Residual values cars in a row

Residual values

May 18, 2022

This article discusses residual values, and how transparency into battery health is crucial for improving the residual values of electric vehicles.​

Residual values cars in a row
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How batteries literally drive value

Residual values play a significant role both for private owners of cars who want to sell them on at a good price and even more so for institutional buyers, whose profitability depends on residual or reselling values.

This topic is now more important than ever considering the current developments in technology and transition to electric vehicles. To better understand why both predicted and current residual values matter so much, let’s look at the market mechanics at every stage of the lifecycle.

What is residual value?

The residual value of a car is the estimated value of the car at the end of its lease term. And with electric cars the battery residual value is the percentage of the original battery capacity that remains after a certain number of years of use.

Launching an electric vehicle in the leasing market

Residual values play a role even before the start of production of a new vehicle. When a new vehicle is announced, leasing companies assess it. Their goal is to price the monthly leasing rates in such a way that a profit is made by selling the vehicle at the end. Ideally, the current value should be as high or higher than the expected residual value. The concept of vehicle ownership by the leasing company is referred to as operational leasing and is the go-to choice for most people interested in electric cars.

Before a vehicle is launched, the vehicle manufacturers negotiate prices with leasing companies, aiming for lower leasing rates to drive sales and achieve economies of scale. The winning argument is usually through the residual value. There are multiple ways of achieving high residual values, for example with buy-back clauses, but ultimately the manufacturer and the leasing company benefit most if the residual value is high as no stabilizing, but costly action must be taken by the OEM.

Batteries are the key driver of residual value

In this context, batteries are relevant in two ways. Firstly, the battery is the most valuable vehicle component, constituting 30-50% of the total costs. Secondly, the battery defines the key characteristics that most interest end users: range and (quick) charging capabilities. Once a battery no longer fulfils these requirements, the vehicle’s user experience rapidly deteriorates.

Even more worrying is a potential battery failure or replacement – particularly beyond the warranty period – which can lead to a vehicle being written off. Costing somewhere between 10,000€ and 40,000€, a replacement battery will be prohibitively expensive in many cases, making the vehicle a case for the scrapyard.

Reselling a battery without transparency into its condition leads to a market of lemons

The next complexity is the information asymmetries in used vehicle purchase transactions. Lacking any information about the battery health, buyers can only assume the worst. In a case study with Autovista and TÜV Rheinland based on the battery usage scenarios poor, average and good, the difference between a good and a bad battery was around 5%, leading to a 450€ spread in the residual values after only three years and in a C-segment vehicle. This means that on average – considering a standard distribution –225€ is lost on the transaction.

Considering the bottom-line impact for a company that leases out 100,000 vehicles per year, the company would lose 2.25 million€ of potential profit annually.

How can this be prevented

The power lies in signaling. Clear, transparent, and reliable signals are required. These can be a star rating, or clear indications on the performance capabilities. However, the signals must come from a trustworthy, ideally neutral third party.

TWAICE analytics solutions provide the ideal foundation for such transparency. TWAICE collaborates with industry partner TÜV Rheinland, which offers independent inspection services. TÜV certificates create trust in the market and drive residual values. The TWAICE/TÜV Rheinland partnership is the optimum combination of technical expertise, infrastructure, and certification know-how. 

Read more in the Whitepaper for which we teamed up with market leaders Autovista and TÜV Rheinland

Featured resource

Battery health report Webinar (German only)

Press release about the TWAICE and TÜV Cooperation

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