The Market for Electric Lemons: Residual Values for Aging Electric Cars Dr Michael Wynn-Williams wm97@gre.ac.uk http://autocognition.wordpress.com/
The Research Programme The purpose of the research To define the market for used electric cars Depreciation rate End of life To project future electric car values To calculate ownership costs To forecast impact on the market and industry Data 10 year private auction sales prices for the UK
Depreciation and Ownership Costs Premium medium size ICE hatchback vs. EV Costs over 3 years, 10,000 miles per year Item ICE EV Purchase 19,650 24,300 (incl. Rebate) Residual 9,175 11,350 Depreciation 10,475 12,950 Service 540 474 Fuel 3,374 881 Duty & Registration 95 55 Total 14,484 14,360 Sources: SMMT (2011), Fleet News (depreciation costs)
Depreciation: Cost Value Original Value % 100 90 80 70 60 50 40 30 20 10 0 Minor service costs Major service costs Terminal value 0 1 2 3 4 5 6 7 8 9 10 Year
Depreciation: One Hoss Shay Original Value % 100 90 80 70 60 50 40 30 20 10 0 Minor service costs Cataclysmic failure Scrap value 0 1 2 3 4 5 6 7 8 9 10 Year
Depreciation: Empirical Evidence Top selling car (or nearest with available data) for the 5 main SMMT categories Supermini Ford Fiesta 1.25 Zetec Lower Medium Ford Focus 1.6 Zetec Upper Medium BMW 3 Series 320i Executive BMW 5 Series 530i Luxury BMW 7 Series 740i UK 8 year data Parker s Car Price Guide July 2013 Price Types Franchised Dealer Independent Dealer Private seller Trade
Depreciation: Full Life Cycle Original Value % 100 90 80 70 60 50 40 30 20 10 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Year
Depreciation: Four Phase Life Cycle 1. Highest depreciation in first 1-2 years irrational from a cost perspective but may signal a price adjustment 2. Steady depreciation in 3-5 years Based on average expected maintenance costs High cost items will be absorbed 3. 8+ years maximum uncertainty Value based on highest cost item e.g. engine Maximum uncertainty means age is no longer a proxy for overall condition 4. Sudden death end-of-life when highest cost item fails and repair is not economic i.e. one hoss shay
Depreciation: Full Life Cycle Original Value % 100 90 80 70 60 50 40 30 20 10 0 Price Adjustment Value 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Year
Depreciation: Full Life Cycle Original Value % 100 90 80 70 60 50 40 30 20 10 0 Price Adjustment Value Cost-based Value 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Year
Depreciation: Full Life Cycle Original Value % 100 90 80 70 60 50 40 30 20 10 0 Price Adjustment Value Cost-based Value Terminal Value 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Year
Depreciation: Full Life Cycle Original Value % 100 90 80 70 60 50 40 30 20 10 0 Price Adjustment Value Cost-based Value Terminal Value Sudden Death 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Year
Depreciation: Life Cycle Costs Car depreciation is consistent across model ranges Small cars have lower quality but they are simple and easy to maintain Premium cars have higher quality but are complex and costly to maintain Average life expectancy of a UK car: 14 years (SMMT) Cars with shorter life expectancies will suffer faster rates of depreciation and raise the ownership cost The higher rate of depreciation means the vehicle is less price competitive, impacting sales volumes and corporate financial viability
NSU Ro80: Death of a Company
NSU Ro80: Death of a Company NSU Ro80 was a highly advanced vehicle, launched in 1967 Styling a decade ahead of its time Aerodynamic body Rotary Wankel engine Electric clutch, semi-automatic transmission Early engines last less than 20,000 miles (2 years) Warranty claims bankrupted the company acquired by VW in 1969 Ro80 production 1967-77 37,000 units total
Depreciation: NSU Ro80 Original Value % 100 90 80 70 60 50 40 30 20 10 0 Ro80 Opel Ascona BMW 2500 1975 1974 1973 1972 1971 1970 Year Source: Glass s Guide
Battery Packs for Engines Technically advanced Attracts first adopters Late adopters may be more cautious Battery pack system is cost equivalent of an ICE engine Current cost could be 13,000 Mitsubishi i/imiev difference: 12,000 Cost in 2020: 6,500 Cost in 2030: 4,100 Source: Committee on Climate Change 2012
Lithium-Ion Battery Pack Longevity The lifespan of the battery pack is influenced by Conditions of use temperature range Charging regime rapid charge/discharge Age Estimates of battery life 60% capacity after 10 years (BCG) 80% capacity 5-20 years (American Chemical Society) Warranties: Nissan 5 years, 70% capacity Mitsubishi 5 years
