Asset value volatility is going to be a big challenge for financial services firms.”
Markus Collet, CVAThe transition to electric vehicles (EVs) will offer banks and insurers lots of opportunities to deliver new products and services. But first they’ll need to overcome a major bump in the road.
The asset values of EVs are going to jump and slump time and again during the transition. And it’s a journey that could last another 10 years. Such volatility will be a big headache for financial services firms. Banks and leasing companies will have to work out how they’re going to value those volatile assets on their balance sheets. And insurers will need to get to grips with pricing the protection they provide for those vehicles.
EVs are at the core of the shift from traditional practices of vehicle ownership to new usage mobility models, says Markus Collet, Partner Corporate Value Associates (CVA). Most drivers in future will not buy EVs but will instead get them through operating leases or subscription services. Finance providers, as a result, will have to take those assets onto their balance sheets.
Collet, who heads CVA’s auto-mobility platform, expects considerable volatility in the prices or both new and used EVs.
“Asset value volatility is going to be a big challenge for financial services firms. They’ll need a new approach to forecasting the residual values of EVs.”
Collet was speaking at an online event, hosted by CVA and the Mobility community at Qorus, that examined the effect of EVs on providers of finance and insurance. Most of the business leaders who attended the event believe managing asset price volatility will be a major task for banks, leasing companies and insurers. Around 55% of them pointed to residual value volatility as the most challenging aspect of integrating EVs into the business and operational models of financial services companies. And almost all the leaders that were polled agreed that finance, insurance and warranty solutions were either critical or significant factor in a smooth and profitable transition to EVs.
Conventional depreciation models that finance providers have long used to calculate the residual value of internal combustion engine (ICE) vehicles don’t work for EVs, says Collet. He identifies forces buffeting EV asset values:
- Big price cuts by vehicle manufacturers. Tesla, for example, has reduced the price of some of its EVs by 30%, in real terms, since 2020.
- Rising production volumes that will reduce manufacturing costs but could also cause high stock levels.
- The large amount of sophisticated technology onboard EVs that could become obsolete.
- Fluctuating customer demand for new and used EVs.
- The infancy of the EV ecosystem. Uncertainties surround the likely pace of the rollout of charging networks as well as the duration of government subsidies and incentives.
- New approaches to EV asset management. Some companies are starting to focus on the amount of value a vehicle has retained, for example, rather than maintain traditional depreciation approaches that concentrate on the loss of value over time. The arrival of EVs has also prompted companies to extend their asset holding periods and lengthen estimates of the useful life of their vehicles.
Collet adds that the volatility of EV asset prices is compounded by difficulties in determining the true value of the batteries in vehicles. These components can account for as much as a third of the sale price of new EVs. He points out that prices for EV batteries are likely to decrease over the next 10 years because of improvements in their technology and rising production volumes. However, sudden changes in the cost of raw materials or the emergence of new technologies could quickly change future pricing.
EVs are heavier than ICE vehicles so there is a lot more wear on the tires
David Fischer, AXA Partners“The evolution of battery prices can also be affected by the unit’s state of health, the extent to which it can keep its capacity over time.”
A battery in an EV that has been driven conservatively and which has rarely been fast-charged has an estimated life of around 12 years while a similar unit in a vehicle that has been driven aggressively and subjected to frequent fast-charging could come to the end of its life in 8.5 years, says Collet. This is a significant performance difference in a major value component of an EV that is not apparent from the vehicle’s appearance.
David Fischer, Head of Marketing and Innovation for Motor and Home at AXA Partners, adds that the maintenance of tires on EVs is a further challenge that owners of vehicle assets need to manage.
“EVs are heavier than ICE vehicles (because of their large batteries) so there is a lot more wear on the tires. Punctures and tires getting worn are much more of a concern with EVs than thermic (ICE) vehicles.”
AXA Partners has launched an insurance product for EV users in Europe that provides quick access to replacement vehicles in the event of an accident, 24/7 roadside assistance and a once-a-year vehicle switch for long-distance holiday travel. The insurer has also introduced an EV charging solution that allows customers to access multiple charging facilities. It is currently available in Spain, Belgium, Germany, Italy and the UK.
