Used EVs Lose 70% of Their Value in Three Years — Electric and Gas Cars Are Two Different Industries

Worthless used cars are undermining the sales channel the auto industry depends on

In 2018, the global electric-car market sold 2 million vehicles, nearly eight times more than the 230,000 sold five years earlier.

The growth looks set to speed up. Nine countries, including China, and more than a dozen cities have decided to phase out gasoline cars. That has pushed Volkswagen, Ford and other automakers to announce EV transition plans worth tens of billions of dollars.

Technology has made electric cars cheaper and given them longer range. Between 2013 and 2017 the cost of a power battery fell from 3,200 yuan per kWh to 1,200 yuan per kWh, a 60% drop in four years. Over the same period, the average range of an American electric car rose from 127 km to 289 km.

None of this would have happened without enormous government subsidies. Over the past decade, governments around the world have spent roughly $16 billion subsidizing new-energy vehicles. In Tesla's home market, federal and local subsidies for a single electric car can reach $10,000. Norway waives the 25% purchase tax on electric cars.

China accounts for more than half of that $16 billion. In 2015 it spent 59 billion yuan on electric-car subsidies; between tax exemptions, cash subsidies and new-energy license plates exempt from driving restrictions, EV sales reached 330,000 for the year, passing the US to make China the world's largest market.

The owners who bought at the peak of the subsidy era now have a new problem: their cars are worth almost nothing.

According to the December 2018 resale-value report from the China Automobile Dealers Association, a pure electric car sells for less than 30% of its original price after three years. A gasoline car still fetches 70% after five years, and an SUV more than that.

And 30% is the good case. Open Guazi Used Cars right now and you'll find a 2015 BAIC EV160 with 20,000 km on the odometer listed at 27,000 yuan — 23% of what it cost after subsidies at the time.

This is not a Chinese problem. The same thing happens in the US, where used-car trading is far more mature. The research firm iSeeCars.com looked at 4 million used-car prices and found that five-year-old electric and hybrid cars sell for 25%-30% of their original price on average, against 40%-60% for gasoline cars.

The Nissan Leaf, the world's best-selling electric car by cumulative volume, sells for only 29.3% of its original price after five years. Among gasoline cars of the same vintage, the Toyota RAV4 averages 56.5%.

EVs Depreciate So Fast That Reselling Them Has Become a Real Problem

Used electric cars are cheap next to gasoline cars, and the shorter the range, the starker the gap.

Three years ago, 120,000 yuan bought an electric car with more than 200 km of range, enough for daily use — a BAIC EV200, say, or a BYD E6. The same money bought a Volkswagen Lavida, the best-selling family car of 2015 at 380,000 units.

Start with the real three-year cost of the gasoline car. A 2015 Lavida manual Fengshang trim drove off the lot for 129,000 yuan, purchase tax and insurance included. Three years later a used one in normal condition sells for 75,000 yuan, which puts the cost of ownership at 44,000 yuan and the resale rate at 60%.

How does an electric car at the same price fare after three years? 120,000 yuan bought an EV200 with more than 200 km of range after subsidies, the long-range model in BAIC's E series. But three years on, its average used price is 45,000 yuan — a cost of ownership of 80,000 yuan, twice the Lavida's, and a resale rate of just 36%.

The US auto market, where both used-car trading and electric cars got an earlier start, has the same problem with worthless used EVs.

The Nissan Leaf, the best-selling pure electric car in history, leaves the factory at $29,000; after subsidies, sales tax and insurance, its real price is $21,600. On CarMax, the largest online used-car marketplace in the US, a used 2015 Leaf goes for only about $10,000 — a three-year cost of ownership of $11,600, and a resale rate of 46%.

Among gasoline cars at the same price, a Toyota Corolla really costs $23,500; three years later it sells for $15,000, a cost of ownership of $8,500, or $3,100 less than the Leaf.

Tesla, the most famous electric brand, is the exception: it holds its value reasonably well. Its long range and its own sales and buyback channels mean a used Model S generally sells for about half its original price after three years, no worse than a BMW in the same price range.

