Automotive Blog

Why should a 6 year old used car be core to your new model launch strategy?

SY Sept Reduced

Most people in the industry understand that an effective used car strategy is key for an OEM in order to maximise residual values, and therefore reduce total cost of ownership (TCO) and allow attractive leasing rates to new car customers.  This typically includes some element of managing supply into the market, maintaining a range mix in fleet sales and providing an approved used car programme that presents used cars to customers in the best possible light.  However, the focus tends to be on the first ownership cycle, typically three years, as this is the one that most directly affects new car sales.
However, we have now entered a new world where the time horizon needs to be much longer, and the consequences of poor planning could be more fundamental.  This is in the area of battery electric vehicles (BEVs) where we will be presenting new research in a specially extended webinar for our members on Tuesday September 25th from 1100 CET.  (ICDP members can register HERE)
Any manufacturer now launching a BEV – and there are many coming in the next year or two – needs to immediately think about the attractiveness of their product when it is around 6 years old.  With a traditional IC-engined car, most cars of this age would be offered for sale by independent traders or in private to private channels.  Few of them would still be seen in the franchised dealer workshops or even authorised repairers.  Consequently the interest of the OEMs would be quite low.
However, with BEVs, the car will be close to the end of the extended warranty offered on the battery (typically up to 8 years), and even under the best circumstances, the range when fully charged will have degraded by 20% or so.  Based on current experiences, the degradation will not have been sufficient to trigger a replacement battery under the terms of the warranty.  For a professional or private used car buyer considering a used BEV of that age, they will therefore be looking at the risk of further degradation or some more significant battery failure which will not be covered by the warranty, and even if they resell whilst the warranty is still valid, the next buyer will be even more concerned for the same reason.  The residual value curve for a BEV will not therefore follow the normal curve with a reducing slope as the car ages.  Instead, there will probably be more of an S-curve, with high early depreciation (as normal), then a levelling off, but a rapid decline in the final years of the battery warranty.  For those willing to take the gamble, this may represent one of the best used car bargains around, but for some, they will have bought a car for a few thousand Euro, and then be faced with a bill which is perhaps 2-3 times that cost, resulting in the car being scrapped.
This then feeds back into the end of the first ownership cycle as the ability to value or sell the car at that point will be heavily influenced by the issues at 6 years old.  This has led to some finance companies refusing to fund 3 year old used BEVs, and therefore independent used car retailers will not hold them in stock.  Uncertainty at the end of the first cycle then feeds directly back into the ability of the OEM and their dealers to be able to maintain high transaction prices and attractive lease rates when new.
The implications are that in the launch strategy for a new BEV, the OEM needs to think ahead 6 years to how they will remove uncertainty from a used car transaction at that time.  Will they take on additional warranty risk through extending the cover for the battery to say 10 years, either now, or as part of an approved used EV offer?  Will an improved warranty on EVs create demand from consumers for equal treatment on IC-engined models?  Will they offer a special deal on replacing or upgrading the battery as Renault have now started to do?  As battery technology improves, is there confidence that a cheaper retrofit option will be available in 6 years, and how can this be factored in now to RVs?  What are the balance sheet liabilities that need to be taken on today, and how do these compare with the potential for higher sales volumes, higher transaction prices and more effective used car defleeting?  These are challenging questions, particularly against a background of general uncertainty on the development of the BEV market, but they need to form part of the launch strategy for a new BEV.

Written by Steve Young

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