Why electric vehicles are changing how we evaluate residual values
Electric vehicles (EVs) don’t function like their fossil fuel cousins, and because of it, the way we measure their value needs to be reworked. Residual values are essential when determining the total cost of ownership (TCO), which affects buying, financing, and leasing decisions for both consumers and fleets. For EVs, it’s becoming a prevalent issue for their wide-scale adoption.
It’s estimated that by 2035, more than 83.3 million EVs will hit the roads in the United States and Canada.¹ This is a seismic change in the way we think about mobility. One of the changes that will need to happen is the method in which residual value is calculated. EVs operate differently, so they also age differently. Consider that a typical internal combustion engine (ICE) vehicle drivetrain has roughly 2,000 moving parts. An EV typically has only 20.² How will EVs impact the near-term and long-term value of ICE vehicles? How does the lifespan of EVs compare to ICE vehicles of the future? How quickly will battery technology advance to boost the performance of both modes of transportation? Several factors will impact EV residual values, such as how fast battery technologies are changing and how quickly these packs will reach the end of life. In-vehicle technologies can open up additional monetization opportunities for operators. Think of vehicle to grid, for example, or car sharing, infrastructure maturity in different markets, government incentives, and most definitely model choices.
This is a pivotal moment for those who work in the automotive sector, as each of these variables will help shape the new model for residual value calculation. The market knows how to evaluate an ICE vehicle. How does the process change for an EV? If the market can’t reliably predict depreciation schedules, the ripple effect across the industry will be significant. Original equipment manufacturers (OEMs) must think strategically about how to shift their product mix over time while maintaining their production in the present day to fund future investments. On the consumer front, some are eager to ride the wave and quickly jump into an EV. Others need more time, and will wait until the next iteration, hoping it will provide even more value upon purchase. Financiers should begin identifying concepts that address a larger portfolio concentration of EVs and determine system capabilities to handle the segmentation. Automotive OEMs and suppliers alike have foreseen the significant impact of future car architecture and invested heavily into new growth areas. Some players have already started to streamline their ICE-related portfolios, while others have disconnected them and are now managing the business separately. Various capital allocation choices are emerging, including investment in captive capacity, acquisitions, spin-offs and joint ventures (JVs), among others.³ Everyone is watching with anticipation, eager to learn how this new market will take shape and how it will transform the automotive industry for the next 5 years, 10 years and beyond.