EV sales are slowing. In August 2023, it took
about twice as long to sell an EV in the U.S. as it did the previous
January. Consumers generally still
have a little bit of anxiety, both about range
and some of the know-how when it comes to EVs. The mainstream appeal of
these cars is still not there. They're still too
expensive, and they've got too many limitations in
terms of how you use them. I've been in the auto
industry 40 years, and I've never seen this kind of
investment. $6.5 billion strictly
dedicated to EVs. Wedbush says spending on
commercial EVs should top $1.2 trillion between now
and 2030. We are building the future
of the electric vehicle. In 2022, consumers spent
nearly $400 billion on electric cars worldwide. The U.S. is expected to add
1 million new EVs to its roads in 2023. And from 2023 to 2027,
automotive companies have committed $616 billion in
total investments. Meanwhile, these efforts
have hit an unnerving speed bump. EV sales are slowing. I was a little nervous about
going all EV because my husband has an EV as well. Uh, and to have two EVs in
the house, you know, it's challenging. I think the
main issue is the long distance travel. Yeah, we've been kind of in
that situation. You do have to plan. Yes. In August 2023, it took
about twice as long to sell an EV in the U.S. as it did the previous
January. Gas burning vehicles were
still selling briskly. While slightly more than
half of consumers say EVs are the future and will
eventually replace combustion engines, less
than a third of dealers say so. You have a product that
almost every automaker has hinged their future on. The government is really
saying, look, we got to go with electrification. But when the rubber meets
the road, when people have to make that decision and a
lot of money is involved, we're starting to see that
that's starting to take a bit of a hit. Tesla has slashed prices
dramatically. Sales at some EV startups
have disappointed, and companies like Ford have
ramped up hybrid production as demand for their EVs has
leveled off. So what is really going on
and why? And what does it mean for
the future? For those who are in
combustion, would you suggest taking the step as
the bridge, so to speak, to a PHEV, a plug-in hybrid? Or do you think perhaps
going right over that to an electric vehicle? There is a oversupply of
electric vehicles in the industry today that is
greater than the demand. This is Jeff Aiosa. His shop is one of 383
Mercedes-Benz dealerships around the U.S. It pulls in about $40
million a year, employs about 50 people and at any
given time keeps about 70 cars on the lot. About a third are EVs and
hybrids. It's not that the customer
is not considering it or entertaining the purchase. It's the reticence to that
anxiety that exists relative to the range that the
battery can produce. And coupled with or
compounded by the lack of public charging
infrastructure, we're perhaps moving a little bit
too fast. Cox Automotive said in July
2023, on average, there's a 52 day supply of ICE
vehicles at dealerships. If they stopped making cars
today, a dealer would have enough to last 52 days. Pickup trucks went from 52
days to turn in January 2023 to just 57 by August. Meanwhile, the EV supply
was closer to 90 to 100 days. No segment has seen a
rise as substantial as EVs. There's definitely a rise in
how long a vehicle is going to sell in a lot. It's just
that the EVs are sitting even longer. And the fact that we're
seeing it reflected in the used car market as well,
that tells us this isn't just like an isolated
incident. This is something that is
very targeted. Numbers elsewhere suggest
enthusiasm for EVs has dampened from a pandemic
era high. In 2021, 86% of U.S. buyers were considering an
EV. That number has since
fallen to 67% in 2023. In May 2021, Ford opened
reservations for its F-150 Lightning, the fully
electric version of the most popular vehicle in America. It closed them by the end
of the year because the company said it had enough
reservations for three years worth of production. But by September 2023, Ford
said it was ramping up production of its hybrid
F-150 because sales of the Lightning had slowed. We literally had people who
would follow car carriers to the store, hoping that when
it got here that the car on the carrier that they
wanted to buy was available, only to learn that it was
already sold. People are rushing to the
dealership. They're going bananas,
paying over MSRP. They're bidding, wars are
going on. People are like, I hope
that guy doesn't buy it. If it falls off the truck,
I'll buy it kind of attitude. I mean, just
completely by the wayside now. It's just been one
year and the market for EVs is upside down. The softening of sales isn't
just happening for legacy brands. The buzzed about
luxury EV brand lucid has seen two consecutive
quarters of weaker than expected demand. Most recently, it delivered
600 fewer of its high performance, 500-mile range
luxury air sedan than Wall Street had expected in the
second quarter of 2023. There are larger economic
challenges. Interest rates are up and
so borrowing money is a lot more expensive. Inflation has reduced
purchasing power and supply chains are disrupted. The inflexible nature of
