The residual value of electric cars, or the key to sustainable leasing
Is full ownership of a vehicle becoming a thing of the past?
At least, that is what appears to be emerging, given the success of leasing options in France. LOA (Lease with Option to Purchase) and LLD (Long-Term Lease): these options now account for 47% of new car registrations by private individuals and 82% by companies in 2022. In 2012, only 11% of households opted for leasing, compared to 21% in 2015, 35% in 2018, and 42% in 2020 (source).
Residual value: the cornerstone of the leasing business model
As the cornerstone of the entire leasing model, residual value alone determines value creation across the entire industry. This is true whether the term “residual value” refers to the buyback agreement between the dealer and the finance company, or to the final resale price of the used vehicle at the end of the contract. Thus, a high residual value ensures an affordable monthly payment for the end customer and a good resale margin for the dealer.
Unfortunately, the forced transition to all-electric vehicles mandated by Brussels—including the ban on internal combustion engines starting in 2035 (source)—is creating significant uncertainty regarding the residual value of cars, particularly battery-powered ones. Among these uncertainties is the risk of obsolescence: battery capacity and performance are advancing rapidly, so how can one be sure at the time of signing the lease agreement that the vehicle in question will still meet market expectations three or four years later? Worse still, can we be certain, upon returning the vehicle, that the condition of its battery will allow for the same performance and range as when it left the factory? Not to mention the powertrain, an electric car is quite heavy, to the point of placing greater strain on its running gear than its internal combustion engine counterpart. To what extent can wear and tear on tires, shock absorbers, suspensions, and drive shafts affect the vehicle’s resale value?
Leasing: An Integral Part of the Transition to All-Electric Vehicles
These are just some of the challenges that the leasing industry will have to address in the coming years, even as this model is set to grow further. Indeed, over the term of a lease, the individual pays only for the vehicle’s depreciation, resulting in much lower monthly payments than a traditional loan. Given the price of electric cars, whether new or nearly new, leasing is therefore the only way for many households to access electric mobility.
In this context, however, industry players are not entirely powerless; they have several options at their disposal. The first lever comes into play early on, at the time the vehicle is ordered: a thorough understanding of the technologies and current or upcoming offerings in the electric vehicle market can help guide the customer toward a model choice that will ensure an easy resale at the end of the contract. Additionally, expert advice can be provided to the customer to raise awareness about the proper use of their vehicle. Similarly, dealers would be well advised to exercise extra vigilance when the vehicle is returned, conducting a thorough inspection of the vehicle’s critical components: traction batteries, tires, shock absorbers, etc. If necessary, they should charge the driver repair costs commensurate with the identified defects.
A charging policy for drivers
Nevertheless, several years generally pass between the start and end of the contract. Leasing providers can also mitigate the risks of depreciation in the vehicle’s residual value throughout the lease term, provided they have access to real-time technical data transmitted by the vehicle and can easily communicate with the customer. If these two conditions are met, it will be easy to convince the user to use their vehicle sustainably, particularly based on three criteria: charging practices, driving style, and adherence to maintenance instructions.
First, the driver’s charging habits have a significant impact on the battery’s State of Health (SoH) at the end of the contract. Indeed, certain practices tend to degrade the battery’s performance: too many fast charges, regularly driving with a very low charge, or conversely with a 100% charge, etc. To estimate a battery’s SoH, the most commonly used method involves using a testing tool connected to the vehicle’s OBD port. The car must then be charged to 100% and driven until it is fully discharged so that its technical data can be analyzed. This method is costly in terms of both time and investment. In contrast, the technical data transmitted by the vehicle to the manufacturer in real time provides insight into the driver’s charging behavior, particularly any poor habits. It is then possible to contact the driver to correct these habits and encourage adherence to a “charging policy.”
Driving habits and maintenance: key metrics to track on a daily basis
Second, driving style is one of the main factors that can reduce the vehicle’s residual value when it is returned. Indeed, sudden acceleration, abrupt braking, and excessive speeds can place undue stress on brake pads and rotors, shock absorber springs, tires, drive shafts, and suspension arms. Not to mention the more frequent charging cycles, which will degrade the battery’s State of Health (SoH) and reduce its capacity, while prematurely wearing out the charging cables and systems. While inspecting the vehicle upon return can detect potential premature wear on these mechanical components, it requires lifting the car onto a lift and the assistance of qualified technicians. However, much like charging behavior, driving habits can be tracked and monitored throughout the vehicle’s lifespan thanks to data transmitted in real time to the manufacturer. Provided they have access to this data, the leasing operator can thus ensure that the customer is using the vehicle responsibly.
Finally, a driver’s careless attitude toward vehicle maintenance can result in the vehicle being returned in poor condition. This applies whether it involves scheduled maintenance (service log) or specific instructions displayed on the dashboard regarding the need for a workshop visit or fluid top-off. Therefore, only real-time monitoring of vehicle data through a dedicated interface can ensure that the driver is complying with the requirements and allow for contact if necessary.