Back in 2012, when I was researching EVs and PHEVs as an alternative to an internal combustion engine (ICE) powered vehicle, I was concerned about battery technology advancing quickly. I thought that those advances would make my vehicle would be worth so little, at the end of my ownership, that getting an EV would be a financial mistake, even if it was a great solution to high gasoline prices. My solution: lease the vehicle so the leasing company accepted the risk.
I could just walk away, at the end of the lease, and let the leasing company worry about reselling it.
Today, the tables are turning and you need to be aware of what’s happening, in places where EV adoption is further along, than where it is in the U.S..
For instance, in China, where EV adoption reached 22% of new vehicle sales last year, what I’ve been anticipating is starting to happen. Inventory of ICE vehicles is piling up in China, but manufacturers are still producing them. The result is pure supply & demand in action. As inventory of a commodity increases, the cost of having that inventory on hand, increases. In the automotive world, this is something that is (usually) closely watched. When inventory is high, in a particular model, you’ll see dealers dramatically cut price, sometimes below their usual cost, just to get rid of them.
As a former salesperson, I saw this work against EVs. Other dealers, whose salespeople were uninterested in (or incapable of) selling EVs or PHEVs, would have EV inventory increase to a point that they’d dump them, below cost, just to get rid of them. This, of course, was a problem for me, as I was focused primarily on PHEV and EV sales and it gave my competitors a pricing advantage over my EVs. My competitors’ prices were well below the price for which I could sell the same vehicle.
In case you’re unaware, when a dealership sells “below cost,” some of that loss is recouped by volume and other incentives from the manufacturer. But the business isn’t the only one affected by price. Most dealerships compensate their salespeople by commission only. If they don’t sell a car, they make nothing. This causes a lot of employment turnover in sales but removes most of the risk in employing a person that fails at selling. The commission is NOT based on the vehicle’s sale price. it is based on the profit in the sale That profit does not include any volume incentives received by the dealer. In other words, the salesperson selling a vehicle below cost is working to make zero dollars! Since no salesperson would waste time on a deal that does not benefit them personally, dealers make up for this with something known as a “mini.” A mini, is any car deal that makes so little the commission would be too small. An adjustment to the salesperson’s commission is made. At the dealership, for which I worked, the commission was increased from zero to $100. To the uninitiated, this may seem to be a good solution. However, to qualify for General Motors’ “Mark of Excellence” award each year, a salesperson must sell at least 75 vehicles a year (among other qualifiers). Let’s do the math. If a salesperson (designated by GM as an excellent salesperson) sold only 75 vehicles a year, if all were “minis,” that salesperson would earn a gross annual income of $7,500. Minimum wage, which is $7.25 an hour in the U.S., would generate an annual gross income of over twice as high! This is the main reason salespeople cannot answer your EV-related questions. Why would anyone learn everything they need to know to sell EVs professionally, if it reduces their income? Would you?
Back to ICE vehicles:
Many countries (and some states, in the U.S.) have passed laws to restrict or stop sales of ICE vehicles by a specified date. Consumer choice cannot be legislated. Those laws could be repealed if the citizenry opposed the time limit, once it gets closer to going into effect. In my opinion, one of the purposes of those sunset laws is to give industry a “heads up” about what the government wants as well as what they see coming. In the case of China’s centrally controlled economy, the government has much more power to dictate these things. However, as Tsar Nicholas II and King Louis XVI learned, there’s only so far you can push the people you rule.
China has publicly stated for years that they’re moving to electric transport. They’ve created an end date for traditional vehicle sales. Industry has had plenty of notice and China’s EV sales is the largest in the world. However, the manufacturers didn’t heed the warning. They continued to do what they knew best: continue to produce ICE vehicles at a high rate. The result? China has a crisis in unsold vehicle inventory. It may occur that millions of vehicles will remain unsold, creating a real economic problem for the country, manufacturers and the people/businesses that sell them.
Why should we care about China’s vehicle inventory problem?
The same thing is taking shape here. Traditional auto manufacturers are continuing the development of engines, other than those for applications for which EVs aren’t (yet) the answer, like frequent, long-distance, heavy duty towing or passenger occupancy over 5 passengers (soon to be 7). That development requires a return on the investment made, so they’ll produce ICE vehicles and dealers will receive them. Eventually, the tables will turn. ICE vehicle sales deals will become “minis,” when inventory gets too high. Salespeople will start to ignore them for the same reason they ignore EV sales today.
But I want you to consider your potential inventory problem, when selecting your next vehicle, which came into sharp focus for me, when I heard this story:
When flat-screen high-definition televisions first arrived, they were prohibitively expensive for most of us. A common experience, for those of us aware back then, is the first time seeing an HDTV in action. I remember it very well. I even remember the store and the program displayed on the television. I froze in place and my jaw literally dropped. I just could not believe what I was seeing! In that moment, I made the same decision that a vast majority of Americans made:
Although there was no way I could afford an HDTV, I made the decision that I’d never buy another CRT-based TV again. That day is coming for ICE vehicles and it’ll be sooner than you (or the OEMs, politicians or dealers) realize.
Here’s why that affects “your vehicle inventory”:
Most of us finance our vehicle purchases for 4 to 6 years, but keep them substantially longer. We all like not having a car payment! However, we do not just discard our vehicle, at the point we no longer need or want it. We trade it in or sell it to an individual. What happens if public sentiment reaches “the HDTV moment,” before we’re ready to sell. It’s simple, really. It’s economics. As preowned ICE vehicle inventory increases, dealers will eventually have swollen ICE inventories and will reduce their offers for them or stop buying trade-ins at all. Leases will cease to exist on new ICE vehicles because the residual value will become so low that the monthly payment is too high to make leasing of any value. Prices for new ICE vehicles will plummet and those new vehicles will be competing with your preowned vehicle, further pushing your preowned vehicle’s value even lower. It’s a death spiral. Eventually, banks won’t finance ICE vehicles unless the borrower has a high enough down payment that the risk of the buyer failing to pay off their loan is reduced. Why would the bank want to repossess a car it cannot resell?
What to do? I recommend these things:
- Test drive multiple EVs and/or PHEVs before acquiring your next vehicle. If you have multiple vehicles in your household, odds are extremely high that at least one of them could be replaced by an EV, saving your tons of money. EVs aren’t a fit for everyone, just the vast majority of us.
- If you fall into the group for which an EV is not a good solution, seriously consider doing what I did on my first two plug-in vehicle acquisitions: Lease the vehicle instead of purchasing it. If values plummet over the next 3-4 years, you’re protected.
- If you still decide to buy (rather than lease), and finance the purchase of an ICE vehicle, get GAP insurance. Your auto insurance reimburses you for repairs, in the case of an accident or vandalism, but the amount they pay depends on vehicle’s current value. If the resale value has plummeted, your vehicle’s value may be so low that you owe more on the loan than the insurance pays. This leaves you on the hook for the difference.
Forewarned is forearmed.