the EV supply chain is pressuring OEMs to make EVs
despite consumer pullbacks. Then there are the
pressures of meeting government mandates. Think of the lens of the
manufacturer, where it typically takes a cycle
time of upwards of 7 or 8 years, from inception to
showroom foreign wheels rolling. Right. So that's a big ship to
turn. And then back to the
mandates, the regulatory pressures, when you have to
meet those, it's not like you can just throw a switch
and convert from combustion to electric. There is a specific pricing
challenge with EVs. They tend to be more
expensive than their gasoline counterparts. That may explain why the
luxury category hasn't slowed down as much as EVs
have. A luxury mid-size electric
crossover, say, will often have a higher transaction
price or even a higher sticker price than a
comparable fuel burning one in the same class. The average transaction
price for a vehicle in the U.S. was about $48,000 in
September 2023. The average transaction
price for an EV was somewhere between $53,000
and nearly $60,000, depending on whose data you
use. Meanwhile, the EV buyer is
changing. Drury says about 40% of EV
shoppers are trading in a vehicle they already own
for a new one. That is about twice what it
was a decade ago. That suggests that a lot of
those EVs purchased a decade ago were supplemental
vehicles. An extra car. Like if you had a two car
garage, you got a third. And part of that was
because those EVs, they qualified for lots of tax
credits. You got HOV access lane. I know in Southern
California that was such a huge thing that vehicles
with that sticker, they would sell at a premium. As a Mercedes dealer, Jeff
Aiosa still interacts with a lot of well-heeled
customers. Even he has seen evidence of this. The early adopters were very
techie and they were very, I want to say, more in the
space of luxury. Last year we had 30
something models in the marketplace to almost 90
plus models, today, a more mainstream buyer. So these are the chargers
for fast charge DC charging and home charging. I also sells an EQB, a more
mainstream priced EV that retails somewhere in the
high $50,000 range. It's not cheap, but it's
only slightly above the average vehicle transaction
price, and it's a lot less expensive than the EQE,
which can run above $90,000, and the EQS, which can run
up to $140,000. These vehicles won't be
worth nearly as much as, say, an ICE equivalent,
which has more certainty involved. There's not going
to be leaps and bounds of technology and improvements
in ICE vehicles, but we know there will be with EVs. Batteries on average, are
warranted for ten years to give at least 80%
efficiency. That's not the case with
ICE. ICE cars, everybody puts
out a good car today and they last well over 20
years. I think there's an evolving
sense of buyer remorse. You see this in televisions
where, you know, every 6 to 9 months, you feel like the
same 52 inch TV is cheaper at Best Buy or pick your
location for the same functionality. And
especially now that OEMs are lowering prices. At the end of the second
quarter 2023, several automakers announced that
they're moving to the Tesla charging standard, also
known as the North American Charging Standard, or NACS. That means there are
vehicles stuck on factory floors with an obsolescent
charging outlet. Charging is a sore spot for
all types of buyers, whether current, past, or
prospective. This EV will allow you to
plot a course and determine and predetermine when you
arrive at different charging stations. Then there is the
government. There's a fair amount of
feedback that we get from customers that say, 'We
just don't like the government telling us what
we should buy.' By 2032, 67.5% battery electric is
aggressive. I think by 2035 all
electric is aspirational. I don't think that that's
going to happen. EVs sitting on lots does not
necessarily equal waning demand. EVs made up a
record 8% of U.S. vehicle sales through early
September 2023. If we looked at EVs as as
their own segment, we took everything and put it
together. It'd be the number six segment in the
industry. So it's not as if nobody
wants them, there's no demand. However, there is a
tremendous degree of regional variation. While there have always
been regional stories in auto: pickup trucks in
Texas, luxury cars in the northeast. EV adoption
rates pretty closely track two economic metrics pump
prices and home energy rates. If gas prices get up to
close to $6 like they are in most parts of California,
we're going to see a lot of consumers there shifting
toward EVs. Meanwhile, in Texas,
gasoline prices are almost $2 a gallon cheaper in
Texas than they are in California. But there is another reason
why inventories have been building. Tesla, which
dominates the EV market, has been hacking away at its
prices. In August 2023, Cox
Automotive data showed the average price paid for an
electric vehicle was $53,376, down from $53,633
in July 2023, and down from more than $65,000 a year
prior. Again, that decline is
driven almost entirely by Tesla. In August, Model 3
transaction prices were down 21% year over year, while
Model S was down 17%, Model Y dropped 16%, and Model X
