Why EV Sales Are Falling | CNBC Marathon

Electric vehicle

sales

are slowing. In August 2023, it took about twice as long to sell an electric vehicle in the US as it did in the previous January. Overall, consumers still have a bit of anxiety, both about range and some technical know-how when it comes to electric vehicles. The overall appeal of these cars isn't there yet. They are still too expensive and have too many limitations in terms of their use. I have been in the automotive industry for 40 years and have never seen this type of investment. $6.5 billion strictly dedicated to electric vehicles. Wedbush says spending on commercial electric vehicles should exceed $1.2 trillion by 2030.

We are building the future of the electric vehicle. In 2022, consumers will spend nearly $400 billion on electric cars worldwide. The United States is expected to add 1 million new electric vehicles to its roads in 2023. And from 2023 to 2027, auto companies have committed $616 billion in total investments. Meanwhile, these efforts have hit a troubling roadblock. Electric vehicle

sales

are slowing. I was a little nervous about going EVs because my husband also has an EV. Uh, and having two electric vehicles at home, you know, it's a challenge. I think the main problem is long distance travel. Yes, we have been in that situation.

You have to plan. Yes. In August 2023, it took approximately twice as long to sell an electric vehicle in the US as it did in the previous January. Gas-burning vehicles were still selling briskly. While just over half of consumers say electric vehicles are the future and will eventually replace combustion engines, less than a third of dealers say so. You have a product that almost every automaker has depended on for their future. The government is really saying: "We have to go for electrification." But when the situation comes to an end, when people have to make that decision and there is a lot of money at stake, we start to see that that is starting to be affected.

Tesla has slashed prices. Sales at some electric vehicle startups have disappointed, and companies like Ford have increased production of hybrids as demand for their electric vehicles has stabilized. So what is really happening and why? And what does it mean for the future? For those who are burning, would you suggest taking the step as a bridge, so to speak, to a PHEV, a plug-in hybrid? Or do you think maybe we'll go from that to an electric vehicle? Today there is an excess supply of electric vehicles in the industry that is greater than the demand. This is Jeff Aiosa.

His shop is one of 383 Mercedes-Benz dealerships in the United States. He makes about $40 million a year, employs about 50 people and at any given time keeps about 70 cars on the lot. About a third are electric and hybrid vehicles. It is not that the customer is not considering it or is not considering the purchase. It is the reluctance to that anxiety that exists in relation to the autonomy that the battery can produce. And compounded or compounded by the lack of public charging infrastructure, perhaps we are moving too quickly. Cox Automotive said that in July 2023, on average, there is a 52-day supply of ICE vehicles at dealerships.

If they stopped making cars today, a dealer would have enough for 52 days. The vans went from 52 days to deliver in January 2023 to only 57 in August. Meanwhile, EV supply was closer to 90 to 100 days. No segment has seen as substantial an increase as that of electric vehicles. There is definitely an increase in the time a vehicle will be sold in lots. What happens is that electric vehicles remain stationary even longer. And the fact that we are seeing it reflected in the used car market as well tells us that this is not just an isolated incident. This is something very specific.

Figures elsewhere suggest that enthusiasm for electric vehicles has weakened since the peak of the pandemic era. In 2021, 86% of American buyers were considering an electric vehicle. That figure has since fallen to 67% in 2023. In May 2021, Ford opened reservations for its F-150 Lightning, the all-electric version of America's most popular vehicle. It closed them at the end of the year because the company said it had enough reserves for three years of production. But in September 2023, Ford said it was increasing production of its hybrid F-150 because sales of the Lightning had slowed. We literally had people following car shippers to the store, hoping that when they arrived the shipper's car they wanted to buy would be available, only to find out it was already sold.

People run to the dealership. They are going crazy and paying over MSRP. They are bidding, there are wars. People say, I hope that guy doesn't believe it. If he falls off the truck, I'll buy him some kind of attitude. I mean, now completely on the road. It's barely been a year and the electric vehicle market is upside down. Falling sales aren't just happening for legacy brands. The buzz around luxury electric vehicle brands has seen two consecutive quarters of weaker-than-expected demand. More recently, it delivered 600 fewer vehicles of its high-performance, 500-mile-range air luxury sedan than Wall Street expected in the second quarter of 2023.

There are bigger economic challenges. Interest rates have risen and that is why borrowing money is much more expensive. Inflation has reduced purchasing power and supply chains are disrupted. The inflexible nature of the EV supply chain is putting pressure on OEMs to make EVs despite consumer pushback. Then there are the pressures of complying with government mandates. Think about the manufacturer's perspective, where it typically takes a cycle of more than 7 or 8 years, from inception to showroom. Good. So that's a big ship to turn. And then going back to the mandates, the regulatory pressures, when you have to comply, it's not like you can just flip a switch and convert from combustion to electricity.

