Auto Finance Conference Reviews

Driving the electrification of the auto industry



The transition to battery electric vehicles (BEVs) comes at a time when there are lots of moving parts in the automotive industry – agency, regulatory changes (including consumer duty), and new mobility products such as subscription and new rental products.

The EV transition saw the UK government and auto industry originally focused on selling new EVs and getting a fully functioning charging infrastructure in place. But while the supply of EVs is starting to improve, demand is suffering as a result of a poor second-hand market.

A panel of industry experts including Professor David Greenwood, CEO of the High Value Manufacturing Catapult at WMG, University of Warwick; Richard Jones, Managing Director of MotoNovo Finance; and Marcella Merli, Head of CA Auto Bank Italy joined Asset Finance Connect’s Head of Content, David Betteley, at the AFC Autumn 2023 Conference to discuss how the industry must now turn their attention to the EV market for the second buyer, focusing on incentives and the type of finance products available, in a bid to ramp up second-hand EV sales and boost confidence in electric vehicles.

The EV revolution

Watch the video below of Professor David Greenwood’s presentation at the AFC Autumn 2023 Conference with accompanying slides.

MotoNovo Finance’s Richard Jones believes that the industry needs to keep perspective on the overall timeline of the EV transition: “Five years ago, EV sales only made up 1% of total sales, but now they are touching 20% which is good progress if we bear in mind that it took diesel (which was a far simpler transition) 20 years to reach its peak”.

Jones notes that the transition to an electric auto industry is a massive change: “Electrification brings huge benefits but also brings real differences in how you have to use your vehicle.”

Fleet v retail EV sales

The conference panel unanimously agreed that, while things are moving forward on the supply side of the industry with the introduction of the ZEV mandate, more needs to be happening on the demand side.

Fleet registrations of electric vehicles are driving the electrification of the auto industry with salary sacrifice (salsac) and Benefit-in-Kind (BiK) incentives. But while these registrations are coming through in the data as fleet, many of them are from private individuals via salsac and BiK schemes, with 60% of UK employees having access to salary sacrifice.

However, there are no incentives for the second-hand electric car buyer and no support for the cost of installing a domestic e-charger. Richard Jones highlighted that, “if the economic case is not there, the demand will not switch to electric.” Incentives need to touch all parts of the second-hand market and move away from new EV purchases.

Second-hand EV market

The EV market will not work unless there is value for the second buyer, according to Richard Jones, who sees “the key to the EV market is getting the second-hand market to be vibrant… If we can’t get the second-hand demand up, then we will see a really choppy adoption.”

And currently there are no government incentives for consumers in a second-hand EV market where volumes are rising.

Professor Greenwood highlighted a recent House of Lords EV report where the need to find the right interventions for the second-hand EV market came through very strongly:

  1. Trust in second-hand EVs – looking at the quality of the battery in second-hand electric vehicles and whether battery passports, for example, can help to increase confidence.
  2. Creating the right finance models – a second-hand EV is still an expensive cash purchase, so the finance industry needs to introduce leasing of second-hand vehicles. Prof. Greenwood noted that more vehicle leasing companies are now offering second-hand leases. Note, the Scottish government is talking about offering 0% interest loans for second-hand EVs.

Residual values

While the methodology for residual values for EVs is the same as for ICE vehicles, Richard Jones noted that the unpredictability of the EV market is very different causing problems for RV setters.

There is a long way to go to build confidence in EV batteries and charging infrastructure, which currently has a massive impact on what a finance company thinks about the value of an EV in three years’ time, for example.

While most vehicles in the used sector are currently financed through a loan, hire purchase agreement or via a rental product, leasing is non-existent in the used sector.

More residual value-backed financing is needed in the industry for the second-hand market according to Jones: “the funding community will need to take on more value risk in an asset that is still nascent and uncertain.”

Integrating incentives for the second-hand EV market into finance products would be a powerful tool for the sector, with subsidised finance or tie-in scrappage schemes. But according to Jones it comes down to the fact that those who take on the RV risk want more certainty, and if the certainty is not there, then you act with caution and price down, causing monthly payments to go up.

Marcella Merli confirmed that this is the current situation in Europe with an obvious correlation between poor charging infrastructure and lower residual values. The lack of confidence has led to low pricing as no one wants to take the risk.

Boosting confidence in EV batteries and charging infrastructure

A big concern amongst retail customers is that, with EV battery technology evolving daily and battery range constantly expanding, an EV bought today could be redundant in three years’ time.

The industry therefore needs to create confidence in EV batteries (from dealers, OEMs, governments) for the second-hand market to thrive, according to CA Auto Bank’s Merli.

Greenwood noted that current EVs are being designed for the environment they live in. With imperfect charging infrastructure, we are currently seeing a ‘race for range’. But in the future with better charging infrastructure, batteries will not need long range so the cost of the battery and hence the EV will come down.

In the future, Greenwood predicts that we will see two types of EVs: Premium vehicles with long-range batteries and high cost, while the majority of cars will come down in range with a fast charge, to go alongside a trustworthy charging infrastructure.

The government is currently pushing for an Open Charging Data Standard highlighting where EV chargers are located, whether they are working, along with an advanced booking facility.

Such government initiatives would help to grow confidence which, in turn, would make the vehicles more affordable. As Jones noted: “Confidence feeds demand, demand feeds stability and pricing.” Technology degradation will be less of an issue once you get increased confidence in EVs.

