The residual value of electric cars, or the key to sustainable leasing

In the Automotive Industry there has been a continual increase in vehicles obtained on finance, and a growing second hand car market. For those companies such as leasing companies, banks, etc… who purchase vehicles on behalf of businesses and individuals, they require to remarket their vehicles, typically at the end of the agreed contract. Our research shows great success of leasing & long-term rental schemes in Europe. For example in France, it has been reported that 47% of new car registrations for private individuals, and 82% for businesses in 2022 were financed through leasing and or long-term rental. In 2012, only 11% of households opted for leasing, compared with 21% in 2015, 35% in 2018 and 42% in 2022. (source). According to MacKinsey, by 2030, the lease-based used-car market will likely reach about €390 billion in Europe (source).

Residual values at the heart of the leasing business model

As the cornerstone of the entire leasing model, the residual value is one of the most important factors in generating value for the entire industry. This is true whether the term residual value is used to qualify generating the value, of the vehicle at the end of the contracted term, allowing funders to provide accurate monthly pricing and forecast the return valuation upon sale.  A high residual value means an affordable lease for the end customer, and a good resale margin for the funder/owner.

Unfortunately, the forced transition to all-electricity decided by Brussels, with a ban on internal combustion engines from 2035 (source) is creating a number of uncertainties surrounding the residual value of vehicle, particularly those running on batteries. These uncertainties include the risk of obsolescence: degredation, battery capacity and performance are increasing rapidly, so how can we be sure when we sign the leasing contract that the vehicle in question will still meet market expectations at the end of the contract?  Worse still, can we be sure, when the vehicle is returned, that the condition of its battery, will give it the same performance and range as when it left the factory? Furthermore, an electric car is very heavy, to the point of putting more strain on its day to day running than an internal combustion equivalent. To what extent can the additional wear and tear on tyres, shock absorbers, suspension and drive shafts affect the maintenance budget and altimately the resale value of the vehicle?

Leasing, an integral part of the transition to all-electricity vehicles

 These are just some of the issues that the leasing industry will have to address in the coming years, even though the leasing market is set to continue to grow. Over the term of the leasing contract, the contract holder, being an individual or business,  finances the depreciation of the vehicle, which means that the monthly payments can be significantly lower than alternative funding. Given the price of new and recently used electric vehicles, leasing is one of the most popular ways for many households and businesses to access electro-mobility.

Against this backdrop, the players in the sector are not totally helpless, and have a number of levers at their disposal. The first is upstream, when the vehicle is ordered: a thorough knowledge of the technologies and the current or future electric vehicle range can help to guide the funders and their customers towards making the right choice of make and model to best guarantee a positive resale value at the end of the contract. In addition, customers can be given sound advice on how to use their vehicle properly. In the same way, it is in the funders interest to be extra vigilant even before the vehicle is returned, with ensuring the vehicle is maintained properly with the OEM’s guidline.  This could then remove the need to invest in processing a thorough examination of the vehicle’s vital components: traction batteries, tyres, shock absorbers, etc. before it is remarketed.  If necessary, the owner/funder could charge the driver or business for any additional costs incurred for repairing the vehicle, in line with any malfunctions found and the terms and conditions of their terms and conditions.

A charging policy for drivers 

Several years generally pass by between the start and the end of the contract, whereby the owner/ funder of the vehicle doesn’t have a touch point with the vehicle. Leasing companies and funders can also be pro-active on the risks of deterioration on the residual value of the vehicle throughout the term of the contract.  This can be done by having access to the technical data transmitted by the vehicle, in real time and can communicate information easily to the driver or customer. If these two conditions are met, it will be easy to encourage the registered keeper to make sustainable use of the vehicle, particularly in terms of three main criteria: recharging methods, driving style and following maintenance guidelines.  This information can also be used to re-write contracts if possible, to ensure that the payments match the residual value if it has changed and a loss is less likely to be incurred.

Firstly, the driver’s charging behaviour has a major impact on the State of Health (SoH) of the battery by the time of the end of the contract. Indeed, the abuse of certain practices tends to degrade the performance of the battery: too many fast charges, regular driving with a very low charge, or on the contrary with a 100% charge, etc. To estimate a batteries SoH, the most commonly used method is to use a test tool connected to the vehicle’s OBD port. The car then needs to be charged to 100% and used until completely discharged so that its technical data can be analysed. This method is costly in terms of time and investment. On the other hand, the technical data transmitted by the vehicle to the manufacturer in real time, can be used to identify the charging behaviour of the driver, and in particular any bad practices. The driver or business  can then be contacted to rectify the situation and sign up to a charging policy.

Driving style and maintenance: data to monitor on a daily basis

Secondly, driving style is one of the main factors likely to reduce the residual value of the vehicle when it is returned. Hard acceleration, heavy braking and excessive speed can put excessive strain on brake pads and discs, shock absorber springs, tyres, universal joints and suspension arms. And that’s without even mentioning the more frequent charges that will degrade the batteries SoH and reduce its capacity, while prematurely tiring out the charging cables and systems. While examining the vehicle on return can detect any early wear and tear on these mechanical components, it requires the vehicle to be immobilised on a hoist and serviced by qualified technicians, creating additional cost and vehicle off road time.  However, in the same way as load behaviour, driving style can be monitored and controlled throughout the life of the vehicle, thanks to data transmitted in real time to the manufacturer. Provided they have access to this data, leasing operators can ensure that their customers are using their vehicles in a sensible way to reduce risk of avoidable issues caused to the vehicle and the residual value. 

Finally, a careless attitude on the part of the driver towards vehicle maintenance can result in the vehicle being returned in poor condition and warrenty being void. This applies both to scheduled maintenance (service booklet) and to occasional instructions displayed on the dashboard about the need to visit a service centre or even to top up fluids. Only real-time monitoring of the vehicle’s data via a dedicated interface can ensure that the driver is caring for the vehicle properly and can be contacted if necessary to establish change in behaviour.

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