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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/
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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)
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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”
Teaching excellence for over a hundred years
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
Price Adjustment Value
Teaching excellence for over a hundred years
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
Price Adjustment Value
Cost-based Value
Teaching excellence for over a hundred years
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
Price Adjustment Value
Cost-based Value
Terminal Value
Teaching excellence for over a hundred years
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
Price Adjustment Value
Cost-based Value
Terminal Value
Sudden Death
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
NSU Ro80: Death of a Company
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred 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
Teaching excellence for over a hundred years
Reva G-Wiz: 2004-2013
Source: GoinGreen
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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
2012 Sales
Teaching excellence for over a hundred years
Reva G-Wiz: Sudden Death Possibility
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
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
Electric Cars: The Disappearing Market
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
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)
Teaching excellence for over a hundred years
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
Teaching excellence for over a hundred years
Q&A
Teaching excellence for over a hundred years
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