Published on September 3rd, 2016 |
by Zachary Shahan
September 3rd, 2016 by Zachary Shahan
Depreciation is an interesting creature, and especially so for the fast-changing auto market and newbie electric car market.
In my recent article on 30 reasons your next car should be electric, the #1 suggestion for what I left out was depreciation. That could seem like an odd suggestion if you know about how horrible depreciation has been on non-Tesla electric cars, but there are some obvious reasons why I agree it should have been included.
In the article below, I’ll first take a look at the poor depreciation of Nissan LEAFs, BMW i3s, and the like (and how that’s a benefit for the EV revolution), but then I’ll get into the fun future we have boiling in the pot.
Depreciation Is A Punk For Early Adopters … Or Maybe Not
The fact of the matter is, if you’re an early adopter, by and large, depreciation is not your friend. Cutting-edge technologies are expensive, which is basically why they aren’t mass-market technologies. Someone has to pay for the R&D, for scaling up production (which brings down costs), and for taking a risk on a new technology. Those people are early adopters.
In the case of electric cars, early adopters often pay the price (in depreciation) because the technology is quickly improving and dropping in cost so fast.
However, the depreciation story is warped by existing subsidies for new electric cars, and it is actually much closer to the norm than it seems at first glance — taking into account statistical significance, I would not be surprised if it’s actually within the norm. Confused? Here’s the thing: There’s a $7,500 US federal tax credit for new electric cars, and there are state incentives like the $2,500 California ZEV rebate, $5,000 Colorado EV tax credit, etc., that further bring down the cost of these cars. (There are similar incentives for new electric cars in other countries and regions as well.) If a new electric car is actually $10,000 less than the at-the-register price, it is going to be worth $10,000 less on the used market immediately — aside from the normal depreciation that occurs as soon as you drive it off the lot.
Inherently, that makes depreciation on electric cars seem horrible, even though $7,500 to $12,500 of depreciation is basically “covered” by these subsidies and doesn’t hurt early adopters at all.
On the flip side, that does mean that used electric cars can be found for stunningly low prices, which is a great boon to the EV revolution. I think the attractive prices on used cars will pick up in importance as more people become aware of electric cars, find out about their benefits, and go looking for them on the used car market. The subsidies are basically a gift that keeps giving, and could bust down the talking point that “people hold onto the cars for a decade or so” — if people can find a much nicer used electric car for a few thousand dollars and save that much on lower operational and maintenance costs, they are justified in dumping their inefficient gasmobiles. There’s not point in holding onto those clunkers for 10 years under such a scenario.
I haven’t seen definitive research on the matter, but here’s a look at a few numbers on EV depreciation to something more concrete behind the summary above:
- In 2013, NADA reported that a 2011 Chevy Volt typically lost ~$21,000 in value after 2 years, and a 2011 Nissan LEAF lost ~$19,000. A 2012 Volt typically lost ~$19,000 and a 2012 LEAF ~$19,000. Approximately $20,000 in lost value sounds horrible, until you realize that the first buyers of these vehicles very likely had access to $10,000 in government subsidies. That means the cars had essentially ~$10,000 depreciation, which isn’t too bad, and it’s very similar to comparably priced gas cars (including conventional hybrids). A 2011 Toyota Prius with a lower starting price, for example, lost ~$9,000 in value, and the same thing happened for a 2012 Prius. That shows that early adopters (who could take advantage of incentives) didn’t actually have much of a different story with depreciation than buyers of mainstream and reliable Toyota Prii.
- A 2016 NADA guide doesn’t share dollar figures but indicates similar depreciation percentages as seen back in 2013, which I think shows again that overall depreciation looks poor on the surface but is probably quite normal if you cut the initial cost of these cars by the average subsidy amount. Again, though, I don’t have enough data on the matter to make a definite conclusion.
- An 2015 NADA guide did share dollar figures and found similar results to the 2013 report — depreciation of ~$20,000 on a Nissan LEAF after 2 years, depreciation of ~$19,000 on a Fiat 500e in that time (note that this was a car almost entirely sold in California, meaning a combined subsidy of $10,000 was definitely available to buyers … if they had enough federal tax liability), and depreciation of ~$25,000 on a Chevy Volt.
In any case, depreciation on electric cars doesn’t seem to be a benefit for buyers so far, and is either similar to or worse than conventional cars when you take into account subsidies.
Tesla Breaks The Rules
Like usual, Tesla is an exception. Thanks to its much longer range, over-the-air updates, free & growing network of Superchargers, class-crushing performance, production limitations, and overall brand, Tesla cars actually beat conventional cars on the depreciation metric — not even taking into account subsidies!