was down 13%. At the beginning of 2023,
the Model S was priced at $104,990, and the Model X
was priced at $120,990. By September 15th, the
price was $79,990 for the X and $74,990 for the S. It's about two thirds of all
EVs sold are Teslas because their prices are so
aggressive. So not only do we have fewer consumers
looking for an EV in Q2, we actually saw that those
that were. It's very hard to get
beyond Tesla with their prices and certainly with
their supercharging charger network to go buy an
alternative. It's an unleveled playing
field when you have a manufacturer that sells in
the space of vertical integration, direct to the
consumer, and not use the franchise system, it gives
some flexibility to that direct seller to be able to
adjust their pricing. And in the case of Tesla,
conveniently below the threshold so that you can
capture more of the incentive money from the
government. Meanwhile, automakers are
releasing EVs that are often selling for above $50,000. Ford hiked the starting
price on its F-150 Lightning in March of 2023 to
$60,000, a 50% increase over the original $40,000
starting price. Ford has since cut that to
$49,000, but again, that is still $10,000 higher than
the automaker had originally planned. It's very expensive to bring
EVs to market, and a lot of cases vehicles that were
announced at a certain price point a couple of years
ago, the automaker has not been able to hold those
prices in this market. And so those earlier
announced prices have have tended to creep higher. The picture that starts to
emerge, the EVs that are on the lots don't match what
consumers want and what dealers are selling. Don't get rid of your
combustion car. I would like to see the
government reassess their regulatory pressures and
perhaps revisit the incentives through the IRA. EV inventory is going to
rise at the same time that the auto industry continues
to launch more and more EVs at that $50,000 to $60,000
price point, which is already well saturated,
there is demand for EVs. It's just that they're
Teslas and they're a lot lower price than what we
see. If perhaps we could hit the
rewind button and do things differently than we have, I
would like to think that maybe we would have slowed
things down, maybe been more in the space of hybrid as a
bridge to a more perfected battery technology. We have been in the space
of combustion ICE for over a century, so we have a lot
of experience with it. Battery electric is at
ground zero. We don't know, we don't
know, and we're still kind of cutting our teeth with
it. Clearly, I believe that
we've moved a little bit too much and too fast. But there are reasons to be
optimistic. The S&P study showed that
people were willing to accept charging times of up
to an hour and less range on an EV than on an ICE
vehicle. That's another shining light
for EVs, is, again, this understanding that they're
not necessarily going to get what they get with their
typical ICE vehicle, but they are actually willing
to accept something less than what they're getting
with their ICE vehicle. And while the number of
buyers considering an EV did fall from 2021 to 2023, it
is still higher than it was in 2019. The analogy that I like to
use is we all have smartphones today, and most
of us had flip phones. And if I said to you, give
me your smartphone and I'm going to give you back a
flip phone, it would be like saying, give me your EV,
I'm going to give you back a combustion. And I would say
that 90 plus percent of the people, including myself,
would say, I'm good, I'm keeping my smartphone, I'm
keeping my electric car. You don't want to go
backwards. Used EV prices are falling. Buyers can get some great
deals, but some say it is yet another sign that
demand is faltering. Low resale value could also
be a major deterrent to EV purchases and EV adoption
more broadly. Others say it is just a
blip and fears of an EV slowdown are overblown. Studies show that used EV
prices fell somewhere around 30% in September and
October 2023, from the same period in 2022. Used vehicle prices overall
saw declines in the mid-single digits for that
time period. The mainstream appeal of
these cars is still not there. They're still too
expensive, and they've got too many limitations in
terms of how you use them. People are broke. Interest rates are high. The demand for EVs is not
the issue, it's the affordability. Some research indicates what
many EV supporters insist EVs are cheaper to own than
gasoline burning cars. You don't have to shell out
for gas, and maintenance costs are lower, but a
car's residual or resale value is a big factor in
determining the total cost of owning it. The
volatility in the used EV market shows how much isn't
yet known about EVs, including how to predict
what one will be worth in a few years, a single change
to policy, battery technology, even a single
manufacturer's prices can upset the whole market. These price drops come at a
time when many other data points suggest EV demand is
stalling. New EVs are collecting dust
on dealer lots. Tesla, which controls
nearly two thirds of the EV market, has been
aggressively cutting prices, and its third quarter
deliveries fell short of investor expectations. Let me give you this general
