Monday, June 14, 2021
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A risk in the EV battlefield: Setting residuals

“We’ve been financing [electrified vehicles] for over 20 years, so we’re not scared about financing them,” said Mark Templin, CEO of Toyota Financial Services. “The only tricky part is setting residuals, because you don’t know what the future value of those BEVs is going to be in the marketplace.”

It’s not a small problem. There are more than 100 new BEV nameplates currently planned to enter the market over the next few years, and most are trying to capture a piece of segments now dominated by Tesla. If the overall BEV share doesn’t grow enough, or consumers remain on the sideline because of lingering range anxiety, infrastructure concerns or pricing, the losses for some automakers could be significant.

Leasing has been a way that some automakers have attempted to lure in potential new customers. Volkswagen, for example, launched its ID4 compact-crossover BEV in March with a $379 per month lease offer, with $3,579 due at signing, while Hyundai put a $319-a-month lease offer on its subcompact Kona Electric, with $3,999 due at signing.

History has demonstrated that automakers and their captive finance arms can get sideways in a hurry if residual values aren’t set properly, or if they’re artificially inflated in a misguided bid to lower lease payments and drive sales. That was the case at Chrysler when gasoline prices spiked in 2008, driving down the value of that automaker’s stable of big pickups and SUVs coming off lease. Each vehicle turned in meant thousands in losses for Chrysler Financial, with the end result being a shuttering of the captive and an acceleration into the automaker’s 2009 bankruptcy.

“Residuals are always going to be wrong on a unit-by-unit basis, but you have to limit the amount by which you can be wrong. And when you don’t have historical data, the propensity to miss is higher,” said Eric Lyman, vice president of ALG, which is now part of J.D. Power.

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