Automakers are having a hard time selling EVs. Incentives have risen dramatically, and some of the
sweetest deals can be found not in buying a car, but leasing it. It's basically a long term rental that you
don't have to worry about reselling later. Almost no concerns about maintenance. Monthly payments are low, and a loophole allows you to
get a subsidy on an EV that wouldn't otherwise be eligible if you bought it. And while that might seem great for cash starved
Americans and for EV adoption in general, used EV prices have tanked. Boosting volume through leases risks pushing prices
down even further. There's just so much happening there that I don't think
any of those automakers can even really predict the high level of accuracy, nor can the guidebooks
predict what's this vehicle really going to be worth. That could hurt the segment and the companies that make
EVs in the long run. So why are EV lease prices so low, and what does it
mean for automakers? Barclays analyst Dan Levy estimates that in May 2024,
EV incentives basically discounts were 15 to 30% of the sticker
price, significantly higher than the overall industry at 5 to 6%. That puts immense pressure on already tight and often
negative EV margins. Tesla, which controls about 50% of the US EV market,
was offering relatively low incentives on its model three, model X and model S, but a 13% on its
top selling model Y, though that promotion ended June 1st. Incentives on EVs from legacy automakers were much
higher mass market EVs, meaning not luxury cars, were discounted 25% off the original
price incentives on a luxury EV. The Cadillac Lyriq from General Motors hit what Levy
called a surprisingly high value of $18,000, nearly a third off the sticker price. Automakers are trying to push discounts because the EV
demand is soft. You saw early on a lot of outright price cuts. A lot of this spurred by Tesla. But I think one of the observations is that the
elasticity of demand is probably not what some were hoping for. And so they're resorting to other ways to discount. And leases are a key way. While leases made up only about 23% of overall retail
new vehicle sales in May of 2024, they were about 35% of total EV purchases and
close to 70% of EVs sold by dealerships. I think it's kind of kick the can down the road
problems where we know there's going to be a problem, what are you going to do with it later? Hopefully, certifying those vehicles, making them seem
even more appealing is going to help. Maybe bump up residuals a little bit or buy consumer
confidence, or maybe they'll just be so cheap they're easy to move. A lease lasts for a period of a few years, often three,
but it can vary. Once you finished your term, you turn the car back in. There are options to buy out the lease if you want to. Monthly payments are usually lower than for a
purchased car. There are, of course stipulations to this, like limits
on the number of miles you can drive, often 10,000 or 15,000 per year. That's usually negotiable at a cost at signing. But once you settle on a limit, going above your
allowance is expensive as much as $0.50 for every additional mile. You might also have to pay extra if you ding the car
up beyond normal wear and tear, but if you can stand that, you'll be driving a brand new vehicle in mint
condition that is less likely to give you problems. Any needed repairs are probably covered by warranty. For the typical consumer out there. No, leasing is probably not a good product. It's a very specific type of buyer that would be
interested in leasing, but there is a contingent out there that it works perfect for. I don't know the exact numbers, but it's a large
portion. Are sales people, you know, people making business
calls and they write off their their vehicle as part of their business expenses. You also don't have to worry about selling the vehicle
when you want to get rid of it, drive it and at the end of the term, turn it back in. Simple. Crucially for EVs, swapping out a car every
few years is also great for somebody who likes to have the latest and greatest in
technology. The lower payments can also get you into a car that
would be more expensive to buy. For example, leasing is far more popular in the luxury
segment than in the mainstream on On average, EVs are still selling for about $9,000 more
than the overall industry average. This may not be a perfect representation of
American attitudes, but a survey of a few thousand consumers considering an EV in France, the UK and
Germany found they were twice as likely to prefer a lease. There are fewer concerns around battery longevity or
the car becoming obsolete as technology improves. They're going to use that leasing because it is the
natural way to get customers to try out this product that are just not going to be willing to slap
down 40 or $50,000 for something. They just have no idea whether this is going to work
for them or not. In addition, the Inflation Reduction Act restricts the
$7,500 tax credit on new EV purchases to cars made in the US, along with some
other criteria. Leasing the vehicle offers a workaround that allows
buyers of foreign made EVs to reap the benefit of this credit. Two prices for EV leases have been extremely
low as of June 24th, 2024. Hyundai advertised a lease deal for its Ioniq
five, which to buy starts at $40,000 for $242 a month for 36 months, with about
3500 due at signing and a 10,000 mile annual limit. That monthly payment is less than half the average
lease payment for all cars in the US as of May. The Chevrolet Blazer EV, with a starting sticker price