thought that I hear from everybody in this business,
including people at Tesla. This is still new. CNBC looked at data and
talked to insiders to determine whether used EV
prices are a sign of a larger slowdown in the EV
market, or a bad investment altogether. One study showed that all
used vehicles up to three years old lost 4.8% in
value from September 2022 to September 2023, but EVs
specifically fell 29.5%. Another show that from
October 22nd to October 23rd, the average price for
1 to 5 year old used EVs dropped 33.7%. Meanwhile, used car prices
only fell 5.1% in the same period. A third showed they
had fallen about 32% from September 22nd to September
23rd. That study said the average
EV price as of October 18th was $27,863, roughly the
same as what it was in early 2021. Some research
indicates EVs have the worst depreciation rates of any
vehicle type, including by a narrow margin. Big value
losers like luxury vehicles. Hybrids are doing extremely
well in holding their value and EVs are doing extremely
poor. Why is that? Because when you buy a
hybrid, what do you get? You get much higher fuel
efficiency and a higher fuel price world we live in and
zero range anxiety, that's a powerful, desirable
combination. The trouble is not limited
to the used market. In January 2023, new car
dealers had about 52 days worth of EVs and internal
combustion cars, but internal combustion
inventory held pretty steady between 52 days and 58 days
throughout the year, while EV inventory soared to 111
days in early July, then settled at 97 days by
October. These numbers have fueled
concerns that demand for EVs is waning, but not everyone
agrees. There has been a fierce
debate over what's actually happening. There's been this wave of
what I would call pretty misleading headlines over
the last few weeks, like you would think that EVs were
dead and buried if you paid attention just to what the
news headlines were. Scott Case is CEO of
Recurrent, which creates vehicle history reports
specifically designed to measure EV battery life. It also publishes the
Recurrent Price Index, which tracks used EV sales. That index is among those
showing prices have fallen dramatically. If you wanted to say, what's
the single biggest cause of used EV price drops? It's Elon Musk. Tesla controls about 60% of
the new EV car market, and in 2023, the company
started a price war that drove a lot of customers
who would buy used EVs toward new ones, especially
Teslas. It also forced a lot of
other manufacturers to lower their prices as well, and
the timing corresponds pretty tightly with the
Tesla price drops. Many of the 2022 models
were current tracks depreciated 20% to 40% over
2023. Nobody's going to pay the
same for a used car as they would for the new
alternative. So you saw an immediate drop in used
Tesla prices, which then was followed by a like a time
delayed drop in the used prices for Tesla
competitors. In other words, plummeting
EV values don't reflect some kind of inherent problem
with EVs, just the fact that consumers who might
otherwise buy used are opting for new Teslas
instead. In addition, 2023 is the
three year anniversary of the Tesla Model Y, which in
the third quarter of the year was the best selling
EV in the U.S. Three year old cars are a
kind of benchmark in the used market. Leased
vehicles are often held for a period of three years,
and a large share of the cars on the used market are
vehicles coming off lease. Recurrent has found that on
average, new EV owners hold on to their cars for about
3 to 4 years before selling. That means a lot of 2020
Model Y's are entering the used market. Driving up
inventory. 2018 to 2019 was just an
incredible step up in new EV production in the U.S. Tesla, but other
manufacturers as well. And so that's what we're
now seeing. Kind of come on to the used
market at scale. Used EV sales now outpace
the sales of all new EV models except the Model Y,
and dwarf the sales of most of them. They do, however,
make up only a tiny share of total used sales, about 1%. Finally, new federal tax
credits kicked in in 2023. These replaced the EV
credits that had been in place since 2009. The original plan offered
buyers a $7,500 credit for each of the first 200,000
EVs a manufacturer sold. The new credits offered the
same amount of money, but introduced a few new
conditions centering on the price of the vehicle, the
buyer's income, battery capacity, and where the car
is assembled, among other things. January 1st of 2023. The $7,500 tax credit
appeared on the scene for new cars, so the immediate
impact was essentially dollar for dollar $7,500
decreases in used prices, like right at January 1st
for any car that was sort of getting eligibility for
this new credit. In April 2021, there were
about 11,000 used vehicles on U.S. dealer lots and on
dealer or manufacturer websites. That doesn't
include private sellers. By October 2023, there were
three times that. Two concepts to keep in
mind. Residual value is what a
car is expected to be worth at the end of some term, a
lease financing period, subscription rental or
something else. It is often based on the
price the car would be expected to fetch on a
