A potential cost to adopting electric vehicles early was highlighted last week by Pike Research.
In a report on “the plug-in vehicle residual value conundrum,“ it was said electric and plug-in hybrid end-of-lease values will remain lower than those of gasoline-powered nearest equivalents for at least the next several years as the market decides how to assess these new vehicle types.
The residual value is an indicator of what a vehicle will be “worth” at the end of a specified lease contract, and may also be a guide to anticipate relative used car prices for buyers who anticipate trading in or selling their car after a few years.
The article was written by David Hurst, a senior analyst for Pike Research who primarily contemplates emerging markets for EVs, natural gas and hydrogen fuel cell vehicles.
He noted the Chevrolet Volt and Nissan LEAF have a three-year lease price of $349 per month, but the residual value for a $41,000 Volt will be just $17,630 after 36 months, and for the LEAF it will be $13,440. In the Volt’s case, the residual will be about 43 percent of its selling price, whereas a Chevrolet Cruze has a residual closer to 52 percent.
Hurst also cited a $499 payment with $2,250 down for the limited availability BMW ActiveE car due to launch this fall. This is significantly more than the lease price for a comparable gas-powered BMW 1 Series which ranges from $329-$399 per month with $1,000 down.
These higher barriers to entry are reflective of across-the-board lower plug-in car residual values, Hurst said. Because the assumption is the end-of-lease value will be less, the up-front monthly payments must be higher to account for the greater depreciation though the lease term.
“Overall it seems likely that the initial residual values are going to be relatively low,” Hurst said, “Industry average after a three year lease is roughly 54 percent to 55 percent.”
To determine a lease rate, four factors are typically considered. Aside from residual value, these are selling price, the “money factor” – which is akin to an interest rate – and the amount of down payment at the lease inception.
The present state of plug-in car residual values is being attributed to a few unknowns.
One is the remaining service life in a used EV battery after three years. GM and Nissan say it is five years, Hurst said.
Another unknown is the rate of future decrease in EV-compatible lithium-ion battery costs. This factor is also making lease companies hedge their bets.
Since before it was launched, the Volt Team has had a mandate to reduce what it pays for its lithium-ion battery pack.
The Volt’s T-shaped li-ion battery was a departure from nickel metal hydride batteries which made them more of an unknown. Also a mystery is what GM will be paying for them by 2012-2013 when the LG Chem factory begins producing the cells in Michigan.
In the CMU study, the so-called “base case” used a Lithium-Ion battery cost of $1,000 per kWh ($16,000 for a 40 mile Volt pack) that was cited in earlier academic articles. The problem is this cost is many hundreds of dollars per kWh higher than the actual cost of the Volt pack today [written Mar. 3, 2009]. Moreover, our battery team is already starting work on new concepts that will further decrease the cost of the Volt battery pack quite substantially in a second-generation Volt pack. Unfortunately, the impact of dramatically lower battery costs (to $250 per kWh) was treated only as a “sensitivity” in the CMU study when it probably should have been highlighted as THE critical element that would dramatically change the cost-effectiveness of plug-ins with greater electric-only range.
We know from recent reports the push to cut the Volt’s battery costs – along with other production cost factors – is “on track.”
These were projections published by Deutsche Bank Dec. 22, 2010. Note it only took one year for it to slash projections, while following a similar rate of decline. In short, no one knows the future, but it is the nature of business to want to, and nothing stops some information purveyors from trying.
Another battery price indicator came at the end of 2010, when Deutsche Bank reduced future cost projections from the year prior, and for all anyone knows, the projections could decline again as variables change.
Hurst said it therefore remains only a semi-educated guess today for leasing companies trying not to get caught short at the end of a lease term.
“To cover their exposure for these vehicles, the companies calculating residuals (banks, insurance groups, and valuation companies) seem likely to set residual values lower than market average,” he said, “It is then up to BMW, GM, and Nissan to decide what value they want to put on the vehicles, which could potentially cost them significant money if the resale values are below their estimated values. It seems likely that to match the Leaf’s lease rate, GM is betting the Volt’s residual value will be closer to that of the Cruze at 52 percent.”
This chart was supplied courtesy of EPRI yesterday and is thought to be based on fairly recent analysis. Instead of pretending to have a crystal ball through to 2020, it bases its projections on a cost decline relative to unit production.
Another factor that especially affects new plug-in car makers like Think, Fisker, and Tesla is these companies are relatively unproven. The same would be true of any other new players in the plug-in vehicle market. Sort of a double whammy, if you will.
As for his own educated guess, Hurst predicted that new plug-in vehicle residuals will edge upwards year by year assuming no truly bad press comes out over EV batteries, and gasoline prices continue to rise.
At this beginning stage, it is all the more important that plug-in vehicles maintain a perceived high reliability record. Recalls, or other negative publicity stand to jeopardize the increase in residual values needed if they are to achieve parity with internal combustion vehicles.
This entry was posted on Tuesday, May 3rd, 2011 at 5:55 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.