the market for electric lemons: residual values for aging ... · teaching excellence for over a...

Teaching excellence for over a hundred years

The Market for Electric Lemons: Residual Values for Aging

Electric Cars

Dr Michael Wynn-Williams [email protected] 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

0 10 20 30 40 50 60 70 80 90

100

0 1 2 3 4 5 6 7 8 9 10

Orig

inal

Val

ue %

Year

Terminal value

Minor service costs

Major service costs


Depreciation: One Hoss Shay

0 10 20 30 40 50 60 70 80 90

100

0 1 2 3 4 5 6 7 8 9 10

Orig

inal

Val

ue %

Year

Minor service costs

Scrap value

Cataclysmic failure


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

0 10 20 30 40 50 60 70 80 90

100

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Orig

inal

Val

ue %

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”



0 10 20 30 40 50 60 70 80 90

100

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Orig

inal

Val

ue %

Year

Price Adjustment Value



0 10 20 30 40 50 60 70 80 90

100

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Orig

inal

Val

ue %

Year


Cost-based Value



0 10 20 30 40 50 60 70 80 90

100

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Orig

inal

Val

ue %

Year


Cost-based Value

Terminal Value



0 10 20 30 40 50 60 70 80 90

100

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Orig

inal

Val

ue %

Year


Cost-based Value

Terminal Value

Sudden Death


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

0 10 20 30 40 50 60 70 80 90

100

1975 1974 1973 1972 1971 1970

Orig

inal

Val

ue %

Year

Ro80 Opel Ascona BMW 2500

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

0 10 20 30 40 50 60 70 80 90

100

0 1 2 3 4 5 6 7 8 9 10

Orig

inal

Val

ue %

Year

Reva Prius Smart UK

Source: eBay, Parkers


Reva G-Wiz: Sudden Death Possibility

Source: eBay

0

2

4

6

8

10

12

2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

2011 Sales



Source: eBay

0

2

4

6

8

10

12

2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

2011 Sales

2012 Sales



Source: eBay

0

100

200

300

400

500

600

700

0

2

4

6

8

10

12

2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

2011 Sales 2012 Sales 2013 DVLA


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 Electric Car Value = -£3,500 (i.e. Scrap)

2.  No ongoing market 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 3rd year


Reva G-Wiz: Depreciation Rate

0 10 20 30 40 50 60 70 80 90

100

0 1 2 3 4 5 6 7 8 9 10

Orig

inal

Val

ue %

Year

Phase 1 Phase 2 Phase 3 Phase 4 UK

Source: eBay, Parkers

Projection anchor point


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-broad-benefits>

§  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

the market for electric lemons: residual values for aging ... · teaching excellence for over a...

Documents