Car makers are putting new faith in an old and often neglected price-control method to clamp down on the rising costs of electric cars: residuals. Residuals is automotive industry jargon for the value of your car when you come to sell and, as you might have noticed recently, that’s a lot more than it has been.
This has created two effects. One: used cars become more expensive. And two: car companies earn a lot of money, particularly on the finance side of their business. VW Financial Services, for example, saw profit more than double to just under €6 billion (£5bn) in a record year, citing higher residuals. Morgan Stanley, a bank, called its performance “EXTRAORDINARY” in an analyst note. (Analysts aren’t known for their prolific use of capital letters.)
In 2021, the value of a three-year-old car rose an unprecedented 28% from the start of the year to the end of the year, according to price experts CAP hpi. The reason for the rise in values was simple: supply of new cars was hit by semi-conductor shortages, meaning buyers turned to the used market to find a car, increasing demand.
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The shortage of semi-conductors has had another side effect: car makers focused on higher-price models and slashed discounts. VW’s average selling price last year rose from €24,000 to almost €30,000 (roughly from £20,000 to £25,000), Morgan Stanley noted. “It’s hard to see how this is sustainable for a beleaguered consumer,” the bank wrote.
But there is one upside. “It's not necessarily bad news that you're not getting a big discount as long as that's also reflected at the back end in the residual,” said Steve Young, managing director of retailer analyst firm ICDP. Or to put it another way, if your car is worth more when you, the bank or the car maker sells it on again, that increased value is reflected in lower monthly payments.
That could be crucial when it comes to selling higher-cost electric cars. “No one is speaking about cars costing £45,000 or £50,000. You speak about monthly payments,” said Guillaume Cartier, head of the Nissan region that includes Europe. “Residual values are higher on EVs so the cost to finance is less than the increase of the price.”
But there’s a huge responsibility on the part of the car maker, or OEM, not to damage those residuals. “You need to make sure that the behaviour of the OEM is proper on the new car,” Cartier said. “Because if the new car is discounted, then the value is impacted. And you need to make sure that you don't overproduce by more than your demand.”
That has not always been the case and Nissan, along with a whole slew of mainstream and premium brands, has been guilty in the past of destroying residual values, rather than shoring them up.
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Residuals - you could write a whole magazine on the subject. Unless new car production continues to be limited in some way, some folk are in for a very nasty surprise on how much they'll loose. Unless Dr Who could loan me her Tardis or Doc Brown loan me his DeLorean, I wouldn't even dream of purchasing a car right now.