How dropping EV values boost ICE aftermarket

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May 1, 2024 by Adam Malik

How dropping EV values boost ICE aftermarket​

The ownership cost of Electric Vehicles (EVs) is experiencing a significant shift, challenging the previously held notion that EVs are cheaper to own than their Internal Combustion Engine (ICE) counterparts.

Recent findings from Lang Marketing highlight a trend: The depreciation rate of EVs is outpacing that of ICE vehicles. And there will be impacts on the automotive aftermarket.

“Most electric vehicles have plunged in value over the past 12 months, increasing the cost of ownership and threatening their sales in the new and used auto markets,” the consultancy noted in its report, Plunging EV Values Boost ICE Aftermarket. “This could have significant consequences for the proliferation of electric vehicles on the road and their impact on the aftermarket for years.”

The report indicated that in the first quarter of 2024, the depreciation rate of EVs in the United States jumped by nearly 30 per cent from the previous year, a rate almost tenfold higher than that of ICE vehicles. This dramatic depreciation, Lang noted, rate underscores emerging concerns about the financial viability of owning an EV and hints at a broader re-evaluation within the automotive market.

Several key factors have been identified as driving forces behind the rapid depreciation of EVs. Dealerships across North America are slashing prices on new EVs to clear their lots of surplus inventories, a result of dwindling consumer demand amidst a surge in supply. Each reduction in new EV prices exacerbates the depreciation rate of existing EVs on the road.

Additionally, “technology depreciation” has become a critical issue for EVs. As these vehicles age, they fall behind in terms of technology, particularly in range and charging capabilities, compared to newer models. This obsolescence, coupled with operational challenges such as extended charging times and higher insurance costs, has diminished their appeal in the used vehicle market.

Previously, some EV models enjoyed lower depreciation rates due to their scarcity in the used market. However, the influx of new EVs and reduced prices has burst this bubble, causing depreciation rates to soar.

The leasing market, which constitutes a substantial portion of new EV transactions in the U.S., faces significant turmoil due to soaring depreciation rates. The diminished residual values of EVs at the end of leases have necessitated automakers to financially compensate leasing companies, thereby increasing the cost of leasing new EVs and potentially hampering market growth.

The consequences of escalating EV depreciation rates extend beyond individual ownership costs to affect the broader automotive landscape. In the used vehicle market, the prospect of continued depreciation, alongside operational concerns, may deter buyers, despite the initial appeal of lower prices.

Aftermarket implications

The swift decline in the value of EVs is set to have significant repercussions for the aftermarket industry. Firstly, the noticeable depreciation may dampen the demand for EVs among new vehicle buyers, potentially leading to additional reductions in prices. This cycle of decreasing prices may inhibit the growth of EVs’ market share and their influence within the aftermarket.

Secondly, as EVs depreciate at a faster rate, ICE vehicles, which experience slower depreciation, might see an uptick in their market share and sales volume in comparison. This disparity in depreciation rates could favor ICE vehicles, making them more attractive to consumers and thus strengthening their presence in the market.

Thirdly, the pronounced depreciation of EVs could indirectly slow down the depreciation rates of ICE vehicles. Since ICE vehicles are depreciating at a slower pace than EVs, this trend could reinforce the value and longevity of ICE vehicles in the operational fleet.

“These factors and other issues will likely strengthen the VIO position of ICE vehicles for years to come and contribute to their aftermarket dominance through 2030 and beyond,” Lang observed.
 
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