Auto Finance News

How electric vehicles could reshape the global leasing landscape

EVs charging

Environmental concerns have increasingly been driving the transition from internal combustion engines to electric vehicles and as climate change rises up the political agenda, old economic models may no longer be fit for purpose.

More specifically, the linear economic model, which historically has relied on mineral extraction to produce goods with a limited lifespan, is now being superseded by the circular economy, where the focus is on extending the life of products, ensuring their reuse and recycling parts at the end of life to start the process again.

In its report ‘The Road to Circularity’, consultancy PricewaterhouseCoopers argues that the circular economy model reflects nature’s biological cycle and creates closed loop material and energy cycles. Waste is a problem because it is seen as ‘value leakage’.

While the circular economy model encourages manufacturers to develop green products, it isn’t without its own challenges for the auto industry, particularly as the cost of recycling is often higher than resource extraction.

Some critics also argue that recycled products are of lower quality – meaning additional and intensive processes will be needed to meet quality and car safety considerations.

Yet the creation of an ecosystem in which the most environmentally sustainable products are also the most economical is a perfectly rational one in the longer term and will in turn produce a more predictable, profitable, efficient and ethical business for resellers.

With sustainability built into product design (guided by government/regulatory pressures) leasing companies are better placed to influence the subsequent remanufacture/reuse of assets.

Instead of value being derived from resources, revenues will become more service focused.

For example, technology means short-term leasing contracts can be processed from a mobile phone. The knock-on effect is the likely further development of subscription-based services or pay- -per-use ones that will feature shared assets, such as ‘used’ cars.

While car subscription services are seen as an extension of operational private leasing solutions, they have an advantage because their flexibility ensures long-term loyalty. This business segment holds promise for lease companies and 2020 may be the right time to explore, invest or enter the segment.

More nimble and flexible mobility solutions that allow customers to change vehicles based on their requirements or pay varying amounts, according to the type of car they use, could have a significant impact on the fleet leasing industry.

As customers engage through digital platforms, they can be offered highly customised solutions and experiences.

Yet there are challenges for electric fleets – not least frequent technology upgrades making the residual values of electric vehicles uncertain.

Frost & Sullivan in its ‘Global Company Car Leasing Market Outlook 2019’ notes: “Almost continuous advances in electric powertrain technologies mean that, typically, people only want to lease such vehicles, rather than buy them and have to deal with their rapid obsolescence.”

Given leasing addresses the risks related to a vehicle’s residual values, demand for electric vehicle leasing is rising, but so are the risks if future value predictions prove optimistic.

Globally, plug-in vehicle leasing is expected to grow 18.5% during 2019, with adoption rates being strongest in Europe and the US.

How market participants respond and adapt, as well as the way they deal with their customers, will determine who leads the industry over the coming years.