The year 2017 was a banner one for the transition to electric vehicles. Sales of new EVs surpassed 1 million globally. Many countries announced timetables to end the internal-combustion-engine age in the automotive industry and manufacturers announced plans to introduce many EV models.
Despite the excitement generated at auto shows and elsewhere, there were still significant technological hurdles to overcome. For example, the cost of batteries was too high, creating a significant differential in the total cost of ownership for an EV when compared with that of an ICE vehicle. Public charging stations were hard to locate, and charging took far too long compared with filling up the tank with gasoline.
These differences created great uncertainty as to whether EVs could ever replace ICE vehicles. Despite government and industry pledges to support EVs over the long term, the initiative was doomed to fail unless the industry could achieve large reductions in battery costs and overcome technical hurdles.
Fast-forward four years and 2021 is shaping up to be another banner year for EVs. Battery costs are coming down faster than most projections. Many EV startups are now firmly established (e.g., Tesla and Nio) in terms of both vehicle sales and market cap. EV sales are expected to exceed 2 million vehicles in China alone in 2021. The transition to EVs is not a matter of if, just a matter of when. The industry is now seriously concerned about the impacts of the potentially imminent and rapid transition from ICE vehicles to EVs.
One of the impacts of the transition is on the residual value of lease portfolios. In the past few years, the residual values of EVs have been improving along with their driving range.
On the other hand, the residual values of ICE vehicles have not yet been impacted by competition from EVs. This will likely change over the next few years as further improvement in EVs make them superior products compared with ICE vehicles in terms of driving experience and total cost of ownership. In other words, EVs can become the preferred vehicle to drive. When this happens, the market share of EVs will increase rapidly and ICE vehicles, now inferior substitutes, will likely have lower residual values.