Rising EVs of EVs May Affect ICE Vehicles
2017 was a banner year for the transition to electric vehicles. Sales of new electric vehicles have exceeded one million worldwide. Many countries have announced timetables to end the era of internal combustion engines in the automotive industry, and manufacturers have announced plans to introduce many models of electric vehicles.
Despite the enthusiasm 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 big gap in the total cost of owning an EV versus that of an ICE vehicle. Public charging stations were difficult to locate and charging took far too long compared to filling the tank with gasoline.
These differences have created great uncertainty as to whether electric vehicles could ever replace ICE vehicles. Despite government and industry commitments to long-term support for electric vehicles, the initiative was doomed to failure unless the industry succeeded in drastically reducing battery costs and overcoming technical hurdles. .
Fast forward four years and 2021 is shaping up to be another record year for electric vehicles. Battery costs are falling faster than most projections. Many EV startups are now firmly established (e.g. Tesla and Nio) in terms of vehicle sales and market capitalization. Electric vehicle sales are expected to exceed 2 million vehicles in China alone in 2021. The transition to electric vehicles 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 electric vehicles.
One of the impacts of the transition concerns the residual value of the lease portfolios. In recent years, the residual values of electric vehicles have improved as well as their 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 improvements in EVs make them superior to ICE vehicles in terms of driving experience and total cost of ownership. In other words, electric vehicles can become the preferred vehicle to drive. When this happens, the market share of electric vehicles will increase rapidly and ICE vehicles, now inferior substitutes, will likely have lower residuals.