wholesale market, like a deal or auction. Resale value is what a car
is likely to be worth once you sell it on the retail
market. Used EV prices matter
because residual value and resale value are factors in
determining the total cost of owning a vehicle. Tesla has long argued that
its cars have a lower cost of ownership than
comparably priced internal combustion vehicles. When you include gas
prices, which EV owners don't have to worry about,
and maintenance costs, which tend to be lower as EVs
have fewer moving parts. Calculating cost to own is
complex and varies tremendously depending on
insurance costs, gasoline prices, and electricity
rates, among other things. In its 2023 five year cost
to own rankings, Kelley Blue Book said the Tesla Model 3
had the lowest cost of ownership in the luxury car
category. The also electric Polestar
2 came in second. What matters is that this
idea that we're going to all be driving electric
vehicles in a relatively short time frame, three,
four, six years. This latest six months, and
what's gone on with electric cars, really puts that into
question in my mind. The reality is that EV sales
growth, both on the new and the used side, is vastly
outstripping combustion engine sales growth. Case cites several
statistics. From September 2022 to
September 2023, new U.S. vehicle sales on the
combustion side rose 13%, new U.S. EV sales rose
almost 60%. Sales of used EVs were up
40%. Used combustion cars fell
2%. But skeptics say that
doesn't cover the full story. Remember, there are three
types of lies lies, damned lies, and statistics. On the one hand, sales are
growing, but in the new market it is taking longer
to sell an EV than a gasoline car. And in the used market,
prices are falling more dramatically. Elon wanted to hit a certain
sales each of his quarters this past year, and he was
dropping his prices to do that, and he still didn't
hit his sales. What do falling prices and
not hitting your sales goals mean? They mean people are
not buying the cars at the rate that you thought they
would. EV sales are not growing
uniformly across the country. Some evidence
suggests that states with the highest share of EVs
like California, Oregon and Washington are also the
slowest growing markets. Brauer says there might be
a kind of natural ceiling for EV demand somewhere
between 7% to 10% of the market, but other data
suggest EV sales are still growing steadily in many of
these places. EVs tend to cost more than
gasoline counterparts, even with Tesla's price cuts and
EV subsidies for at least some models, new EVs often
have higher sticker prices. Public charging is something
that people worry about. If I don't have a Tesla,
where am I going to charge it? La la la. Well, you
know something? Somewhere between 70% and
75% of people just charge at home. Most of the time. I think people and the
government need to embrace the reality that electric
cars have some advantages, and they can serve a role
in personal transportation. They cannot be the solution
and serve the role in personal transportation
until some big problems are solved. In 2024, what is now a tax
credit needs to be filed on a tax return will become a
point of sale rebate, $7,500 on a new EV and $4,000 on a
used EV. I wouldn't be at all
surprised to see a coming surge in both categories
starting in January, when someone can basically get
cash in their pocket right at point of sale rather
than having to wait. You know what essentially
would be 18 months to file their taxes and have a
reduction in their tax liability. But for people who have
bought a new EV in 2023, there might be another
hitch to pay attention to three years down the road,
the terms for the $7,500 tax credit on new EVs in 2023
were tightened considerably. If you're buying an EV, you
would have to fit certain eligibility requirements. For example, the car has to
be below a certain sticker price and assembled in the
U.S., among other things. However, there was a
workaround. A manufacturer could still
offer the credit if the buyer leased the vehicle. The lease rates on those
cars have just absolutely skyrocketed this year,
which is the interesting sort of knock on effect in
the used market. Is that means that, um,
three years from now, a ton of them start showing up in
the used market. Skeptics like Karl Brauer
think that more will really need to change before the
used car market looks more like its internal
combustion counterpart. If they need to cost as much
as combustion engines, they need to travel as far as
combustion engines, and they need to refuel as quickly
as combustion engines. When EVs can do those three
things, why would you not buy an EV? In addition, larger economic
factors like high interest rates would need to change. The factors that are in
place, which is a budding oversupply of new EVs,
which is making them less valuable and pushing their
prices down, and economic concerns and high interest
rates. I don't see any of those
changing in the next few months, so there's no
reason to believe in the near tum, at least that you
would suddenly see a reverse in used EV pricing. A spike in gas prices could
also spur demand, but under certain conditions,
