The uncertainty that vehicle manufacturers and their captives face when confronted with the challenges of financing electric vehicles and determining their residual values is felt throughout the industry as demand for zero-emission transport grows. Miles Rogerson reports.
Electric vehicles (EVs) are set to become the biggest challenge for more than one-third of dealers in the UK, while 13% don’t plan to retail them at all, according to research from finance provider Startline Motor Finance.
The research provides an insight into the level of uncertainty in the automotive sector about the future of EVs as they start to take a greater proportion of new car sales.
To get a clearer picture on how the market might develop in future, Asset Finance International discussed the key issues with independent consultant and industry veteran David Betteley.
Betteley began his career in the financial services sector in the late 1970’s as a graduate trainee with Lloyds and Scottish Finance. In 1989, he joined the International Motors Group and was responsible for establishing their in-house finance company for the Hyundai and Subaru brands, before moving to Sweden in 1992 to run vehicle distribution operations in Scandinavia, Russia, and the Baltic states.
After four years, he returned to the UK as managing director of Vauxhall Finance and successfully consolidated seven branches into one central location. Recruited by Toyota in 1998, Betteley went on to become senior vice-president, responsible for the overall operations, sales and marketing, and the development of new markets for both Toyota and Lexus in Europe and Africa.
He also took on the role of chairman of the UK Finance and Leasing Association from 2007-2010.
After joining Jaguar Land Rover in 2010 as global financial services director he then retired in 2017.
Betteley now works as an independent advisor to the industry and is the chairman of new B2B car-sharing platform Tomorrow’s Journey.
He said a challenge facing the leasing industry as it prepares for growing demand for EVs is the lack of historic data on which to base key business calculations, such as residual values.
Betteley added: "Due to the relatively new technology - and the new ways it is being used - there is very limited data available on which to set the resale value for an EV. However, it’s not impossible to calculate the RV, just more challenging. The evidence suggests that battery-EVs are performing pretty well, and that the main worry is that battery technology takes a sudden leap forward. This would make current battery-EVs yesterday’s technology, and if that happens then the resale values would take a dive.
“To help minimise this issue, some electric vehicle manufacturers are financing the car and the battery separately.”
Leasing companies are also looking ways to maximise the value they extract from a single vehicle by retaining cars for longer and developing services ranging from car sharing to used vehicle leasing.
However, this relies on manufacturers to produce a wide range of models in significant quantities.
Despite recent growth and the launch of dozens of new models next year, it could be years before the market reflects the level of choice fleets are currently used to.
Betteley said: “Due to EVs being a relatively new market development, there is a distinct lack of range in the market that companies looking to build a fleet may need to suit their variety of employees. A certain proportion of the staff base may require a hatchback, some may require a saloon, or even an SUV, and finding this selection of suitable vehicles that match the mileage requirements is certainly a challenge.”
Pricing also remains a challenge, as electric vehicles don’t currently have the economies of scale that are well established in the manufacture of internal combustion-engined vehicles.
The additional cost of the battery and electric powertrain in an electric vehicle is an estimated $15,000, three times the cost of a traditional petrol or diesel powertrain.
Betteley said: “There’s a premium on an electric vehicle that manufacturers are struggling to price in. This leads to a much higher capital cost for choosing electric vehicles compared to ICE vehicles.”
While prices for entry-level electric vehicles are currently around £30,000, executive models such as the Tesla Model S still retail for nearly £80,000 and upwards, before the cost of investing in infrastructure, such as home or office charging points.
Accessibility is also a factor, Betteley added, as employees living in a flat would not benefit from the convenience of home charging available to house owners, particularly if they have a driveway in which they can plug-in.
Photo credit John Cameron/Unsplash
Charging point access is a key government concern and in September more than £70 million was allocated to install 3,000 public charge points – more than doubling the number across the UK to 5,000.
However, critics say that the network needs to be expanded to tens of thousands of charge points to support the predicted growth in electric vehicle use as drivers respond to government policies.
