Electric vehicles – zapping assumed economics for asset finance

Layne daniel

The rise of eco-conscious individuals has created a surge in demand for electric vehicles; according to the International Energy Agency, electric vehicle ownership will soar to 125 million by 2030.

Following the passing of the Automated and Electric Vehicle Act through the UK Parliament in July 2018, we can expect to see major steps forward in the infrastructure and consumer confidence that will support this trend, with new public charging points planned and a push for standardisation around reliability standards and payment mechanisms.

In addition to the widely discussed impact on the energy and transport infrastructure, this transport revolution will also bring new challenges and uncertainty for the auto finance sector.

The mix of governments’ evolving subsidy strategies, shifting consumer demand patterns and new technology will up-end the traditional economics and pricing models associated with vehicle leasing, demanding new flexibility from traditional providers.

Vehicle valuation

One of the key reasons for this shift is the change in engine type, which has a major impact on the residual vehicle valuation systems that are already in place.

Conventional depreciation models used to calculate the value of combustion engine vehicles after lease expiry will no longer apply – wear and tear of an electric motor is very different to that of an internal combustion engine.

A standard car is valued as a whole ‘piece of metal’, unlike an EV, which can be valued in components. Not only that, but the battery can make up 50% of the EV’s value.

As electric vehicles continue to develop, we will see more and more technology integration. For example, over the air software updates and data connectivity between the vehicle and the home or smartphone.

Today’s vehicles contain millions of lines of code, which can be updated and upgraded remotely with new and enhanced functions. With this much ‘intelligence’ being piped into cars after they are leased, traditional depreciation theory will be completely reversed, as software augments vehicle performance over time.

This trend is as relevant across the enterprise landscape as it is in a consumer context.

Data from the Corporate Vehicle Observatory shows that 30% of very large companies have already introduced some electric vehicles to their fleets, and 27% have adopted hybrids, with an intention to accelerate this movement in the coming years.

Meanwhile, research from Smart Energy GB shows that more than 8 million people in Britain are considering buying or leasing an electric vehicle in the next five years.

Tapping the data

To ensure appropriate pricing metrics and prevent against revenue losses in this ‘new normal’, auto financing businesses will need to understand how to better price electric vehicles.

The key to this lies in the ability to gain access to, source, and process vehicle and industry specific data in real-time.

Connected cars provide a significant opportunity for asset owners to dynamically and accurately price and update their offering based on actual vehicle ownership, rather than relying on estimations, guesswork and averages.

This becomes even more relevant in a corporate fleet context, when this is scaled up to encompass thousands of vehicles.

Data insight will allow the lease provider to transform their business relationship from transactional to value-add advisory, drawing on vehicle usage data to help enterprise fleet managers optimise their fleets to achieve cost savings, reduce carbon emissions in line with CSR targets, and improve driver safety; for example, by providing real-time notifications when a vehicle detects a fault, or uses machine learning to predict a future fault.

Calling for access

Rising levels of vehicle connectivity allow vehicle manufacturers to engage directly with customers, enabling them to maintain brand awareness and promote maintenance and other service offerings.

However, external service providers, including automotive finance companies, are currently at a significant commercial disadvantage as they are unable to access this data.

Action is being taken by stakeholders within the automotive finance industry, who are calling for greater levels of access to connected car data.

The European Commission’s Gear 2030 report recognises the importance of direct, safe and secure access to a wide set of in-vehicle data in real-time for the provision of connected services.

We are on the cusp of some changes in the automotive sector that will shake the assumed foundations of so many parts of the value chain.

It is critical for the measures outlined in this document to come into play to ensure the advancement of the automotive finance industry.

With them in place, the automotive finance industry can present more innovative leasing solutions that are better matched to customer expectations, both retail and enterprise.

* Quotevine is a technology business that provides a suite of cloud-native SaaS solutions to digitise asset and automotive finance.
* Daniel Layne has 17 years experience designing multi-million pound systems for blue-chip automotive funders, providing technical consultancy and guiding projects from inception to delivery.