interest in hybrids and EVs tends to rise when gas
prices are rising, but level off when prices settle,
even if the price is high. Understanding the used EV
market and EV depreciation presents serious
challenges. First, the data set is small. As mentioned,
only a tiny share of all used cars are EVs. Second, because the market
is still new and the technology changes rapidly,
there are still unknowns. Battery technology is one
such area. It's something people worry
about because they're like, you know, my iPhone is down
to 80% after two years, what's going to happen to
my car? So it's one of these things
that may be more of a consumer perception thing
in real life. I mean, what we're seeing
with Teslas is the batteries do tend to go 7 or 8 years
and are still pretty good at the end of that. The short story on battery
longevity is that EV batteries are holding up
better than people's expectations. It is not the
case that an EV is an iPhone with wheels on it. It
doesn't work the same way, but there is variability
between different cars of the same make, model and
year. And that's especially true
as vehicles age. So if you start out with a
car that has a range of 250 miles, after five years, it
could have a range of 200 or 220, depending on how it's
used, how it's charged, what weather conditions it's
exposed to. A simple change in federal
tax credit rules can lead to a flood of used vehicles
three years down the road. And just one manufacturer,
Tesla, can move the entire market just by changing
prices on its website. It's still a new market. We are still figuring out
how EVs at scale work. We are still figuring out
how charging at scale works. It's all these little
things. People are doing this stuff for the first
time, used EVs that aren't Teslas are a new thing. To some extent, used Teslas
are still a new thing, and we're all still learning
how this is going to work. It's all still emerging. Tesla on the company's new
agreement with car rental giant — Hertz. A few months out of
bankruptcy said it's going to order 100,000 — Tesla Model 3s. Those purchases total value
of about $4.2 billion. In October 2021, Hertz
publicly announced it intended to buy 100,000
Tesla vehicles. Shares of both companies
soared. Check out shares of Tesla
soaring to all time highs today, launching the
company into the trillion dollar club for the first
time. First mover advantage aside,
it would help Hertz distinguish itself, in an
industry plagued by commoditization, where the
color of a brand's signage seems to be the only
differentiator. If you or I went to the
airport and we went to the green counter, the red
counter, the yellow counter, we're still going to get
the same white Toyota Camry. But only a couple of years
in, while the rental company is posting strong finances,
its EV strategy is facing some serious challenges:
pricing troubles, skyrocketing repair costs,
and low resale values. There's no technology
change, EVs included, that run a straight line without
some hiccups and challenges. And that's this. The line from A to B is not
always straight. Meanwhile, big rental rivals
hung back on EVs. Hertz's investors are
divided over what to do next. Either kill or at
least pause the EV initiative, or try to find
a way to make it work. Hertz, a more than century
old rental company, filed for bankruptcy in May 2020
as demand for rentals dried up during the coronavirus
pandemic. Even before the pandemic,
Hertz had a number of challenges. Sales grew from
about $7.6 billion in 2010 to a peak of about $11
billion in 2014, but fell to about $9.8 billion in 2019. Pre-bankruptcy the stock
had been highly volatile, climbed as high as $109.48
in 2014, and sank as low as $3.07 the day before Hertz
filed. In addition to the Hertz
rental brand with stands at airports or parking
garages, the company has a number of other businesses,
including car sales, truck, van and equipment rentals,
and a leasing division. It also acquired the Dollar
and Thrifty brands in 2012. The company operates in 160
countries and jurisdictions around the world. 13 months after filing for
chapter 11, the company emerged from bankruptcy,
unveiling big plans. When you're coming out of a
process like that, you need a story to tell investors. People want to know what
your strategy is, what's going to be different this
time? Some moves were expected
securing more corporate accounts, like a big
partnership with American Express, cleaning up its
dollar, and thrifty brands, which had suffered from
underinvestment, and a pledge to focus more on
cost efficiency. But the big move was its
plan to buy 100,000 Teslas, mostly model three sedans,
for its U.S. and European operations. It also planned to set up
about 3,000 fast chargers for 65 markets. Both Tesla and Hertz share
prices popped on the news. Hertz jumped 10% over the
previous close, and over the course of the next week
rose another whopping 29%. Tesla shares rose 12.7% on
the day over the previous close, and then another
14.4% through November 2nd, the day Tesla CEO Elon Musk
took to Twitter to break some news. They didn't
have a fleet deal. They didn't have a special
contract with Tesla. And Elon Musk led all the