of about $50,000, can be leased for $369 a month for 24 months, again with a $1,679 upfront payment and a total 20,000 mile limit. Polestar, a luxury performance vehicle brand, offers a
lease for $299. In general, leases are a mixed bag for
automakers. You're better off having a customer buy and hold the
vehicle because with extended length of time, they're going to have more, you know, they run past the
warranty, let's say. Right. So you're gonna have repairs, reconditioning,
things like that. On the other hand, leasing is a great way to move
metal, which means get more cars off lots. Especially useful when inventories are high. While it is taking dealers longer to sell any kind of
car, it's taking many more days to sell an EV compared with internal combustion vehicles and hybrids. They are also a great way to get customers hooked on
your brand. Loyalty rates for leasing are far higher than they are
for purchases. The reason is simple when you return your car to the
dealership, you're providing the dealer with an immediate opportunity to put you in another car. Then the dealer sells the car you turn in and the used
market. This is where the trouble is used. Ev prices fell 16% year over year in May 2024,
compared with just 12% for internal combustion vehicles that same month. Least EVs were expected to hold about 55% of their
value, while Ice vehicles were expected to hold closer to 62%. Levy said in his report that current residual rates,
what vehicles are expected to be worth after the end of the lease term, might even be optimistic. Next gen EVs could be either available in just a few
years time or on the horizon. Flood the market with a bunch of leases. What happens? You end up with poor residual values. Kind of creates this like vicious cycle. You're going to kill your residuals. It's very hard to dig yourself out of that hole. It's hard to convince a consumer that to even buy one
of your cars and have it long term and, you know, drive it to the wheels, fall off and build loyalty and build
a good impression because you think, oh, these cars are worthless in a couple of years. Automakers using aggressively attractive leasing terms
on EVs now could be deferring losses into the future. When those EVs come back to dealerships and have to be
sold in a used market where prices are already dropping. They're going to only get worse because you have so
many more that will be flooding the market. I think that that where it's like that's one out of
what every it's like two thirds or so, like a little over two thirds of current EVs being
sold at dealerships. Those things, they're gonna find their way back into
the market in like 2 or 3 years. Um, and that is not going to do nothing but hurt. You know, it's great for adoption purposes. It's great for consumers on the used end. I mean, I love that, right? A bunch of cheap used TVs running around. It's possible it will hurt. Pure play EV companies like Tesla more than legacy
automakers. For companies like GM or Ford, even if they are
increasing discounts on the EVs, the key thing to remember is that they are still, at
their core, Ice vehicle manufacturers. And so that yes, even if the EV demand
is weak, there is a strong ice profit stream to support the numbers for the
Western OEMs and specifically in North America, EVs are still, you
know, quite loss making for Ford and GM. For instance, Ford is going to lose on their EV unit
this year 5 to $5.5 billion. Just for context, the total business as a whole is is
10 to $12 billion of profit this year. What that means is that ex EVs, this is $16
billion of profit and EVs are $5 billion plus drag. Gm similarly, they don't actually break it out. But on our math, last year they lost $4.5 billion on
their North America EV business, and that was on a business that X strike
would have been $14 billion. So what it tells you is x x the EV losses. It would have been closer to, you know, 18 plus
billion dollars of profit. The popularity of EV leasing is partly striking because
a lot of people say it often isn't the smartest decision. On the one hand, payments and interest rates
are usually lower than what you would pay to finance a vehicle, but you don't actually own the car you are
paying for, and you are paying for it when it is depreciating fastest. Cars lose about 40 to 50% of their value in the first
three years of ownership. So Alessi is really paying for all that depreciation,
only to turn around and hand the vehicle back in when chances are it's near the bottom of its depreciation
curve. Some advisors advisers say the most financially sound
move in the long run is to buy a car and drive it around until it is no longer worth repairing. Two back to back three year leases will cost you more
than purchasing a car. Usually that's because cars can last a long time. The average age of the American fleet is nearly 13
years, but for this segment, the advantages for customers and the sheer need automakers have to move
metal are outweighing the negatives. We've gone from an environment that was EV euphoria to
an EV winter. Like I said, EV euphoria was unlimited demand, capital
markets willing to absorb losses, etc. we're in an EV winter today. Demand is is, you know, facing a reset. And clearly there is some challenge in pivoting from
the early adopters to the early majority. The real question is how long can it last? You know, maybe in a year you'll still get a decent EV
lease, but two years from now, three years from now? Debatable.
