VOLATILITY IN THE USED ELECTRIC MARKET –HOW CAN THIS CHANGE?

The used vehicle market landscape continues to experience significant and enduring transformation. Recent market reports indicate that Europe’s pandemicrelated supply chain disruptions and the ongoing conflict in Ukraine have lost nearly 42 million vehicles over the last three years.

Moreover, consumers’ changing attitudes towards vehicle ownership have substantially impacted financing and leasing, affecting both new and used vehicle markets. We must also consider the potential impact of some OEMs shifting towards the premium segment to boost profitability during the supply shortage. This shift could have significant implications on used vehicle market dynamics for the next five to ten years, with fewer cheaper yet still popular models entering the market.

It is clear that the used vehicle market is in a state of flux, with numerous factors shaping its future trajectory. But above all the factors just mentioned, the single biggest change to the used car market is the rise of battery electric vehicles (BEVs).

Undoubtedly, the supply of BEVs in the used vehicle wholesale market is increasing, and this growth has led to unprecedented levels of volatility and uncertainty, catching many off-guard. While it is true that changes in the used vehicle market historically take time to stabilise, the emergence of the BEV sector adds an extra layer of complexity, especially around managing residual values.

Unlike the development of an Internal Combustion Engine (ICE) vehicle or the facelift of an existing model, the evolution of the BEV sector presents unique challenges for market participants. As a result, effectively navigating this rapidly changing landscape requires a comprehensive understanding of the factors driving demand and supply and the broader trends shaping the used vehicle market.

Incentives are needed to support the used BEV market

The regulations mandating net-zero emissions are the main driving force behind the shift towards BEVs in the new vehicle market. This shift is accompanied by the potential of significant financial costs for OEMs and the need for infrastructure improvements, which are being supported by local governments. However, in the UK, there is a great deal of caution around preowned BEVs, and it’s clear more needs to be done to support consumer and business appetite towards the purchase one.

While some European countries provide generous incentives to encourage the adoption of pre-owned BEVs – such as subsidies of up to €2,000 in the Netherlands, a one-time grant of €1,000 for private individuals in France, and incentives of up to €6,000 in Germany for both BEVs and

PHEVs – the UK currently offers limited support for pre-owned BEVs. Even in the US, the Biden administration has introduced a $4,000 tax credit for the purchase of used BEVs under $25,000, which has led to a significant increase in their adoption.

It is essential that similar initiatives are implemented here to encourage the adoption of used BEVs and support the growth of this market. Until then, there will only be more instability and volatility.

Currently, there is a disparity within the UK, as Scotland supports the transition and preowned BEV market by offering 0% finance. Still, it’s clear that England and Wales need more incentives to encourage used buyers to consider BEVs.

Used Bev Pricing

As the BEV sector continues to evolve with new entrants and innovations, the increasing volume of used electric vehicles entering the market creates uncertainty and volatility around pricing. Although pricing dynamics depend largely on the specific make, model, and derivative, cautionary buying bahaviours by retailers and consumers is common. In addition, the lack of government incentives to support the transition to electric vehicles in the used car market adds further pricing pressure.

As we look ahead, the number of used BEVs entering the market is growing at a faster pace than the development of supporting infrastructure and the 2030 Net Zero deadline. Furthermore, the pricing strategies of Chinese brands entering the UK and Europe still need to be determined, as they prioritise volume market share and disrupt existing brands. Therefore, it’s essential to closely monitor these developments to understand their impact on preowned battery electric valuations and prepare for any future pricing disruptions. In contrast, ICE vehicles will remain in demand for years due to infrastructure challenges, range anxiety, or simply user preference and a reluctance towards the shift to electrification. This will create a valuation imbalance between BEVs and ICE vehicles.

The current state of the electric vehicle market poses a potential risk for the used car sector. Despite the increasing prevalence of BEVs in the UK parc, only 64% of franchise dealers stocked BEVs as part of their used vehicle inventory in 2022, whilst 89% of independent dealers refrained from doing so. This creates uncertainty around the pricing and availability of pre-owned electric vehicles, which could lead to cautionary buying behaviours from both retailers and consumers.

By the end of 2023, more than a fifth of 0-1-year-old vehicles in the UK parc is expected to be a BEV, and this figure is projected to increase to 41% for 1-3-year-old cars by 2027. To keep pace with this rapid market shift, the sector must prioritise education, knowledge-sharing, and legislative measures to support the ownership and stocking of pre-owned electric vehicles.

Without collaborative efforts to improve awareness and infrastructure, the used car sector risks falling into a ‘valley of death’ where the new market moves faster than the appetite for pre-owned BEVs.

Cox Automotive Used Car Forecasts

Building on recent used car figures, the market factors described in this article, and in line with previous Cox Automotive forecasts, we have adjusted our used car registration forecasts for 2023. Our forecasts are broken up into three scenarios –upside, baseline, and downside – each with its justification below. The baseline is, we believe, the most likely scenario to materialise.

Upside Scenario

y The increased new vehicle productivity immediately impacts used vehicle supply and the consumer and business confidence recovery.

y Agency model shift creates a positive ecosystem for the relevant OEMs’ used vehicle retailers.

y As with new, the recent government and Bank of England measures have an immediate influence on stabilising and reducing inflation and the cost of living.

Baseline Scenario

y The market experiences a stable but slow consumer and business confidence recovery, with little significant shift.

y Economic headwinds remain consistent throughout the remainder of 2023, and any notable recovery is not seen until early or mid-2024.

y Consolidation and acquisition positively impact the transactional used vehicle market, while retail pricing remains unaffected by the rise in interest rates and household expenditure.

More Insight From Cox Automotive

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Downside Scenario

y The headwinds of the broader economy, cost of living pressures, and the energy crisis continue to intensify, creating a challenging business environment for the automotive industry.

y The shift away from used vehicles and back to new ones becomes even more pronounced as the oversupply of new vehicles leads to heavy discounting, further eroding the value of used cars.

y Despite an increase in vehicle production and registration activity, the used vehicle wholesale sector remains stagnant due to the oversupply of older models and a lack of demand, exacerbating the supply and demand imbalance and making it difficult for dealerships to move stock.

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