The Expert Podcast

Is 2024 a very important watershed moment for electric vehicles? A lot of people think so. This article says it's in total failure mode. We'll get back to that. Here's something that may seem like a very obscure and complex financial article, but really, it paints a picture of what's going on with electric vehicles.

S&P, which is Standard & Poor's, a major rating agency, has a white paper on residual value risk of EVs. What does that mean? When vehicles are bought or leased—either financed or leased—the company that finances the vehicle or leases it has to have a very good determination of what's called a residual value. This refers to the resale value of the vehicle. When you lease a vehicle, you lease it for three years, and at the end of those three years, you return it to the leasing company. They then sell it. To calculate how much to lease the vehicle for, they need to know in advance how much they’ll sell it for.

For example, if it's a $50,000 vehicle and in three years it will be worth $30,000, that means over the course of the lease, the company needs to get $20,000 from you in payments. They’ll recover the remaining $30,000 when they sell the car. The leasing company pays full price for the vehicle upfront ($50,000), and their money is recovered from your payments and the resale. But what happens if they estimate that the vehicle will be worth $30,000 in a few years, but it ends up being worth only $15,000? They will lose a lot of money.

What about finance companies? Finance companies sometimes have to repossess vehicles, and they also need to know how much these vehicles will be worth so they can repossess and sell them. If their estimates are wrong, these finance companies will lose money. If finance companies face increased risks on their balance sheets, their stock value declines, and their credit ratings drop. This is where S&P comes in—they analyze and rate these risks. Currently, S&P is sounding an alarm on residual values, stating that higher exposure to EVs could increase residual value risk in U.S. asset-backed securities.

Remember the term "asset-backed securities"? It's what triggered the housing market crash in 2008, specifically mortgage-backed securities. EVs currently have higher depreciation levels than internal combustion engine vehicles, which could result in lower recovery rates. As a result, finance companies are lowering residual values for EVs.

What about the personal level? Here's a guy who's falling asleep in his car while losing money. He’s stuck in his car charging it, and because it’s cold, he's losing money on charging costs. He’s also losing money on the vehicle's value. Not to beat a dead horse or kick EVs while they’re down, but there are some problems with this forced, rushed electric vehicle conversion. Many of these mandates may not be realistic.

Maybe it’s a good time to buy a used electric vehicle if you can get a good deal on it. Just make sure the battery is in good condition because the battery constitutes most of the vehicle's value. However, it remains to be seen if EVs will become more desirable. Currently, it seems they are becoming less and less appealing.

In fact, Ford recently announced that they are stopping shipments of the Ford Lightning truck to dealers. This was a hot truck, selling for way over its sticker price—around $100,000 just six to eight months ago. Now, they can’t even sell them at a discount.

What do you think about the future of electric vehicles? Do you think they’ll eventually succeed, or is the market already dead? Will it just take more time, or were EVs oversold from the start?