaking to Electric Autonomy Canada, Tony Hughes, a London-based managing director at Moody’s Analytics likens the evolution of the electric car to the iPhone. “Remember when the Nokia cell phone was dramatically impacted by the introduction of the iPhone?” he asks. “That’s what’s happening here. You’re in a situation where a product is rapidly improving and so the obsolete tech devalues at a much faster rate.”
Batteries and incentives
The biggest area where obsolescence is an issue, according to a Dec. 2017 Moody’s report, is with batteries, which account for 30 per cent to 40 per cent of the price of an EV. Because the technology is evolving rapidly, older vehicles that can’t be refit with new battery advances are less appealing to buyers. Government incentives can also have a big impact on a car’s resale value, says Julian Sale, founder of Victoria’s Motorize.ca, the first EV-only car dealer in Canada. If incentives disappear then a used car would be worth more than it is now. If additional incentives get added to new cars, then older ones become less attractive.
While all of these issues make buying EVs more complicated for companies, it’s also a problem for lessors who want to offer EV options. Gerry Corcoran, national director of Jim Pattison Lease’s commercial remarketing service, has several EV-leasing clients who do pay higher monthly rates to drive electrics. Part of his job is ensuring those clients aren’t hit with a big bill at the end of their lease, so he has to find a way to figure out what a car will be worth after it’s returned. He determines the residual value of a car by looking at how much the vehicle will be driven, how long the car will be needed for, the brand’s reputation and the sale price of comparable cars. He’ll then figure out that car’s future value and work it into the lease price.
It’s the same process for all types of cars, but with EVs there are fewer comparables. “Everything we do is based on comparables with what we have sold in the past,” Corcoran says. “Until you have some volume of sales, it makes it hard to predict value. When we have uncertainty in the marketplace, where government incentives go on and off overnight, it can really affect the resale value.”
Like Carter, Motorize’s Sale says higher monthly payments and lower residual values are impacting EV uptake among corporations. But at some point, resale values will firm up and become more predictable. When the market starts seeing more incremental improvements, rather than game-changing upgrades, and electric cars have similar ranges, people won’t be as concerned about buying a used one. “There will be a time when even those who hate EVs will be buying them,” he says.
This also means that at some point, as ICE vehicles become less popular, the current situation will reverse and those vehicles’ resale values will decline.
Naturally, Sidwell hopes residual values on EVs climb higher, but the city will be buying these cars regardless. With Vancouver having a green fleet strategy, and with British Columbia now requiring all cars and trucks to produce zero emissions by 2040, she wants to do her part to combat climate change and accelerate EV adoption. “We’re excited about exploring a zero-emission mandate,” she says. “These cars are also fun to drive.”