THE AVERAGE NEW CAR BUYER might not think about their vehicle’s potential resale value the day they drive it off the lot. But in the world of auto leasing and financing, determining that number — an accurate “residual” value, in industry lingo — is essential.
Those calculations form the basis of lease terms and contracts, for individuals and fleet customers, and dealers and manufacturers rely on them to set competitive prices while ensuring a profitable return at the end of the term.
This calculus, while never simple, is about to get a lot more complicated — and precarious — now that electric vehicles are on the scene.
The challenge is two-fold.
With EVs themselves, determining residual values when a product is relatively new and based on rapidly evolving technology, is like trying to hit a moving target.
However, a bigger issue in the long run might be what the rise of EVs does to the value of used internal combustion engine (ICE) vehicles. Canada’s target, for example, is for EVs to make up 30 per cent of the new car market in 2030. In some places, that share could come sooner. What will that market dynamic mean for the future value of a new ICE vehicle someone buys this year or next?
To probe this topic and get some answers, Electric Autonomy Canada sat down for an exclusive interview with Eric Lyman, executive vice-president at ALG, a North American leader in residual value forecasting.
In November, ALG was purchased by consumer intelligence and data analytics specialist J.D. Power. Two weeks ago, J.D. Power unveiled the winners of its 2021 Canada ALG Residual Value Awards. Those awards recognize the vehicles, in 29 model segments, expected to have the highest residual values after either a four-year period, for mainstream vehicles, or after three years, for premium vehicles. In our interview, we asked Lyman to also set his gaze a little farther into the future.
(Note: this interview has been condensed and edited for clarity.)
Electric Autonomy Canada: ALG bills itself as the industry benchmark of automotive residual value projections. When J.D. Power’s purchase of ALG closed in late November, the first sentence of its press release stressed the impact “a wave of new electric vehicle models” and “increased vehicle automation” will have on forecasting. How much is that affecting the market today?
Eric Lyman: One of the core pillars of our business is consulting with automakers to determine content, price, volume expectations and how that can lead to success or failure of a product in the marketplace. About a third of our studies the past few years have been EVs. So, it’s top of mind. In the U.S. and in Canada, there’s a regulatory and a compliance component of EVs. There’s clearly interest among consumers. There’s demand there. It’s growing. We all know it’s the future. But there’s a lot of uncertainty. As with any new technology, there’s a lot of things that we still have to learn about elasticities and sensitivities, how the product should be executed, even how it’s designed, right? So ALG is being tapped by automakers and lenders to understand how those different approaches will impact, ultimately, viability in the marketplace. It’s become a key focus of our outlook and something that is talked about in every meeting we have with various automakers.
Electric Autonomy: Since Electric Autonomy launched, a burning question on our minds has been what’s going to happen to residual/resale values of ICE vehicles when EVs take off? There has to be a point where these lines cross and ICE valuations fall and potentially leave owners at a loss. Is our assumption correct?
Eric Lyman: Well, yes and no. Any time there’s a new groundbreaking technology, there’s obviously an impact on the technology that preceded it. When it comes to EVs, I think the big question, and what might be overstated, is how fast is this going to happen? An EV experience is great: charging at home, once we have a charging infrastructure; low noise, no oil; you can keep talking about the benefits of the EV ownership and driving experience. But I don’t think we’re going to see this quick inflection point where values just drop off the cliff with regards to the ICE vehicles.
Electric Autonomy: What are you basing that on? Aren’t transitions like this often marked by sudden tipping points?
Eric Lyman: If you point to Tesla and the launch of the Model S as what would eventually become the first viable high-volume electric vehicle from what would eventually become a preeminent global manufacturer, that was, what, eight years ago or so? And here we are — forgive me for quoting numbers from the U.S. market, I’m a little more familiar with it — about 2 per cent of sales are EVs [slightly higher in Canada]. It took us 10 years to get to 2 per cent. We’re expecting in 2025 that number to be about 5 per cent. So, we’re still kind of ramping up.
“Even if we stopped right now and said no more gasoline vehicles will be produced, it would still take 12 years for us to churn [through] all of those gas vehicles in the fleet”
Now, we’re seeing declarations from General Motors, and from states like California, that 2035 is when we’re going to start selling all new vehicles as EVs. So, it’s going to be another 10 years before we’re getting closer to that 100 per cent. And that’s just those OEMs and just those markets.
We’ve had a pretty gradual increase to date, slower than what most would wish for and hope for. But the benefit is that’s giving us the time to absorb the supply of EVs into the marketplace and at the same time to move the aging ICE vehicles out. And I personally believe that that’s going to benefit everybody by allowing for a smoother transition. Because if we saw ICE values sort of collapse, that would be extremely disruptive in a lot of different ways in the marketplace.