But the Model S is still a luxury car. Used BMWs and Mercedes lose more value not because of their condition but because the brand premium fades. Tesla's mainstream car is the Model 3, a mid-priced model in which the battery accounts for a bigger share of the cost. Once the Model 3 sells in real volume, whether it can hold a 50% resale rate is another question.

Fast depreciation hits the used-car market first.

In a mature auto market, used cars raise the number of vehicles on the road and enlarge the market. Cars that hold their value stimulate new-car sales: a dealership can use used cars to draw in customers who could not otherwise afford a new one, and the back end — repair shops, insurers — gets a steady stream of business.

But when electric cars lose value this fast, fewer of them change hands. The China Automobile Dealers Association notes that at this stage an electric car more than three years old performs so far behind current models that it isn't worth reselling.

Zhang Jian, who buys used cars from private owners in Shanghai, told QDaily: "If I take an electric car and can't sell it, every day I hold it is a day I lose money. If it ends up stuck on my hands with no buyer, I lose a lot more."

Small dealers who take electric cars usually just pass them to a bigger shop for a finder's fee. Zhang tells customers who really want to sell to list the car on an e-commerce platform instead.

In 2017 Nature ran an anonymous survey of dealers at five sites in Europe; most of them did not recommend electric cars to customers.

For now, consumers bear the entire loss of an unsellable used electric car. A 120,000-yuan long-range EV200 is worth barely more than a third of that after three years, a cost of ownership of 80,000 yuan. Once the subsidies are gone, that number will only rise.

In Mature Markets, Used Cars Are 75% of All Car Sales — a Core Part of the Sales Channel

Used-car sales are a critical link in the auto industry. For the past decade, US used-car sales have held steady at around 40 million a year, more than twice new-car sales.

In 2017 Americans bought 17.2 million new cars and 41 million used ones — 75% of the total, worth more than $100 billion. China, where car ownership per person is still relatively low, sold 13.82 million used cars in 2018, half as many as new cars, worth more than 800 billion yuan.

By 2017 the gross margin on a new car had been squeezed to 4.5%, while the average gross margin on a used car was 11.5% — more than double.

In the US, and in most markets, building cars and selling them are separate businesses. The automaker sells the cars it builds to dealerships, so the factory carries no inventory. The dealership buys from the factory and then sells to customers over time, carrying enormous capital pressure — especially when sales are slow.

In July 2017 General Motors announced a three-week production halt: more than 980,000 cars had piled up in the dealer channel, hundreds of millions of dollars of inventory. Last year new-car sales in China fell for the first time, and dealerships began closing in waves. Pang Da Automobile Trade, one of the country's largest dealer groups, lost more than 6 billion yuan in a single year.

Dealerships put up with the inventory and the debt — borrowing to stock cars, sometimes selling at a loss — partly to hit the sales targets that earn them rebates from the automaker. The bigger reason is that most of the money made after the sale — car loans, insurance, servicing, repairs — lands in their accounts.

After a few years, used-car dealers — CarMax in the US, Guazi Used Cars in China — buy the cars back from individual owners and resell them, extending each car's life and feeding more work to repair shops and insurers. That closes the loop for the whole industry.

Selling trade-ins has gradually become a revenue line for dealerships too. Edmunds research finds that dealerships account for 37% of the total US used-car market, and 55% of the used cars they sell come from customer trade-ins.

Spending ahead of income and a slowing economy pushed US new-car leasing from just over 1 million in 2009, after the financial crisis, to 4.5 million in 2017 — 31% of new-car sales.

A new-car lease usually runs three years. When it ends, the car goes back to the dealership and the customer either leases another new one by the month or buys the car outright. That leaves dealerships with a large supply of nearly new, three-year-old cars, which they resell at a higher margin.

Used cars need more repair and maintenance, which has pushed average annual growth in the US auto-repair market to 12.7%. The consulting firm Ipsos put the American aftermarket — repair, maintenance, detailing and customization — at $241 billion in 2017.

The growth of the used-car market has also raised financial penetration in car loans and insurance. Open the Guazi app today and it immediately invites you to check your credit line. Roland Berger predicts China's auto finance and insurance market will reach 1.8 trillion yuan by 2020.