excitement kind of go viral before he one week later
clarified that Hertz didn't have a fleet contract with
Tesla. He added that he was
surprised by the stock pop, since he thought the Hertz
deal has had zero effect on Tesla's economics,
according to its 2022 10-K. Hertz has large-scale
acquisition agreements with Tesla, Polestar and General
Motors, but the company neither denied nor
confirmed the details with CNBC. At the time of the
filing, the goal was to convert one quarter of
Hertz's fleet to electric. Hertz doesn't break out the
amount of money it spends on EVs, but we can make some
assumptions. In 2022, the company ended
the year with 428,700 vehicles in the Americas
and 118,700 international. 9% of its fleet, or about
49,266 vehicles, were Teslas. This isn't perfect,
but if you assume Hertz paid about $50,000 on average
for each Tesla, as some analysts who follow the
company think, that would be about $2.5 billion in Tesla
vehicles alone. That doesn't include any
other infrastructure or expenses Hertz had to
undertake in 2022. Overall, globally, it spent
$10.6 billion on new vehicles that year. This EV strategy really was
the one that kind of took off and Hertz became, I
guess, kind of affiliated with that. That became kind
of their calling card, uh, in the market and something
that a lot of folks kind of kind of latched on to and
said, hey, this seems like a really interesting story. I'm going to follow this. These three car rental firms
control about 95% of the market. Hertz was the only
one to make an EV push. This big Hertz intention
was to be a first mover. The industry has received
some pressure to green its fleets, and the idea was
that it would help its corporate customers, too. Large organizations around
the globe, really are interested in choosing EVs
for their employees. It really helps them to
meet their own ESG goals. And we see a lot of
corporate demand both here in North America as well as
in Europe. Hertz also saw an
opportunity to introduce EVs to ordinary consumers who
might be curious, but reluctant to commit to a
purchase outright. In the leisure space, there
is also a lot of organic demand, certainly for
customers who are perhaps curious about whether or
not an EV would fit with their lifestyle. And so
choosing an electric vehicle like a test drive is
something that we see, and we see situations where
customers are choosing, you know, an EV both for long
road trips and as well as for shorter drives. In 2016, Hertz struck a
partnership with Uber to start renting out fuel
burning vehicles to rideshare drivers. Hertz considered the
electrification of rideshare a fast approaching
requirement, not merely an option. New York City's
Green Rides program requires 100% of rideshare trips to
be either zero emissions or wheelchair accessible by
2030. Despite an investment of at
least $2.5 billion, the expected demand from
corporate and private customers has not
materialized. Consumers generally still
have a little bit of anxiety, both about range
and some of the know-how when it comes to EVs. And to that end, that has
really informed our strategy around building resource
and really helping with that challenge. Demand that did arise
tended to come from customers who were already
Tesla or EV owners. What has worked sort of is
the ridesharing segment of the business. As of
December 2022, 65% to 70% of the EVs in Hertz's fleet
were utilized by rideshare drivers. They didn't want those
things sitting around their very expensive cars, and so
it made all the sense in the world to Hertz, right, to
to say, 'hey, we're going to extend, essentially extend
our, our normal ride share rental program, and we're
going to throw Teslas into it and other EVs.' I mean, I think from my
perspective, Hertz and Uber has been a great
partnership. I think that Uber really needs Hertz,
and Hertz really needs Uber. Harry Campbell is the
founder and CEO of The Rideshare Guy, a website
and podcast dedicated to Uber and Lyft drivers and
other gig economy workers. There's really no better use
case in my mind, than an Uber driver who's going to
put 1,500 miles a week on their car to not only rent
a car, but to rent an electric vehicle. Renting to rideshare
companies is cost effective. There's a one week minimum,
and costs of turning a vehicle are substantially
cut. The challenge, though, is
that hurts gets about $43 per day rather than the $75
to $90 it gets for a consumer or corporate
rental. There's also been a
disproportionate number of accidents. While hurts says
routine maintenance costs on EVs are lower, the cost of
repairing the damage from accidents is twice what it
would be for an internal combustion vehicle. This is partly a Tesla
problem. A lot of their critics will
say, meaning they've grown the number of vehicles on
the road without investing enough service centers and
overreliance on their mobile service fleet to fix those
vehicles. And so you'll see these
long wait times to get spare parts put into the cars. You'll see long wait times
to even get an appointment. That's only one tiny piece
of why EVs are expensive to repair. In order to buffer some of
the higher repair costs, the rental giant has taken on