There is a specific pricing challenge with electric vehicles. They tend to be more expensive than their gasoline counterparts. That may explain why the luxury category hasn't slowed as much as electric vehicles. A mid-size luxury electric crossover, for example, will often have a higher transaction price or even a higher sticker price than a comparable fuel-burning one in the same class. The average transaction price of a vehicle in the US was approximately $48,000 in September 2023. The average transaction price of an electric vehicle was between $53,000 and almost $60,000, depending on the data use. Meanwhile, the electric vehicle buyer is changing. Drury says about 40% of EV buyers are trading in a vehicle they already own for a new one.

This is about double what it was a decade ago. That suggests that many of the electric vehicles purchased a decade ago were add-on vehicles. An extra car. Like if you had a two-car garage, you would have a third. And part of that was because those electric vehicles qualified for many tax credits. You have HOV access lane. I know in Southern California that was such a big deal that vehicles with that sticker sold for a premium. As a Mercedes dealer, Jeff Aiosa still interacts with many wealthy clients. Even he has seen evidence of it. The early adopters were very technological and, I mean, they were more in the luxury space.

Last year we had between 30 or so models on the market and almost 90 more models; Today, we are a more common buyer. These are the chargers for DC fast charging and home charging. I also sell an EQB, a more conventionally priced electric vehicle that sells somewhere in the high $50,000 range. It's not cheap, but it's only slightly above the average vehicle transaction price, and it's much less expensive than the EQE, which can cost more than $90,000, and the EQS, which can cost up to $140,000. These vehicles won't be worth as much as, say, an ICE equivalent, which means more certainty.

There will be no technological advances or improvements in ICE vehicles, but we know there will be with electric vehicles. Batteries, on average, are guaranteed for ten years to provide at least 80% efficiency. That is not the case with ICE. ICE cars, everyone makes a good car today and they last more than 20 years. I think a sense of buyer's remorse is evolving. This is seen in TVs where, every 6 to 9 months, you feel that the same 52-inch TV is cheaper at Best Buy or you choose your location for the same functionality. And especially now that OEMs are lowering prices.

At the end of the second quarter of 2023, several automakers announced that they will adopt the Tesla charging standard, also known as the North American Charging Standard or NACS. That means there are vehicles stuck in factories with an obsolete charging socket. Collection is a sore point for all types of buyers, whether current, past or potential. This electric vehicle will allow you to plot a course and determine and predetermine when you will arrive at different charging stations. Then there is the government. We get a lot of feedback from customers saying, "We just don't like the government telling us what to buy." By 2032, 67.5% of electric batteries will be aggressive.

I think that by 2035 everything electric will be an aspiration. I don't think that's going to happen. EVs in batches don't necessarily equate to waning demand. Electric vehicles accounted for a record 8% of US vehicle sales through early September 2023. If we consider electric vehicles as their own segment, we take everything and put it together. It would be segment number six in the industry. So it's not that no one wants them, there's no demand. However, there is an enormous degree of regional variation. While there have always been regional stories in the auto sector: pickup trucks in Texas, luxury cars in the Northeast.

Electric vehicle adoption rates closely track two economic metrics, pump prices and home energy rates. If gas prices rise to around $6 like they do in most of California, we will see many consumers shift toward electric vehicles. Meanwhile, in Texas, gas prices are almost $2 per gallon cheaper in Texas than in California. But there is another reason why inventories have been increasing. Tesla, which dominates the electric vehicle market, has been cutting its prices. In August 2023, data from Cox Automotive showed that the average price paid for an electric vehicle was $53,376, down from $53,633 in July 2023 and more than $65,000 the year before.

Once again, that decline is driven almost entirely by Tesla. In August, Model 3 transaction prices were down 21% year over year, while the Model S was down 17%, the Model Y was down 16%, and the Model X was down 13%. As of early 2023, the Model S was priced at $104,990 and the Model X was priced at $120,990. On September 15, the price was $79,990 for the So not only do we have fewer consumers looking for an electric vehicle in the second quarter, but we also saw those who were. It's very difficult to go beyond Tesla with their pricing and certainly their supercharger network to buy an alternative.

It's an unlevel playing field when you have a manufacturer that sells in the vertical integration space, directly to the consumer, and doesn't use the franchise system, it gives that direct seller some flexibility to be able to adjust their prices. And in the case of Tesla, conveniently below the threshold in order to capture more of the government incentive money. Meanwhile, automakers are launching electric vehicles that often sell for more than $50,000. Ford increased the starting price of its F-150 Lightning in March 2023 to $60,000, a 50% increase over the original starting price of $40,000. Ford has since reduced that amount to $49,000, but again, it's still $10,000 more than the automaker had originally planned.

It is very expensive to bring electric vehicles to market and in many cases, vehicles that were announced at a certain price a couple of years ago, the automaker has not been able to maintain those prices in this market. And that is why the previously announced prices have tended tothat Uber really needs Hertz and Hertz really needs Uber. Harry Campbell is the founder and CEO of The Rideshare Guy, a website and podcast dedicated to Uber and Lyft drivers and other gig economy workers. In my opinion, there really is no better use case than an Uber driver who is going to drive 1,500 miles a week in his car to not only rent a car, but also rent an electric vehicle.