They Are Both Cars, but Electric and Gasoline Vehicles Run on Completely Different Supply Chains

So why can't electric cars sell on the used market?

Kelley Blue Book (KBB), the American car-valuation authority founded in 1926, points out that a new electric model has far more range and far more features than a used one from a few years back. "The range gap is so large that nobody wants to consider an older model first."

What KBB is describing is exactly the third-generation Leaf Plus, shown this past January and going on sale in 2020.

Without much of a price increase, the Leaf Plus's range rises to 360 km, 50% farther than the previous generation.

Naturally, nobody wants to buy an older car with 50% less range. Range anxiety means watching the battery gauge the whole time you drive, and not daring to run the air conditioning when the charge gets low. Every extra push on the accelerator hurts. Short range also limits where you can go: a trip out of town means mapping out chargers along the route in advance, and a lot of time gets burned waiting at charging stations.

But the Leaf Plus's extra range doesn't come from a leap in battery technology. It comes from stuffing in more cells. Nissan says most of the gain is capacity, up from the previous generation's 40 kWh to 62 kWh, with a third row of cells added at the back of the pack, taking the count from 192 to 288 — exactly half again as much.

Falling battery costs and rising energy density are what let the Leaf hold its price while carrying a bigger battery. But that kind of improvement in lithium batteries cannot go on: the conventional technology is close to its ceiling.

A study published in Nature found that gains in the performance and price of lithium-ion batteries are slowing. The amount of charge that can be stored in the gaps of an electrode material's crystal structure is approaching its theoretical limit.

Over 20 years the cost of a lithium battery has fallen 30-fold, to around $150 per kWh today. But the rate of decline has slowed from 15% a year five years ago to 8% now. Bloomberg's Electric Vehicle Outlook 2018 predicts the decline will slow further, and that once the cost reaches $100 per kWh, another technological revolution will be needed to push it lower.

At $150 per kWh, batteries are nowhere near cheap enough to bring electric cars down to a price that competes with gasoline cars — least of all in a market where oil prices have kept falling for years.

Volumetric energy density tells the same story: it rose from 130 Wh/L in 2013 to 290 Wh/L in 2015, after which the growth began to slow.

The Tesla Model 3, which began shipping in volume last year, uses a 21700 battery system with 30% higher energy density. In reality the 21700 cell is simply wider and longer than the old 18650, giving 1.1 times the volume and therefore more capacity — not a breakthrough in materials.

Technology is improving more slowly. More important, the most valuable part of an electric car — the battery — is a consumable, and nobody has solved that.

A well-maintained gasoline engine lasts more than 10 years. An electric car's battery, like the one in a phone or a laptop, loses capacity irreversibly as it is used.

Continental, the parts supplier, has published a chart of what ages an EV battery. Storage temperature matters most, then the temperature the car is driven in, then depth of charge and discharge, which mainly affects cycle life.

NEC of Japan, which builds the battery packs for the Nissan Leaf, has run aging simulations. In a city with an average annual temperature around 20°C, its model showed an electric car still losing 6.9% of battery capacity a year.

Cold is worse. Testing by the American Automobile Association (AAA) early this year found that at -6.67°C, an electric car with the heater on loses 41% of its range on average. Electric-taxi drivers in Beijing have taken to installing small gasoline heaters in the trunk to get around the choice between staying warm and keeping range.

A car that sits unused loses capacity too. Above 25°C, a battery left alone for a year loses 20% of its capacity.

An electric car is simpler than a gasoline car, with most of the cost and the technology in the battery. The battery in a BAIC EV200 costs 70,000 yuan, 60% of what the car actually sells for.

Because the battery is a consumable, the fast depreciation of used electric cars is unavoidable — and today's lithium battery technology has no answer for it.

As more electric cars go unwanted, used-car turnover is bound to shrink, and repair and maintenance will feel it next.

For dealerships and repair shops, electric cars break the old model of making money on servicing.

A gasoline car costs at least 1,500 yuan a year in routine maintenance alone, and a luxury brand costs more. Take the entry-level luxury models: the Mercedes C200, Audi A4L and BMW 3 Series all cost more than 4,500 yuan a year to keep on the road.

