EV market faces deepening crisis as residual values plummet, finds ADS

Plunging residual values in the electric vehicle (EV) market are creating substantial financial challenges for leasing companies, manufacturers, and customers alike, according to Auto Data Solutions (ADS) which is warning of a prolonged impact on the sector.

ADS is calling for greater collaboration within the industry and enhanced data transparency in order to mitigate risks, seeing extended warranties and GAP insurance as potential revenue opportunities during this period of uncertainty.

Re-leasing older EVs is also highlighted as a strategy to provide consumers with affordable options while avoiding an oversupply of vehicles in the used market. It noted that leasing companies are already adapting by extending contracts and re-leasing used EVs, a move designed to generate revenue and delay exposure to falling residual values.

Amanda Morgan, commercial director at ADS, described these steps as necessary for preserving financial stability in the lease sector by retaining vehicles longer and keeping them out of oversaturated used car auctions.

“The pace of EV success has created an imbalance between the demands of the new and used car markets. Extending contracts and re-leasing vehicles are pragmatic steps to maintain revenue and avoid flooding the used market.”

It points out that some EVs, initially forecast to retain over 40% of their value after three years, are now achieving sale prices closer to 20% of their original cost.

This steep depreciation translates to substantial financial losses. For example, a £40,000 EV could lose over £7,000 more than anticipated, a trend that has already cost the leasing sector hundreds of millions of pounds.

The crisis stems from several interconnected issues. Sales growth in new EVs has been driven largely by tax incentives, such as salary sacrifice schemes, but this has not been matched by equivalent demand in the used market where consumer preferences still favour cheaper internal combustion engine (ICE) vehicles or lower-cost used cars.

Compounding the problem, innovations in EV technology rapidly render older models less desirable, while steep discounts on new EVs further erode the value of used vehicles.

Additionally, government targets for electric vans have created an oversupply, as the second-hand market lacks the demand to absorb them.

However, Morgan concedes that extending contracts and re-leasing used EVs carries risks as it reduces demand for new EVs, potentially exacerbating manufacturers’ ability to meet government-imposed zero-emission targets.

She said consumers are also feeling the effects, with many facing higher lease payments as companies try to recoup losses. Employees participating in salary sacrifice schemes may be required to drive older vehicles for longer, diminishing the value of their vehicle perks. For first-time EV users, re-leased vehicles may offer a more affordable entry point, but this solution could again inadvertently reduce demand for new cars.

She added that manufacturers must address these issues by reassessing EV list prices to improve affordability and better align supply with market demand.