In the fleet sector, Deloitte is predicting a “step change” in electric vehicle demand among fleets when new tax rates come into force next year.
The benefit-in-kind tax rate for pure electrci cars next year is 0%, rising to 1% the year after and 2% in 2022/23.
For a driver in an executive car, the potential tax saving from moving to an electric vehicle over the three year period could be nearly £20,000.
For example, a driver paying 40% tax, with a company-provided BMW 530d SE Sport auto worth £46,000, would pay £19,433 in company car tax between 2020-23. Switching to an £82,000 Tesla Model S, the driver would incur just £1,000 in benefit-in-kind tax over the same period.
While a shift to electric vehicles is better for the local environment, there is concern over potential disruption to tax revenues, particularly when it comes to fuel taxes. Estimates suggest mass take-up of EVs could cost the Exchequer £32 billion annually in lost fuel duty and VAT by 2030.
Betteley said: “I think the government will be forced to find a way of taxing electricity use when charging EVs from home to compensate for their massive loss of revenue from the sale of the diesel and petrol that people will no longer be buying.
“Secondly, the government may consider charging by the mile. This would be relatively easy as all electric cars are ‘connected’ and supply data on when and where they are being driven. This supply of data could be used to implement a pay-per-use tax system, where you pay more if you’re driving at rush hour in the city than if you’re driving at 3am in the countryside, where you probably wouldn’t pay anything.”
The likelihood of mass adoption of electric vehicles increases as their running costs reach parity with traditional internal combustion-engined (ICE) vehicles.
This will be caused in part by reduced production costs for electric vehicles, but also by the increasing complexity of designing and building cleaner petrol and diesel engines.
Betteley said: “Regulators are insisting that more equipment is added to ICE cars to reduce emissions output, which is pushing the cost of the vehicle upwards. This, paired with falling battery prices (perhaps not falling as quickly as many anticipated) is why we’re going to achieve cost parity.
“An unintended consequence of this added emission-reducing equipment is that the cost per unit for ICE vehicles is rising so much that it’s becoming completely uneconomic to manufacture small cars, because they will be too expensive for people to buy them. Ironically, this will push people to drive bigger cars, in turn putting up the CO2 of the fleet.
“To start resolving these issues, and to avoid another diesel debacle, the government needs to work with the industry much more than it already is.”
Living with an EV
Fleet managers and leasing companies will face new challenges as a growing number of drivers switch to electric vehicles for the first time.
There are likely to be ongoing issues as drivers adapt to a new way of travelling, particularly when it comes to understanding a vehicle’s range and the recharging process.
David Betteley has been through the ownership experience first-hand as he currently drives a zero-emission vehicle.
He said: “Range is by far the biggest challenge for any consumer dealing with an electric vehicle on a daily basis. In my case, it is nothing like the official figures. It has a claimed 240 miles but when you fully charge the battery, the dashboard only says 201 miles.
“This is further worsened if you’re driving on a motorway, where the mileage is reduced to around 150 miles because there is no battery regeneration from braking or slowing down.”
He has also found the UK charging infrastructure too limited, particularly when it comes to fast charging points.
Betteley added: “What little there is often either out of order or busy. This means you must stop with at least 30 miles left in the battery in case the charger is out of order or too busy and you have to go elsewhere. This makes any medium length journey a challenge.
“Manufacturers advertise charging times based on 100Kwh chargers, which in my case could offer around 90 miles for one hour plugged in, but they’re practically non-existent in the UK. Most chargers are AC, where you get around 20 miles of range per hour of charging, which isn’t bad if you leave it charging overnight but on the road it is far too slow. Chargers providing around 50Kwh are better and can give 50 miles for a half hour charge.”
The cost of public charging points is also a concern, with rates of 35p/kwh or more, more than double the cost of charging at home.
If an electric vehicle averages around 3 miles per kwh, then the fuel cost will be 11.6 pence per mile, which is the same fuel cost as running a petrol or diesel car.