Electric cars are serviced differently: fewer visits, fewer items on the bill. Tesla founder Elon Musk has tweeted that servicing a Tesla every 2,000 km costs a fifth of what maintaining a BMW costs.

An electric car replaces the engine and gearbox with a motor, which simplifies or removes a long list of parts. No more oil changes, fuel filters or spark plugs, and no emissions checks. A pure electric car doesn't even need frequent brake-pad changes, because most braking energy is recovered through the motor and the pads wear far less.

So dealerships, whose real profit is in after-sales repair and maintenance, have to strike item after item off the bill, and the business gets harder to sustain.

The auto industry today rests entirely on the dealership network; apart from Tesla, no automaker has built its own. Without that channel, the whole process of selling a car changes. Carmaking is a business with staggering scale requirements: GM sells nearly 1,000 cars an hour and builds more than 10 million a year, which makes it acutely sensitive to unsold inventory.

For now, subsidies are still holding up the electric-car market — but the money is shrinking.

Last November Larry Kudlow, chief economic adviser to President Trump, said the US government was considering scrapping EV subsidies. China has published a plan to withdraw its own step by step: from 2018 to 2020, new-energy-vehicle subsidies fall by a third each year.

After Tesla passed 200,000 cumulative sales, its federal subsidy dropped from $7,500 to $3,500, and Tesla cut prices by $2,000 to make up the difference. That briefly set off doubts about whether it could still attract buyers, and the stock fell nearly 10%.

Facing a Very Different Electric Future, Automakers Start to Experiment

For most buyers, a car is the biggest single purchase of their life after a home. Nobody wants to watch the car they just bought fall behind the times and lose its value in three to five years.

Bloomberg's new-energy unit reports that in 2017, 80% of American electric cars were on three-year leases, against 30% of gasoline cars.

Loren McDonald, editor-in-chief of CleanTechnica and author of Gas Station Zero, thinks electric cars will be replaced as often as smartphones. Consumers want a new car every three years or so to try the new technology, he argues, rather than paying a large sum once and driving the old car for years.

That is a completely different business from buying and selling cars, and it pulls automakers much deeper into the sale. Some of the experiments started earlier than you might think.

In 2011 BMW launched DriveNow, a car-sharing service, and later put large numbers of i3 electric cars into the fleet; it started in Germany and reached North America a year later. Mercedes' Car2go, running since 2008, is expanding its electric coverage worldwide.

Building dedicated new-energy dealerships has become another goal for automakers. BAIC New Energy, GAC and Chery have all opened standalone new-energy stores; Changan, Geely and JAC have announced plans to. Because there is less servicing to do, these stores can be more flexible about where they open — in a shopping mall, for instance.

A more radical view: "in the electric era, both buying and leasing will be replaced by subscriptions from the automakers." An article in The Motley Fool argues that in the future the cars will be owned by automakers, dealerships and ride-hailing platforms, not by individuals. Using a car will be like paying a monthly music subscription.

BMW, Cadillac and Volvo are all piloting subscriptions on a small scale. The customer signs a contract with a local dealer, in a model similar to a lease but cheaper and longer. The owner no longer has to think about insurance, maintenance or, more to the point, what the car will be worth later.

The car business really is being reshaped by electric cars, whether through running car-sharing services, opening their own dealerships, or selling subscriptions. Automakers are trying many things to find the sales model that fits an electric car, and some of it is working.

What all these attempts have in common is that the automaker absorbs costs it used to push onto someone else. Building your own channel means carrying the inventory; ride-hailing and subscriptions mean carrying the depreciation.

With Europe and China, the world's two largest auto markets, setting optimistic and aggressive policy targets, automakers have little room to move: a shrinking gasoline market on one side, billions to spend on electric R&D on the other.

If the battery never breaks through, the governments' targets may simply not be met. George W. Bush's hydrogen-car program faded away after tens of billions of dollars in subsidies. Obama, then president, set a goal of 1 million electric cars on American roads by 2015; that year the US sold fewer than 200,000.

A big change in the auto industry is only a matter of time. What it will look like is still an open question.

Charts by Zheng Shuya

Cover image/Greentech Media