Fleet managers are very familiar with depreciation as it is the largest cost after fuel purchase. Depreciation can be understood in either accounting or operational terms. Accountants “depreciate” vehicles as part of tax return processes. Operational depreciation is the difference between the purchase and sales price of a vehicle.
Fleet managers will talk about “residual values” which is essentially the percentage of the original value left on the vehicle at the point when the vehicle is sold. For fleet managers, the timing of sales for a vehicle is a critical element of the total cost of ownership, and when managed well can significantly alter the total cost of ownership of a vehicle.
Drivers of depreciation
Depreciation of a vehicle will be driven by a myriad of factors.
- The age of the vehicle. Typically the rate of depreciation drops as the vehicle gets older
- Mileage
- Condition
- Servicing history and compliance with recommended schedules
- Running costs of the vehicle
- Model release cycles – new vehicles from a model range that may soon be replaced will potentially depreciate faster
- Supply and demand for a particular vehicle
- Supply and cost of spare parts for the vehicle
- Technological progression and relative cost for newer vehicles
Depreciation and electric vehicles- the challenges
Vehicles that have high sales volumes and with models that have been in the market for many years will have fairly certain depreciation rates. These rates are also confirmed in industry standard databases such as “Glass’s guide”.
The leasing industry (i.e. those providing operating leases) and many organisations that purchase vehicles directly have challenges pricing the residual value for vehicles. When there is a lack of information, organisations will tend to be overly conservative when pricing the vehicles, which has had a deleterious impact on purchasing of vehicles in the Australian market to date.
There is a perception within the industry that depreciation of electric vehicles will be sharper than for ICEVs as declining battery prices result in new variants with lower price points. This leads to a “wait and see” position for many buyers.
The price and availability of replacement batteries is also a key challenge for many buyers of used electric vehicles and something that manufacturers need to answer as part of the introduction of new models into the market. This goes hand in hand with the support of a model in a market, as the reputational impact of not supporting second hand parts will have a major impact on future sales.
For many of the original owners of vehicles such as the Nissan Leaf in Australia, cost effective access to batteries has been a challenge. It should also be noted that performance of batteries degrade over time.
Depreciation in electric vehicles – the positives
In reality, many electric vehicles have had far better resale values than expected. This has been particularly evident in the United Kingdom with newer variants of vehicles.
As a new technology, previous generations of electric vehicles released in Australia have had some significant limitations. However, the constant innovation in electric vehicle production is meeting the challenges as outlined above.
New vehicle models have longer range capabilities, and technical platforms manage processes such as battery optimisation. It is unlikely that these new versions will have loss in value due to the issues related to previous generations of vehicles.
As new electric vehicles start to enter the market in larger numbers, manufacturer support for residual values (particularly with respect to battery replacement) will improve. A tangible example of the key high volume Plug-in-Hybrid available in Australia is the Mitsubishi Outlander. In 2019 they offer a 160,000 km or 8 year warranty. [1] In fleet sales they have been guaranteeing residual values when they sell leasing packages [2] and residual values have been very strong. [3]
In markets such as the United Kingdom, second hand electric vehicles have held values strongly:
Second hand electric vehicles have much stronger total cost of ownership profiles given depreciation. This puts an effective “floor” on depreciation as a budget conscious consumer can buy one purely on a cost saving rationale.
Currently there is (and will be for some time) a supply and demand imbalance – with lack of supply being a major issue. Several reports in Australia have documented the strong demand for electric vehicles in Australia with little view on the demand being fulfilled.
As new legislation restricting low emissions vehicles is introduced, the relative price of traditional ICE vehicles is reduced- compared to electric vehicles- resulting in increased demand.
A major challenge for residual values is the battery replacement as stated above. A number of key factors will mitigate this :
- Battery packs can be refurbished to extend life. At small volumes there will not be viable warranted offering in the market, however this will emerge and extend the life of batteries as has occurred in other markets [4]
- As battery prices reduce for new vehicles, the battery prices for replacements in existing vehicles should also drop significantly
- Currently there are no viable after-market producers of batteries, however, this could change if existing manufacturers do not offer second hand batteries at lower costs.
- Unlike other car components, batteries have inherent value. Nissan and Renault are finding that long after a battery is useful in a vehicle, it can be used as a storage device. According to one source this can be as long as 22 years in some cases. [5] As the aftermarket becomes established and sophisticated it is possible that replacement batteries will be heavily subsidised through payments for return of existing batteries.