Despite the asset valuation challenges facing financial services firms, speakers who attended the online event are confident demand for EVs will continue to rise. CVA estimates that battery powered EVs and plug-in-hybrid electric vehicles could account for 90% of new vehicle sales in Europe by 2035. And used EVs and hybrids could total 42% of used car sales. Collet adds that CVA has tempered its forecasts because of the recent slowdown in EV sales, the cutback in incentives and the lack of low-cost electric vehicles.
“Any forecast until 2035 should actually be done with a lot of care and a lot of modesty.”
Amélie de Valroger, Electric Solutions and Consultancy Global Director at fleet management and leasing company Ayvens, describes the shift to EVs as a megatrend that won’t be pushed back by current headwinds.
“We know that the move to electric is a mega trend that is going to stay because the fundamental drivers are in place.” - Amélie de Valroger, Ayvens[SC1] .
The weak economy and high electricity prices in Europe together with changes in government EV incentives and targets, price cutting among vehicle manufacturers and political rhetoric in the build-up to EU and US elections have all put a dampener on electric vehicle sales in recent months.
However, De Valroger believes the migration to EVs is inevitable.
“We know that the move to electric is a mega trend that is going to stay because the fundamental drivers are in place.”
De Valroger points to several forces propelling the transition to EVs:
- Regulatory pressure on organizations to cut CO2 emissions, especially emissions generated by mobility solutions.
- Growing evidence that switching to EVs is the most efficient route for organizations looking to reduce their CO2 emissions.
- Lack of alternative clean energy mobility solutions that can match the cost or availability of EVs.
- The total cost of ownership of EVs, in most countries in Europe, continues to lower than equivalent ICE vehicles.
- Ongoing improvements in the capabilities and density of charging networks in Europe.
- The reluctance of vehicle manufacturers to drop their commitment to EVs and thereby relinquish their big investments in electric vehicle production.
There's a host of data we can provide to our partners to help them make better decisions about their vehicles and their assets.”
Julian Mensah, VoltricDe Valroger remarks that companies are increasingly turning to Ayvens to help them transition to EVs. She points out that 81 of Ayven’s top 100 clients have adopted the Science Based Targets Initiative (SBTi) pledge to reduce greenhouse gas emissions.
“They need our support because such change is complex. Companies don’t know where in their organizations to make the cuts. They don’t know the costs nor the best solution.”
Ayvens, which operates a fleet of more than 520 000 EVs, offers a range of leasing and consultancy services in 34 countries.
CVA’s Collet points out that financial services firms looking to capitalize on the transition to EVs will need to integrate their products and services within a broad ecosystem of offerings delivered by a variety of organizations.
“The EV is much more systemic than an ICE vehicle. You need a much more integrated ecosystem to make the transition to EVs succeed. Financial services are critical to the EV transition. Without them the transition will never happen.”
Julian Mensah, Founder and CEO at fledgling EV subscription service provider Voltric, says his company is looking to expand its offerings and deliver an integrated mobility solution. The UK company provides clients with a subscription package that includes on-demand access to EVs together with vehicle insurance, breakdown support and access to multiple charging networks. Founded in 2019, Voltric manages more than 100 EVs. It expects to double its fleet in 2024 and top £1million in revenue.
Voltric has established ties with several EV manufacturers and suppliers and also secured links to an administrator of a salary sacrifice scheme, an insurance provider and a group of charging network operators. Now, Mensah says, Voltric plans to build closer relations with its partners.
“Sharing data is one of the things we want to do with our partners because all of our vehicles are connected via API or telemetry solutions. There's a host of data we can provide to our partners to help them make better decisions about their vehicles and their assets.”
Most of the business leaders who attended the online event believe the financial services industry is beginning to understand how to accommodate the transition to EVs. But they acknowledge that many the challenges still need to be addressed.
CVA’s Collet claims the EV transition has reached a key point in its evolution.
“Everyone seems to believe the transition is important. It needs to happen. But it’s not yet clear how it’s going to work. We are at the beginning of an S curve. We are now going into big volumes and the problem is, if you go into big volumes but haven't figured out how how you’re going to do it, you are not only scaling up volumes but you're also scaling up risk.
“This is true for insurers, for leasing companies and for OEMs who would do financing. We are at a really special moment in development of EV technology.”