more of them in-house while also negotiating for
cheaper parts. Hertz expects costs will
drop over time. However, repair costs have
not come down as fast as the company had expected. In another move to try to
limit damage and repair costs, the company shifted
some of its EVs meant for rideshare into its leisure
business. But this left a glut of
unused cars in that segment and lowered revenue. The collapse of used EV
values is another problem. They've fallen about 30%
between September 2022 and September 2023. The main reason Tesla,
which controls more than 60% of the new EV market,
drastically cut prices on its cars, driving down the
value of everything else. This is important because
about every two years, rental companies turn cars
over to the used market. The mSRP on the cars Hertz
bought has since dropped by about a third. The opportunity to dump the
car, so to speak, is not really one that's available
to us. And frankly speaking, not
one that I would take. There's positive margin to
be had in the existing fleet of cars, and we will, buy
our price down over time as these cars have fallen in
price. And by the way, we'll buy
more than just Teslas. These companies have to
report the depreciation of their assets in their
financial statements even before they sell the car. So falling used EV prices
hurt Hertz's balance sheets, even for cars that are
still in their fleet. Hertz claims that taking
into account depreciation, collision damage and
revenue per vehicle Hertz's EV fleet as costing the
company several EBITDA margin points compared to
ICE vehicles. Investors are split over
what to do next. Some want Hertz to pause
the EV program or abandon it altogether. Others say
Hertz should persist. Hertz CEO Stephen Scherr,
who inherited the EV plan when he took office in
February 2022, said in the company's 2023 third
quarter earnings call that it would be reducing the
share of Teslas in Hertz's fleet in favor of those
made by GM and other legacy automakers with stronger
parts and service networks. In its rideshare business,
Hertz is only renting Teslas to more experienced drivers
in order to lower the likelihood of damage. I've driven a Tesla for the
past seven years. These cars have a lot of
power. I'm not going to lie, I almost got into two or
three accidents when I first got my Tesla Model 3
because I wasn't used to it. And so I think one cool
thing that Hertz is doing now that we've seen is they
actually require drivers to have a minimum number of
trips, so you can't be a brand new driver and get
into a Model 3 anymore, which I think is smart. Cars Hertz had previously
shifted to leisure, where they languished are now
back in rideshare. Hertz overall rideshare
rental business has grown 50% year over year. The higher rideshare demand
has brought the company more revenue per unit, better
rented than sitting on the lot. And by reducing the
glut and leisure business, Hertz can resume premium
pricing in that segment. We do see really nice
demand, certainly across large travel companies,
hotels and airlines, as well as large associations here
in North America. And that's a natural
organic demand for these EVs that we see coming through. In 2023, it staged drive
events at airports, including the Los Angeles
International Airport and Denver International. It does the same on
corporate campuses. The company is also putting
together instructional videos and other online
content to inform customers about driving EVs. Yes, Hertz has also taken a
leadership role in building out charging
infrastructure, and we have partnered with large energy
companies like BP to do exactly that. And the
objective is to build out large scale fast charging
for the public as well as for our own customers. And we're going to see
Gigahubs appear at airports like Houston and LAX
upcoming. Scherr has also said that
cheaper EV prices benefit the company going forward,
as it continues to acquire them. Overall, Hertz isn't
exactly struggling. In the third quarter of
2023, it pulled in $2.7 billion in revenue, a
record gasoline vehicle rentals, which make up more
than 85% of Hertz's fleet, are profitable. Overall
demand was 16% higher than in the previous quarter. Operating costs are in line
with expectations as inflation starts to
subside. Some costs are coming down. Billion dollars of EBITDA in
2023. And they're still solidly
positive. And they still generate
ample cash flow. They could potentially buy
back stock. So it's not a case of,
'hey, the company is getting totally wiped out or
anything by this.' It's just, it just it's
obviously crimping profits. Hertz is not the only
company doing well. The whole industry is
thriving. The only difference is competitors
don't have the pressure of such a large and struggling
EV fleet. The hope is that its
investments now will give it a leg up over competitors,
if and when EVs take off in car rental. There are
reasons to think it will. It takes at least a year or
two to turn over EVs in a fleet. Hertz thinks it
might be able to hold on to the cars for 3 to 4 years,
so Hertz's competitors are not going to be able to
match Hertz's EV fleet overnight, nor will they
immediately be able to match Hertz's investments in
infrastructure.
