Why It Makes Sense for New EV Drivers to Look Beyond Tesla

For consumers, it makes a lot of sense to lease an electric vehicle instead of buying one. For the companies on the other side of the trade, not so much.

A full 59% of the EVs sold through U.S. dealerships in December were leased rather than bought outright, according to the data provider Edmunds—the highest share in three years. Importantly, that calculation excludes the market leader Tesla, which sells directly to consumers. Its leasing share is at the other end of the spectrum: It fell to 2% of deliveries in the fourth quarter, the lowest in at least four years.

Leasing—whereby cars are essentially rented out, typically for three years—is a natural fit for EVs, at least from the consumer’s perspective.

Recent headlines about frozen charging stations, buggy software in the new Chevrolet Blazer EV and production cuts for Ford’s F-150 Lightning all highlight the appeal of trying the new technology before buying. Leaseholders are protected from unexpected depreciation, a concern with any novel product. And the tax credits introduced as part of President Biden’s Inflation Reduction Act exempt leased EVs from onerous conditions otherwise necessary to qualify.

Leasing was also popular before the pandemic with the few EVs not sold by Tesla, according to Edmunds’s data. That changed when high-profile models such as Ford’s Mustang Mach-E came out and a semiconductor shortage severely limited the number of vehicles on dealer lots. Consumers had to stump up cash to secure any new vehicle, including an electric one. Now, the market is getting back to normal, with tax credits adding an additional impetus to EV leasing.

Yet what is good for consumers isn’t necessarily good for the industry. While manufacturers benefit from the government subsidies and having an easier sales pitch for their products, the depreciation risk they are taking on should give investors pause.

The average residual-value assumption baked into dealerships’ EV leasing contracts has risen in recent years and stood at about 55% of the manufacturer’s suggested retail price in December, according to Edmunds. But EV values have fallen over the past 12 months as Tesla has cut prices aggressively, forcing others to follow suit. That means companies may end up taking back leased EVs at lower valuations than they were counting on. The captive financing operations that contributed so much to the industry’s profitability during the pandemic could have to swallow write-downs.

Tesla, which doesn’t have a banking arm like the traditional automakers, might intentionally be offering uncompetitive leasing terms so it doesn’t have to shoulder the residual-value risk within its core business. “I think that they’re trying to deter people from leasing because they know the residuals are going to be atrocious,” says Edmunds’s director of insights, Ivan Drury.

The irony is that Tesla chief executive Elon Musk has long argued that Tesla could become more valuable over time because of self-driving software updates issued over the air. It hasn’t worked out that way yet.

Traditional carmakers, particularly those from Germany, protect residual values carefully in an effort to build trust with customers and improve the leasing math for their financing operations. Luxury vehicles can end up costing consumers surprisingly little if they can count on strong valuations in the secondary market. With its highly visible price cuts, which have continued this year in Europe and China, Tesla is pursuing a different approach to making its vehicles more affordable—one that comes at the expense of existing Tesla owners and makes the brand harder to lease.

It may be a reason for those consumers still interested in trying out an EV to look beyond the U.S. market leader.

Write to Stephen Wilmot at [email protected]