There's a big problem in the auto industry that isn't talked about enough...
The residual values of their cars are very important to the huge financing departments of auto OEMs... For example, GM and Ford have financing debts of $94 billion and $118 billion, respectively...
Due to a lack of supply and near-zero interest rates, used car prices and residual values have been artificially pushed up over the past year or two. But now that production is back to normal and interest rates are going up, used car prices are starting to go up again...
If OEMs can't resell cars for close to what they thought they were worth when they financed them, their financing divisions will lose a lot of money... Even though the market is used to the fact that car prices go up and down, the long-term risk of residual values is way understated. Looking beyond a recession, electric vehicles pose a major long-term threat to residual values...
99% of the financing division's risk is tied to vehicles with an internal combustion engine (ICE). Over the next ten years, several governments, including California (the largest auto market in the US), Europe, and China, plan to stop selling gas-powered cars.
Whether you agree with these policies or not, this will definitely hurt ICE residual values in the future. From the point of view of natural consumer demand, EVs will hurt ICE residual values because:
- a much lower rate of wear and tear
- Better service to customers
- Maintenance costs are 40–50% less
Hertz tested more than 20,000 electric vehicles and confirmed these results on their Q2 earnings call. ICE residual values have continued to drop because EV adoption has been low in the past. But as EVs have gotten cheaper and charging stations have gotten better, the number of EVs on the road has grown by a huge amount...
Also, once people buy an EV, the vast majority don't go back to ICE. Long-term demand for ICE cars will drop because:
- EVs are becoming more popular because people want them.
- It's against the law to sell ICE cars.
- Electric vehicles are becoming more affordable.
Each of these will cause ICE residual values to go down: People know that the auto industry is very cyclical and that there have been many bankruptcies in the past. But the world we live in now is very different and brings new problems. When interest rates go up and short-term and long-term residual values go down, bad things happen...
Given that they make parts for these items, legacy OEMs could be in a lot of trouble...