As Chris Cooper wrote in a comment under the recent article I mentioned at the top, “You missed the single largest financial benefit to owning an EV. That’s depreciation — or rather lack of it.” Going on:
“I bought my P85 a year and a half ago, and today it’s worth exactly what I paid for it, on the second hand market. It’s a free EV in one sense, certainly cheaper than a cheapy ICE car. Why don’t people realize depreciation is a game changer for EV value. Don’t focus on the cost of the EV, focus on the value. Which for second hand Teslas is always far higher than any equivalent luxury car. I’ve no idea why this isn’t marketed more widely as a benefit. I challenge you to write a whole CleanTech story about EV depreciation being close to zero, just like the cost to run them. Now if that doesn’t get you driving one, what will! The cost of interest on a Tesla loan can come out of running savings on gas and servicing. Anyone like a Tesla for free? It is possible. I’ve done it — surely others have? I’ve heard Tesla restricting sales to some who have been making a profit selling them second hand even. Tesla is an investment that makes far more sense than buying a petrol car — on depreciation alone, which exceeds the petrol savings over five years easily I believe. Tell me I’m wrong!”
Here’s what the latest NADA report had to say about Tesla depreciation:
“Looking first at one-year-old EV retention, we see there are some very strong―as well as extremely weak―performers. Led by Tesla’s Model S, retention for the entire group fell between 83.1% ‒ 34.9%. By comparison, segment averages for gasoline-powered luxury large, mid-size and compact cars fell between 70.1% – 62.7% for the same period.
“So far, prices for luxury EVs have been the strongest with Tesla and Porsche at the top of the list. Tesla and Porsche’s relative strength can likely be traced back to their luxury status. For example, the Model S and Panamera S-E are expensive vehicles purchased by affluent consumers. Demand for the two has been predicated on owning a vehicle with cachet and exclusivity. These luxury vehicles are status symbols and often do not compete with the large pool of mainstream, gasoline-powered substitutes, but rather a rarer group of more technologically advanced performance models.”
It’s a similar story looking at two-year and three-year depreciation, with Teslas holding 71% and 57% of their value, respectively.
For a few reasons, it’s hard to know exactly how this will play out in the future. Tesla has long been very supply constrained, but after ramping up production considerably, it seems that production capability and demand now line up pretty well on the Model S (and presumably soon the Model X). Tesla is still massively supply constrained, but this is in regard to the Model 3 and yet-to-be-unveiled Model Y and electric pickup truck (both of which I’m sure there’s already a ton of demand for).
Overall, though, as Chris excellently summarizes, a Tesla has so far been an excellent purchase solely looking at depreciation … not to mention all of its other benefits! Here are two more stories on the topic:
- “Tesla Model S Depreciation Better Than Any Other Car In UK“
- “Is It Possible To Break Even On A Tesla?“
The Future — Things Are Going To Get Nasty
Another commenter, neroden, postulated a bit about this:
“Everyone else is going to want to buy electric cars. In 5–10 years the market for used gasoline cars will be terrible. The depreciation hit on gasoline cars will be even worse than it is now — like the depreciation on buggies when automobiles took over. If you want to get *any* resale value out of your car, you had better buy electric.”
I agree, but these claims certainly need some explanation. Why will gasoline cars take such a hit in value?
Well, there are 30 reasons listed in the article Chris and neroden were commenting on. But there’s actually more to it. I think the remaining reasons basically fall under three categories: 1) gasmobile challenges as the market shrinks (this is a medium- to long-term issue), 2) the competitiveness of coming electric cars (I think this is already having an effect), and 3) the operational and maintenance costs of used EVs vs used gasmobiles (the relevance of this factor is basically going to depend on consumer awareness, which is hard to predict).
As the market shrinks, as I wrote in a previous article, gas stations will get harder to find and less convenient to use week after week; maintenance and parts will become more limited and more expensive; and the unattractive noise and stink of gasmobiles will become more obvious, directly turning people off from these options and also stigmatizing them.
New & coming electric cars will be so cost-competitive and so much better than gasmobiles that people will be unwilling to pay as much for “competing” gasmobiles, quickly slamming their value on the used car market and probably disrupting the auto industry to a considerable degree, as Julian discussed in his Cleantech Revolution Tour presentation and a subsequent article.
Operational & maintenance costs of electric cars are likely to be considerably lower than old gasmobiles. Since they are much simpler; use regenerative braking, which is softer on the brakes; and don’t include transmissions, mufflers, timing belts, various hoses, engines, etc. — and also don’t need oil changes or smog checks — operational costs are likely to be much lower. Once consumers become aware of this, a used EV for a similar upfront price as a used gasmobile is likely to look a lot more attractive. However, there is a wildcard here, as the genuinely useful lifespan of batteries is still unknown, and replacement battery costs could completely eat up the savings from those other components. We’ll have to wait to see what the story is in that regard.
Again, though, if you just look at Tesla, think that those factors combined with high demand for its cutting-edge, Supercharger-capable, Autopilot-equipped cars is going to be high enough that depreciation is much lower on the Model 3 and Model Y than on competing gasmobile models.
There’s also the question of which cities will ban non-electric cars from their central districts, or at least impose a fee on them. That could quickly degrade their value.
If I’m missing something here — I surely am — please chime in down in the comments to help the story along. I’m happy to make updates to the piece as potential improvements are identified.
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