EVs Reach Mainstream In 2020 ALG Residual Vale Awards, Analysis

Honda and Land Rover were the mainstream and luxury brand winners of the 20th annual ALG Residual Value Awards announced at the Los Angeles Auto Show during the week. But those results and the list of the 27 segments that are projected to hold the highest percentage of their Manufacturer’s Suggested Retail Price after a three-year period, while important, are not nearly as telling as the market shift that the awards and accompanying analysis help quantify.

The revolutionary slide from cars to trucks over the past decade is well-chronicled in the residual value data. And since residuals are, almost counterintuitively, designed to predict the future, they also give a hint as to whether another tectonic market shift is imminent or whether the market represents a new normal. Taken over time they certainly paint the picture of a market taking a hard right turn.

“It was really disruptive when the consumers decided about 2015 they wanted utility vehicles on the new-car side,” Eric Lyman, chief industry analyst at ALG, the source of the study, told forbes.com. “Automakers started to shift production more toward the utilities, but the the used market is fixed up based on historical sales. Consumers they decided we want more utilities, but the market was flooded with passenger car sedans and coupes and there was a big shortage of utilities and trucks. So you can guess what happened. We go back to economics 101. The passenger cars and sedans really tanked and the used-car market dropped precipitously.”

Is the market still on that path? Or are we likely to see a swing back to passenger cars? Lyman expects neither. He looks to the current new-car divide of about 30% passenger car and 70% “truck,” which includes the ever-popular SUV as the new watermark.

“We’re now reaching sort of maturity where the supply is starting to reflect that 70-30 split, so [used-vehicle] values have kind of normalized their back to where they were. Trucks are still high at 58 percent forecast. There’s still a lot of demand, but we’ve seen some recovery and normalization. So passenger-car values have recovered because of the pullback in production.”

As we look toward 2020, Lyman expects that as the new-vehicle market flattens as it is now, the used-vehicle market will also flatten and values will fall off but not go over the cliff.

“If you if you produce more than consumers want, you have to discount it through incentives,” he said. “And right now in our forecasting model, incentives are the biggest driver putting pressure on declines in in vehicle values. In the past few years, it’s been supply. We’ve been ramping up in terms of the [used-vehicle] supply of vehicles, selling 17 million vehicles a year. That’s a very healthy number historically. And now that’s sort of smoothed out.”

New-car incentives put price pressure on used vehicles for at least two reasons. First, based on robust incentives some used-car buyers instead choose a new car. Further down the road, new cars bought with strong incentives were typically purchased less expensively than they otherwise would have been, and that  means they are more likely to be worth less one, two and three years later.

Meanwhile, it is likely the industry will oversupply at retail in 2020 with the consequential downward pressure on vehicle values.

“There are going to be more vehicles produced than the natural demand would would allow,” Lyman said. “And so the natural result of that is more incentives. We’re expecting those to continue to creep up. Transaction prices are going up, too. But incentives are also going up and we expect that to continue. And that’s the single biggest factor that we’re looking at right now.” 

From a business side, in terms of transaction prices the used-car market will be softer next year, while from the consumer side, used cars will be less expensive and potentially better values.

When it comes to residual values for individual vehicle types the most problematic to predict have been the battery-electric vehicles. Not only have they been sold in very low volume, but the vast majority of those sales were in some ways government-subsidized. That can play havoc with both price and demand predictions, but Lyman says the ability to create valid residual values in that area is improving. Further, the residual performance of EVS like Tesla Model 3, Nissan LEAF and Chevrolet Bolt seem to be on a uptrend. 

“In terms of residuals on a dollar basis — we’re looking at just pure dollars — we actually see that electric variants are at parity with their gasoline counterparts. That’s a big change from a few years ago,” he said. “We had an oversupply of electric vehicles, especially the first-generation vehicles that had maybe 80 miles of range. There just wasn’t enough demand to sustain the price so value fell off precipitously.”

Now, as more EVs enter the market equipped more in keeping with consumer desires, we should see a normalization in used electric-vehicle values.

“I think as we start to see those federal tax incentives start to pull out of the market, as we’ve seen automakers rightsize their production, as we see more EV utility vehicles be introduced with the utility body style that consumers are looking for, we should see continued growth in EV.”