Electric Cars in the UK Market Lithium-ion electric cars are relatively new to the market Mitsubishi imiev late 2009 Nissan Leaf March 2011 Reva G-Wiz available in UK since 2004 Lead acid batteries shorter lifespan Short range and speed 48 miles, 50 mph Categorised as a quadricycle in many markets Assumptions Representative of electric car buyer behaviour Buyers are first adopters Budget is the only difference between buyers Battery cost 1,100 Battery life 3 to 4 years
Reva G-Wiz: 2004-2013 Source: GoinGreen
Reva G-Wiz: Used Value Data Data collected from ebay: Actual agreed sale price 2 bid lower limit Vehicles described as good condition no insurance write-offs, MOT failures or dead batteries Data collected over 2 years 2011, 2012 Equivalent data collected for other environmental vehicles: Toyota Prius smart FourTwo
Reva G-Wiz: Depreciation Rate Original Value % 100 90 80 70 60 50 40 30 20 10 0 Reva Prius Smart UK 0 1 2 3 4 5 6 7 8 9 10 Year Source: ebay, Parkers
12 Reva G-Wiz: Sudden Death Possibility 10 2011 Sales 8 6 4 2 0 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Source: ebay
12 Reva G-Wiz: Sudden Death Possibility 10 8 2011 Sales 2012 Sales 6 4 2 0 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Source: ebay
Reva G-Wiz: Sudden Death Possibility 12 10 8 6 4 2 2011 Sales 2012 Sales 2013 DVLA 700 600 500 400 300 200 100 0 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 0 Source: ebay
Reva G-Wiz: Interpretation of the Data 2012 owners kept their cars longer than 2011 owners 2013 ownership of older cars has collapsed (post 2007 models) Conclusion Weak evidence of lower residual values future depreciation should be steeper Strong evidence of sudden death
Electric Cars: The Disappearing Market
Electric Cars: The Disappearing Market 80%+ of electric cars are expected to be charged at home garage or driveway 2012 California EV survey: 79% of owners earn US$100,000+ ( 65,000) 91% have their own garage US homes with private garage or driveway: 53% of private houses 22% of rented houses UK 40% of dwellings have access to a garage 34% of dwellings have street parking or nothing
Electric Cars: Residual Value Projection by Phase Phase 4: Sudden death uneconomic battery replacement at 8yrs 1. 8yrs @ UK average residual = 3000 (New = 24,300) New battery = 6,500 2. No ongoing market Electric Car Value = - 3,500 (i.e. Scrap) Phase 3: Terminal Phase highly predictable battery condition means period is brief Phase 2: Cost Value Phase Highly predictable maintenance costs and battery conditions leads to straightline depreciation Known battery changeover at 8 years (approx.) steepens the rate of depreciation Phase 1: Price adjustment phase similar to market average 53% value retention after 2 years but continuing into 3 rd year
Reva G-Wiz: Depreciation Rate Original Value % 100 90 80 70 60 50 40 30 20 10 0 Projection anchor point Phase 1 Phase 2 Phase 3 Phase 4 0 1 2 3 4 5 6 7 8 9 10 Year Source: ebay, Parkers UK
Depreciation and Ownership Costs Premium medium size ICE hatchback vs. EV Costs over 3 years, 10,000 miles per year Item ICE EV Purchase 19,650 24,300 (incl. Rebate) Residual 9,175 11,350 ( 7,047) Depreciation 10,475 12,950 ( 17,253) Service 540 474 Fuel 3,374 881 Duty & Registration 95 55 Total 14,484 14,360 ( 18,663) Sources: SMMT (2011), Fleet News (depreciation costs)
Long-Term Implications Electric car ownership costs will be higher than advertised Lack of electric cars in the banger market Reduced spread of electric cars in the car parc High demand for used ICE reduces depreciation Higher demand for public transport Industry may fail to attain economies of scale Short-term demand challenges may lead to long-term strategic withdrawal from EV technology Nissan battery plant: 50,000 units per annum Lithium-ion hybrid cars will suffer a proportion of the accelerated depreciation
Q&A
References Akerlof G A (1970) The Market for "Lemons": Quality Uncertainty and the Market Mechanism in The Quarterly Journal of Economics Vol. 84, No. 3 (Aug., 1970), pp. 488-500 American Chemical Society (2013) Understanding the life of lithium-ion batteries in electric vehicles. Conference presentation. American Housing Survey for Metropolitan Areas (2009) Boston Consulting Group (2010) Batteries for electric cars California Center for Sustainable Energy (2012) <http://energycenter.org/index.php/ news-a-media/ccse-press-releases/3271-first-ca-electric-vehicle-survey-shows-broadbenefits> Committee on Climate Change (2012) Cost and performance of EV batteries English Housing Survey (2010) <https://www.gov.uk/government/uploads/system/ uploads/attachment_data/file/6748/2173483.pdf> SMMT (2011) Electric car guide 2011. London: SMMT Glass s Guide 1976