Renting from rideshare companies is profitable. There is a one week minimum and the costs of delivering a vehicle are substantially reduced. The challenge, however, is that Hurts receives about $43 per day instead of the $75 to $90 he receives for a consumer or corporate rental. There have also been a disproportionate number of accidents. While Hurs says routine maintenance costs for electric vehicles are lower, the cost to repair damage caused by accidents is twice what it would be for an internal combustion vehicle. This is partly a Tesla problem. Many of his critics will say that they have increased the number of vehicles on the roads without investing in enough service centers and without overly relying on their fleet of mobile services to repair those vehicles.

And then you'll see these long wait times for parts to be put into the cars. You will see long wait times to even get an appointment. This is just a small part of why electric vehicles are expensive to repair. To cushion some of the higher repair costs, the rental giant has taken on more in-house while negotiating cheaper parts. Hertz expects costs to come down over time. However, repair costs have not dropped as quickly as the company expected. In another move to try to limit damage and repair costs, the company transferred some of its electric vehicles intended for ride-sharing to its leisure business.

But this left a glut of unused cars in that segment and reduced revenue. The collapse of used electric vehicle values ​​is another problem. They have fallen about 30% between September 2022 and September 2023. The main reason Tesla, which controls more than 60% of the new electric vehicle market, has slashed the prices of its cars, reducing the value of everything the rest. This is important because approximately every two years, rental companies deliver cars to the second-hand market. Since then, the mSRP of the cars Hertz bought has dropped by about a third. The opportunity to get rid of the car, so to speak, is not really available to us.

And, frankly, it's not one I would accept. There is a positive margin to be made on the existing fleet of cars and we will buy our price down over time as these cars have come down in price. And, by the way, we will buy more than just Teslas. These companies have to report the depreciation of their assets in their financial statements even before selling the car. Falling prices for used EVs therefore hurt Hertz's balance sheets, even for cars still in its fleet. Hertz says that, taking into account depreciation, collision damage and revenue per vehicle, Hertz's fleet of electric vehicles costs the company several points of EBITDA margin compared to ICE vehicles.

Investors are divided over what to do next. Some want Hertz to stop the electric vehicle program or abandon it altogether. Others say Hertz should persist. Hertz CEO Stephen Scherr, who inherited the electric vehicle plan when he took over in February 2022, said on the company's third-quarter 2023 earnings call that he would reduce the share of Teslas in Hertz's fleet. in favor of those made by GM and other legacy automakers. with stronger spare parts and service networks. In its ride-sharing business, Hertz only rents Teslas to more experienced drivers to reduce the likelihood of damage. I have driven a Tesla for the past seven years.

These cars have a lot of power. I'm not going to lie, I almost had two or three accidents when I first bought my Tesla Model 3 because I wasn't used to it. So I think one interesting thing that Hertz is doing now that we've seen is that they actually require drivers to take a minimum number of trips, so you can no longer be a new driver and get into a Model 3, which I think . thinking is intelligent. The cars that Hertz had shifted to leisure, where they languished, are now back in ride-sharing. Hertz's overall rideshare rental business has grown 50% year over year.

The increased demand for ride-sharing has brought the company more revenue per unit, better rented than sitting in the parking lot. And by reducing the oversupply and leisure business, Hertz can resume premium pricing in that segment. We see really good demand, certainly from large travel companies, hotels and airlines, as well as large associations here in North America. And that's a natural organic demand for these electric vehicles that we see emerging. In 2023, it hosted drive-thru events at airports, including Los Angeles International Airport and Denver International Airport. The same thing happens on corporate campuses. The company is also putting together instructional videos and other online content to educate customers about driving electric vehicles.

Yes, Hertz has also taken a leadership role in building charging infrastructure and we've partnered with large energy companies like BP to do exactly that. And the goal is to develop large-scale fast charging for both the public and our own customers. And soon we will see Gigahubs appear in airports like Houston and LAX. Scherr has also said that lower prices for electric vehicles benefit the company in the future as it continues to acquire them. Overall, Hertz isn't exactly having problems. In the third quarter of 2023, it made $2.7 billion in revenue, a record in which the rental of gasoline vehicles, which represent more than 85% of Hertz's fleet, is profitable.

Overall demand was 16% higher than the previous quarter. Operating costs are in line with expectations as inflation begins to decline. Some costs are going down. Billions of dollars of EBITDA in 2023. And they remain solidly positive. And they still generate ample cash flow. They could potentially buy back shares. So it's not about saying, 'Hey, the company is being totally wiped out or anything like that.' It's just obviously limiting profits. Hertz isn't the only company doing well. The entire industry is thriving. The only difference is that competitors don't have the pressure of such a large and struggling EV fleet.

The hope is that its investments now will give it an advantage over its competitors, if and when electric vehicles take off in car rentals. There are reasons to think that this will be the case. It takes at least one or two years to deliver a fleet's electric vehicles. Hertz believes it could keep the cars for 3 or 4 years, so Hertz's competitors won't be able to match Hertz's EV fleet overnight, nor will they be able to immediately match Hertz's investments in infrastructure.