Electric Autonomy: A lot of people buying new cars now hold on to them for eight, 10 years. How does that factor in?
Eric Lyman: In the U.S. — and I don’t think it’s much different in Canada — the average length of ownership is about 12 years. So, even if we stopped right now and said no more gasoline vehicles will be produced, it would still take 12 years for us to churn [through] all of those gas vehicles in the fleet.
The other thing is, there are people that are going to resist that change. Ultimately, if there still exists demand for ICE vehicles in an environment where the supply starts to go down — this is basic economics — we’ll actually see an increase in values in the used market for those internal combustion engine vehicles. That assumes that you’ve got a lot of people that are really dragging their feet about migrating over to EVs. But we have historical examples of vehicles like a Honda Element or a Toyota FJ cruiser. Now, these are niche vehicles, but they were discontinued because they weren’t deemed viable by the automakers and there was still strong consumer demand and you actually saw the values go up.
Electric Autonomy: What about the wild card of more aggressive government regulation? We talked about 2035, but what if 2030 starts to become the number? Is that a factor that could change your vision of a gradual transition?
Eric Lyman: Any time we pull the date forward or we accelerate the rate of adoption, you’re going to see more volatility and uncertainty with regards to values on both sides, for the EVs and the ICEs. But I still just go back to my earlier point: if we stopped selling gas vehicles today and 100 per cent of vehicles were EVs, it would still take, you know, 12 years to kind of cycle through the entire fleet. I hope I’m not being naive in assuming that that should give us a nice runway of time to sort of understand the impact from a valuation and a country fleet valuation standpoint.
There’s an interesting parallel. It’s not exactly the same thing as EVs, but we’ve seen a massive proliferation and democratization in ADAS [Advanced Driver Assistance Systems]. This technology made utility vehicles actually drive smaller, they were more manageable. It was a big injection that led to the increased demand for utility vehicles, because it made the vehicles much easier to drive, especially in urban and dense city centres. We saw a big increase for demand for those features. And it created what I would call a valuation discrepancy between the upper-level trims that had those features and the lower-level trims that did not have those features. There was a period of time where automakers were saying, ‘Hey, this is luxury stuff, this is high-end stuff. We’re going to charge for it up here.’ And you saw a bit of a divergence where the vehicles [with] that technology were in shorter supply and that led to high demand, low supply, high price. And then the other trims that didn’t have those features were in lower demand and we saw an erosion in those prices.
The automakers have solved that by [putting ADAS in all of their] vehicles. The price has come down as the technology has gone up in scale. But the point, in terms of EVs, is it’s contingent upon the demand. You need to see the same phenomenon where everybody says, ‘Hey, I want that,’ and then you’ll see that sort of separation. With first generation EVs — the [Fiat] 500e, the first-generation Nissan Leaf, the Chevy Volt — manufacturers expected a lot of demand for these products. [But ultimately], the consumer demand just wasn’t there. And what happened? Residual values were abysmal.
Ultimately, we have to get a groundswell of demand from consumers to do any of the things we’re talking about here, to sell 5 per cent market share of EVs, to get demand to the point where adoption ticks up and ultimately leaves the ICEs as the undesirable, previous generation automotive technology in the new and delightful world of high-tech EVs. If you don’t have the consumer demand, all of these things we’re talking about are just simply not going to materialize.
We still see range anxiety as one of the top reasons why consumers will not buy an EV. Price is up there as well. Price, with scale and with battery technology, will certainly come down. But we have to get over some of these hang-ups that we have as consumers around range anxiety, around time to charge if we’re taking that road trip. Those are the sort of mental hurdles consumers are going to have to get over to really accelerate the adoption.
Electric Autonomy: A recent Canadian federal government opinion poll about support for EV incentives among the public also asked about people’s intent to buy. Around 20 per cent in the survey said they plan to buy an EV for their next car. That’s a lot higher than today, but it’s nowhere close to a majority. How should we look at that number?
Eric Lyman: I’ll make a little joke. I live here in Santa Barbara, California, and, you know, I plan to buy my next house down the road in Montecito in the same neighbourhood as Oprah and Prince Harry, right. The problem is when I see the prices, I say, ‘Oh, my gosh, I guess I have to make different plans.’
So, you know, EVs still are expensive. The pricing is a real issue. And I think it’s great, it’s a wonderful first step for people to first be aware that they’re out there. Second, to say, yes, I would love to plan to buy one. But what we really need to do to kind of get to that 20 per cent is to break down all the other barriers of why they can’t execute on that plan.
For the folks like myself that are looking at, you know, climate change and the benefits of EV ownership experience, you’d love to see that number getting close to triple digits, close to 100 per cent. But there are the realities of our collective experiences as humans in the automotive space that give concern around range anxiety and price and all those things.
This article was originally published on February 25, 2021, on the Electric Autonomy Canada website.