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Tesla’s price cuts are driving down car values so much that EV makers are sending checks to leasing firms to compensate them

by Index Investing News
February 21, 2024
in Financial
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Ayvens, the biggest multi-brand leasing firm, already has received checks in recent weeks to make up for slumping prices, according to Chief Executive Officer Tim Albertsen. Leasing companies are demanding concessions from EV makers, including agreements that manufacturers will buy back vehicles, to protect against further erosion in the $1.2 trillion second-hand car market.

Prices for used EVs plummeted last year as weakening demand for new battery-powered cars prompted Tesla to slash sticker prices, forcing others to follow suit. The moves are reverberating through leasing firms, such as Europe-focused Societe Generale SA’s Ayvens and BNP Paribas SA’s Arval, which serve as middlemen in the corporate car market that accounts for roughly 60% of sales in the region. 

“Manufacturers today need to keep selling EVs,” Albertsen said during the company’s earnings call this month. “We then need some kind of protection from the manufacturers in terms of their future pricing.”

Typically, leasing agreements are based on the estimated used value of a vehicle at the time the contract expires, with payments designed to cover depreciation. If the value drops more than expected, as it has recently for EVs, the leasing companies lose money on those cars. 

A range of carmakers operate leasing arms, like Volkswagen AG Financial Services, Stellantis and Credit Agricole’s Leasys or Mercedes-Benz Mobility. Ayvens, formed from the 2022 merger of ALD Automotive and LeasePlan, has more than half a million EVs in its fleet. The company is in talks with carmakers to cover the risk of depreciation — such as agreements to re-lease well-maintained cars a second or third time — Albertsen said last week.  

Fueled by generous subsidies and tax breaks, corporate cars are especially popular in Europe, with Volkswagen, Stellantis and BMW leading a market with nearly 13 million deliveries last year. Fully electric cars made up nearly 16% of sales then.

Carmakers need to comply with tightening fleet emission levels, or pay fines. In the European Union, the permissible level of carbon dioxide emissions will drop next year with Volkswagen still some way off, according to an analysis by market researcher Jato. In the UK, zero-emissions vehicles must make up 22% of sales this year, rising to 28% the year after.

But without stable pricing in the used-EV market, Europe’s target for phasing out sales of new combustion-engine cars by 2035 looks less likely.

“There will not be an EV transition without structured and liquid markets where EVs hold their second- and third-hand values,” Jefferies analyst Philippe Houchois said in a note. “In the end it is the difference between new and used price that is the real cost of a car.”

But major corporate customers have started to pull back. SAP SE this month said it will stop offering Teslas to employees because fluctuating prices are complicating planning and risk management. The move added to pressure after Hertz Global Holding Inc. in January decided to offload 20,000 EVs from its fleet. Europe’s biggest rental company Sixt SE also said in December would drop Teslas. 

All EV manufacturers are now offering buyback guarantees to leasing companies to keep selling new battery cars, said Ursula Weigl, a partner at McKinsey consultancy. While this helps shift risk into the future, carmakers remain on the hook to find used-car buyers at a decent price, or risk writedowns. 

US-based residual value insurer RVI Group said it had seen a surge in demand for its specialist cover in recent months as customers — mostly financial institutions — look to protect themselves from falling EV values.

“The EV market is extremely distorted by incentive schemes around the world,” Weigl said. Demand is “artificially stoked, and it currently ends with the second-hand market.”

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