In recent years, leasing companies have been able to save well, partly thanks to phenomenal book profits on end-of-contract cars. That piggy bank will now have to be smashed!
Since 1990 there have been a few significant residual value crises from which we can learn lessons. Residual values fell sharply in the early 1990s, the same after 9/11, and the financial crisis even brought real panic in 2008/2009.
During the initial phase of Covid, we had yet to experience the last heavy decline. Between the various drops, the residual value as a percentage of the new price has continued to rise and shortly after the crisis you often even saw a positive peak. That last peak of more than two years is now quickly wearing away and we are facing a sharp decline in residual value of EVs.
If you look at the results of leasing companies, you will see that they have always come through these crisis periods unscathed. Timely write-downs and contract extensions ensured that no losses were recorded. The real celebration came afterwards, because of the write-downs and the rapid recovery of the residual values, the result was extra good the following year.
So what is the explanation?
In times of economic crisis, residual values immediately take a heavy hit. Everyone in the used car chain wants to get rid of their stock. Nobody buys, everyone sells and residual values go into a kind of free fall. New sales are also stalling, but new deliveries will continue for a while based on past orders. Almost every new car sold leads to a used car, either through trade-in or because the leasing company receives one in return.
As soon as the inflow from trade-in and end-of-lease decreases, used car prices recover quickly, often even above pre-crisis levels. This is because the demand for used cars remains relatively intact or even increases. People simply need cars and they choose a used one instead of a new one.
Why is it different now than in the past? The decline in EVs has another cause and cannot be explained by economic parameters. The first EVs (Tesla model S) were priced so cautiously that Tesla was forced to offer a residual value of 45 percent after 3 years.
Everyone knows that those cars were ultimately a treat and sky rocketing end- of-contract profits were made in the lease. There were only a few EV’s on the market while demand (whether stimulated by the government or not) arose in Europe.
When the Tesla Model 3 arrived in 2019, leasing companies fell over each other to use these cars. Nobody wanted to miss the party!
In its wake, the several other available EVs (Audi E-tron, Jaguar I-pace, BMW i3, Nissan Leaf, etc.) also received gilt-edged residual values.
And now it’s 2024.
The tax benefits for EV’s disappear like snow in the sun, not only in the Netherlands but also in neighboring countries. As a result, interest in EVs appears to be declining. Recent research showed that in Germany only 16 percent of new car buyers are considering an EV and in the Netherlands the enthusiasm is also declining rapidly).
Financial factors play a role in this, but there is also still range anxiety and the perceived inconvenience of charging. A declining interest in new always has an impact on the residual value.
Take into account that a number of the first models of EVs occasionally (exemplarily) have an unsolvable charging problem, then you know that the residual value will come under pressure.
Tesla is hammering the prices down
But most importantly: compared to 2019, a new Tesla model 3 now costs €7,000 less and you receive a €2,950 subsidy on purchase. The new 3 also has a larger battery pack and drives more efficiently. In addition, the current model is significantly better finished and produced.
Since a few days the Model Y is even available at € 44.950, more than 20% down in less than a year!
Other producers and new entrants are also lowering sticker prices. So now we have a real residual value crisis on EVs, this time not caused by an economic crisis but simply by the old law of supply and demand.
At the same time book value’s are too high since they were based on a percentage of higher sticker prices and a positive effect of inflation.
The internationals among the leasing companies are less affected by this; EVs have not played a significant role in most countries in recent years. But many Dutch leasing companies are now in dire straits. But if they were smart, they would have put something aside recently.
Norbert van den Eijnden is former CEO of Alphabet International and independent consultant
