Companies with fleets of electric vehicles (EVs) on their books need to prepare themselves for a bumpy ride ahead. The slump in demand for new EVs, tumbling prices for used models and the offloading of end-of-lease vehicles by fleet operators has sent residual values skidding.
New approaches to managing EV residual values and associated risk are essential. Conventional practices struggle to accommodate the short-term volatility of EV residual values. They also cannot properly account for the multiple lifecycles of electric vehicles.
“There's a lot of pressure on the prices of new and used electric vehicles. This is challenging for vehicle OEMs but also for finance providers that have to write new contracts, book values for existing contracts and manage the risk attached to EVs in their asset portfolios,” says Markus Collet, Partner at Corporate Value Associates (CVA).
Collet expects uncertainty surrounding EV residual values to continue for a considerable time. “Everyone is looking for a way forward. We’re at the beginning of a phase of exploration.” Many other executives who attended the event share Collet’s assessment. When polled about likely developments in EV markets, 47% of respondents expect them to remain challenging into the mid-term. And 19% think they’ll get worse. A more optimistic 28% believe the next 12 months will be difficult but anticipate EV markets will then improve.
Key factors that will shape automotive industry in Europe during 2025
Weak economic growth
With forecast GDP growth of around 1% for 2025 the Euro zone lags the US and China
Green transition
The shift from ICE vehicles to EVs remains on track despite recent setbacks. European governments will likely renew incentives to encourage EV sales
Carbon emissions targets
OEMs and fleet managers will need to meet stricter CO2 targets by 2025. Such green legislation will likely boost EV production and sales
Chinese competition
China is set to be a major global force in EVs. About 25 Chinese automotive brands are competing in Europe or have plans to enter the European market
"EV residual values are expected to fall a further 2% to 6% in European markets during the next 12 months."
Christof Engelskirchen (Autovista Group)Almost all the business leaders at the online event recognize that OEMs, leasing firms, finance providers and other companies in the mobility sector need to change how they manage their EV assets. When polled about how the mobility sector is coping with EV automobility, 45% of respondents report that their firms are experimenting with changes while a further 45% acknowledge that they have already adopted new approaches.
What is driving the volatility of EV residual values?
Christof Engelskirchen, Chief Economist at automotive industry researcher, the Autovista Group, points to several factors currently fueling the volatility of EV residual values in Europe:
- Stalling demand for new EVs – Vehicle production is overtaking demand. Most new EVs are still more expensive than their internal combustion engine (ICE) counterparts
- Shift to smaller, more economical EVs – Larger, high-end models, now entering the used vehicle market, are experiencing especially steep declines in residual values
- EU tariffs – While intended to curb the import of Chinese EVs, these new tariffs will also affect many other OEMs that operate in China. They are unlikely to increase demand for electric vehicles in Europe.
- Lack of effective national EV policies – Stronger industrial policies, such as those implemented in Norway, are needed to increase EV use and ownership.
“There will be structural differences between the residual value curves of EVs and those of ICE vehicles.”
Max Müller (Corporate Value Associates)Ian Plummer, Commercial Director at the AutoTrader online automotive marketplace, notes similar conditions in the UK. He adds, however, that EV sales in the UK have begun to rise, in contrast to Europe. Used EV prices in the UK have fallen around 40% over the past two years. Typically, the biggest drop in EV prices occurs in the first year after its initial purchase.
“People often ask whether we think used electric vehicle prices will fall further. Our general response would be no, because it doesn't feel like there is a dearth of demand for those EVs at a point where they are at parity with ICE vehicles.”
How should asset managers should respond to the volatility of EV residual values?
Max Müller, automotive strategy consulting manager at CVA, says traditional methods of setting vehicle residual values won’t work during the automotive industry’s transition to EVs. “Residual values on ICE vehicles were mainly determined by statistical models and historic data. But for the next 10 to 15 years, while the industry is transitioning to electric vehicles, historical data is not going to help.
“We need to include a systemic quantitative assessment of contextual factors as well as the expert manual adjustments that we’ve also seen with ICEs. These factors can provide a very granular understanding of the industry and help forecast its evolution.”
Contextual factors that can affect used EV values include market forces such as new car costs and prices, used vehicle supply and demand, subsidies, and technology obsolescence. Changing business practices are also contextual factors that need to be considered. Such practices include longer holding periods for EV assets, extended lifetime value, battery management, and international remarketing of vehicles.
Three steps to effectively manage EV asset risk
Risk Assessment
Identify EV assets on the balance sheet, build scenarios for asset price evolution and potential changes in book value, and verify vehicle restitution conditions such as buyback options and exposure to dealers
Risk Management
Limit risk taken onto the balance sheet through, for example, risk sharing and changes in financing, and mitigate remaining risk using approaches such as multiple asset-lifecycles and longer holding periods
Risk Strategy
Determine future risk appetite, navigate between an aggressive and a conservative approach to risk management that balances protecting market share with business growth
“There will be structural differences between the residual value curves of EVs and those of ICE vehicles. EVs will depreciate faster, mainly because of technical obsolescence and new car price evolution, but they also offer longer usage value. EV batteries, for instance, have proven longevity and can be recycled at the end of the life of the vehicle.
“The EV’s residual value curves makes those vehicles predestined for multicycle use. Instead of just handing out a vehicle for an initial leasing term, owners of EV assets should look use it for a second or third cycle. This concept, of course, has some complexity. It requires, among other things, changes to business models and operations and the adoption of new dynamic asset management capabilities.”
Car rental firm Lizy is one company that has already grasped the complexity of EV multicycle usage. The Belgium-based startup, which began trading in 2019, buys used EVs and through its digital platform leases them to SMEs and small business operators. Lizy co-founder and CEO Sam Heymans describes EVs as perfect assets for multiple lifecycle management.
“EVs are initially much more expensive than conventional cars. But they have longer durability, require less maintenance and offer greater usage value. We can really use those assets and use them for a long time.
“Instead of just selling a car or leasing it once for four years, we lease it for multiple life cycles. Already, 70% of our vehicles get re-leased for a third cycle.”
Key to Lizy’s ability to dynamically manage its EV assets over multiple cycles and contain costs is its extensive investment in digital technologies. “We have really digitized everything we do. We have digitized our operations, marketing, sales and sourcing.”
The rise and fall of the residual valuations of used EVs are a major headache for many organizations in the mobility sector. But Heymans sees such volatility as a big opportunity for leasing companies, fleet operators, OEMs and alike to change their business models to manage their EV assets more effectively, make electric vehicles more affordable, and to promote more sustainable transport.
“The way we think about it at Lizy is that if you know the market is difficult, if it makes you uncomfortable, you need to start thinking differently.”