Negative media coverage on electric vehicles and charging infrastructure and reporting misinformation to the public has not helped to build a positive public opinion of EVs: “As an industry there is a lot we can do to help reinforce reality and to promote the growth and standards and capabilities, and to get more universality in coverage,” commented Richard Jones.

Jones believes that it is essential for the finance industry to look at the financial products it can offer and how it can work with government to get incentives, such as BiK, available to everyone including the second-hand market.

Social leasing

While EVs might be the better option for the climate and path to net zero, they are not the best option for the wallets of those on lower incomes affected by a cost-of-living crisis.

Government subsidies in Europe have been launched in order to make EVs more affordable to lower income people. In France, for example, the social BEV leasing program offers a government-subsidised leasing scheme for low-income households to counter criticism that EVs are out of reach for many and to reduce negative social impact from the green transition.

The leasing scheme stands to benefit European carmakers rolling out new smaller less-expensive electric models, with the French government pushing for more locally-made smaller EVs in addition to higher-end models.

The UK national government by contrast has no (current) plans to support the sale of second-hand EVs to lower and middle-income households. Moreover, the continuing roll out of ULEZs by local governments effectively punishes drivers who can’t afford either an EV or a very new diesel or petrol vehicle. This is a developing social divide and surely an unintended consequence of what the government is trying to achieve.

Will the march of the Chinese change the dynamic of the whole BEV debate?

Chinese automakers are the best producers and sellers of EVs, according to Marcella Merli, with a full range of vehicles, full capability and advanced technology at a reasonable price. But whilst they have an advantage in battery materials, technology and factories, new Chinese brands need to create a name for themselves in Europe with reliability and aftersales.

Chinese OEMs are heavily vertically integrated with the battery, technology and materials, along with very heavy government subsidy. However, in the electric transition, China moved very big very early and are now locked into old technology. As the electric revolution fast forwards around the globe, Greenwood sees Chinese manufacturers losing their technology advantage, requiring them to innovate along with other countries.

Prof. Greenwood sees the march of the Chinese presenting more of a problem for the European auto industry than the UK, as they are competing on lower cost smaller vehicles than high-cost premium vehicles (like JLR and Rolls Royce in the UK).

It appears that EU regulators could see this coming and based regulation – some environmental and some protectionist – around the entrance of Chinese brands into Europe. Chinese manufacturing has very high embedded carbon emissions compared with Europe, so the car industry will likely move from legislation for tailpipe emissions to legislation of embedded carbon emissions in order to negate some of the cost advantage of Chinese brands.

Concluding remarks

The electric transition in the UK is gathering pace with EV supply improving and increased investment in an EV charging network.

With growth in EV registrations driven entirely by fleet investment as a result of government incentives, private consumer EV demand remains stable with cost-of-living pressures and high interest rates constraining growth.

However, EV demand in the UK is suffering because of a poor weak second-hand market, which is in urgent need of attention. Purchase incentives and support for the installation of a domestic charger are urgently required in order to generate demand for used EVs which in turn will lead to increased adoption of new EVs.

Additionally, growing confidence in EV batteries and charging infrastructure is essential to fuel EV demand, providing a stable market that would give certainty to EV residual values.

Analysis from David Betteley

Asset Finance Connect's head of content

The transition to electric is the issue that is top of the agenda for all automakers globally, and the cost of fuelling that transition are astronomical. It is almost impossible for traditional western manufacturers to shoulder the whole cost of the transition on their own balance sheet, and this has led to a rash of partnerships and co-operation arrangements between manufacturers.

This activity will in time reduce differentiation in performance and design, resulting in a reduction in “brand snobbery” which will, in turn, result in the erosion of brand premiums. So, at a time when manufacturing margins are under pressure due to the loss of brand premium, higher manufacturing costs, and a price war between BEV manufacturers, the ability to invest in this new technology has become increasingly challenging.

And there is as always, an elephant in the room which is the march of the Chinese brands. It is generally acknowledged that the manufacturing cost of a Chinese produced BEV is c 20% lower than a European/ US produced similar vehicle.

Not acknowledging the threat from Chinese brands may be just one of the issues that western governments have overlooked. Indeed, the rush to electrify personal transport may well have created other unintended consequences.

We discussed in the session the issue of affordability for an average retail car buyer who cannot access either BiK payments or a salary sacrifice scheme. This particular unintended consequence is that there has quickly developed a social divide between fleets and new car buyers with deep pockets and lower income households who cannot afford to “go green”.

Moreover, this latter group are the ones that are unfairly discriminated against as they are less likely to live in a home with a driveway and therefore have to rely on public charging at two times or even three times the cost of domestic charging. To add insult to injury, the proliferation of low emission zones up and down the country discriminates unfairly against this group that can only afford to own an older, often non-compliant ICE vehicle.

There is, however, some good news. The UK charging infrastructure is benefitting from a mix of investment from private companies and a number of government-sponsored schemes. Despite the ongoing negative attention of the media, the UK is quietly becoming a charging infrastructure blueprint for the rest of Europe to follow.

As Prof David Greenwood pointed out, when the public can rely on the charging network, range anxiety will all but disappear and the competition between manufacturers to continually add range will give way to more limited range vehicles, produced at a much lower cost. When this point is reached, the transition to EV transport will be able to be considered as mature.