ALL-ELECTRIC CAR LEASING CHAIN

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1 ALL-ELECTRIC CAR LEASING CHAIN Since most car holders will change cars before the car s end of life, i.e. sell it if they own, or lease another if they lease, the car s residual value is crucial for most customers. This applies regardless of whether they buy or lease their car. The depreciation is a substantial part of a car s mileage cost particularly for newer cars. One hindrance for the commercialization of electric cars is the uncertainty about their residual value which translates to an uncertainty about mileage cost. This currently depends both on the lack of used electric cars on the used-car market, and also on the uncertainty regarding the expected useful lifetime of the expensive batteries. One way to reduce the uncertainty is to own the car until its end of life. Most private households are uninterested in such commitments. In fact, a growing share of households finds car ownership less and less interesting and offers for private leasing of cars are instead increasing in popularity. If a leasing company owns the electric cars until their end of life, the residual value becomes less of an issue.

2 THIS IS HOW IT WORKS In the all-electric car leasing chain the car is leased on a scheme that either ends before the battery warranty ends, or, if replacement batteries are available, can last significantly longer. An alternative, especially if the battery can be replaced, is to eventually sell the car on the global used car market. The all-electric car lease chain offers operational lease of all-electric cars in several steps until the cars end of life. The operational lease offer includes all service and repair for the car. A customer can chose where in the lease chain they want to be, and for how long, and the customer s lease payments will be based on the current age and mileage of the car. Car customers have very different preferences. Car rental companies lease new cars which they use in their operations during a relatively short time period (about months). A large group of private customers are interested in nearly new cars and are prepared to pay a bit extra for a car of this status compared to what families are prepared to pay for a second car. There is also a group of customers who may well consider driving an older car, as long as it is carefree and cheap. This differentiation in preferences ensures that there is a customer base large enough for each of the steps in the leasing chain. There are three main parameters that make or break the business case for all-electric car leasing compared to leasing of an internal combustion engine (ICE) car. The parameters are purchase price, residual value, and mileage fuel cost. Hitherto, all-electric car leasing has been less interesting for customers since the purchase price has been high, the residual value low. Mileage fuel cost has been low, but not sufficiently low to get a break even annual mileage of relevance for any large customer segment. By letting the leasing company own the car until its end of life only purchase price and mileage fuel cost remain in the calculation; the uncertainty of residual value is removed. Since the leasing company owns the car during its entire lifespan the company can set the residual value of the car themselves after each step in the leasing chain. This way the company can design a deprecation curve of the car that makes the leasing fee for each step of the leasing chain competitive to leasing a corresponding ICE car. All-electric cars are expected to need less service and fewer repairs when getting older compared to ICE cars. It might even show that operational lease for used cars will only be offered for all-electric cars due to service and repair cost levels and risks for older ICE cars. If so, that can be a significant and lasting advantage for allelectric cars in the lease market. In that case, this business model has the potential of providing a very unique and attractive value proposition for a customer segment that is growing with time and consumer generation. The leasing chain business model has been developed with all-electric cars in mind although it may be of value also for plug-in hybrid electric cars and range extenders. The all-electric car is advantageous by that it does not have to be refueled, it is conveniently charged at home. The marginal cost for an additional km is also very low, which often leads to that the all-electric car, even when it is intended to be a second car, is used as a first car. if the business is viewed from above, battery technology improvement will also lead to decreasing prices on new all-electric cars relatively to ICE cars. So even if the profitability of one specific all-electric car will go down, the profitability of another, newer all-electric car will go up. Illustrations: Johanna Svantesson

3 BUSINESS MODEL IN DETAIL In this section the all-electric car leasing chain is described based on the business model canvas 1 developed by Osterwalder et al. CUSTOMER SEGMENTS CUSTOMER RELATIONSHIPS KEY RESOURCES KEY ACTIVITIES There are two principal customer segments for the all-electric car leasing chain; businesses, like car rental companies, carsharing companies, providers of company cars etc., and private households. Businesses are primarily interested in the first step of the chain and reasons for their interest could be that they by using allelectric cars enhance their image as environmentally friendly companies. With this business model they can do this without sacrificing profitability and by using the same terms as for ICE cars. Offering all-electric cars might also attract the segment of consumers who wants to try new technology without having to make a commitment. Although some of the private households are interested in leasing a new car, it is the latter steps of the leasing chain that most of them find interesting. Used car leasers are preferably car commuters with more than one car in their household, who normally buy used cars, and preferably commute km or more per year. Advantages that private households can get from leasing an all-electric car are that the monthly cost of the car is fixed and known, also for a used car, they don t have to sell the car or take any financial risk and they are relieved from the curse of car ownership. By leasing a used all-electric car, the household can contribute to the future of their kids and the environment and this at the same or lower cost as for a corresponding ICE car. The customer relations are the same as for leasing companies today. It is possible that the leasing company doesn t have any previous relations with the private household customer segment interested in used-car operational lease, since that seems to be an unexploited market, but that shouldn t be too much of an issue given the company s close relation to the car OEM and related sales organizations. KEY PARTNERS A car manufacturer who wants to use this channel as a means for faster commercialization of their electric cars could constitute a key partner in this business model. COST STRUCTURE Typically, the cost sources will be the same as for traditional operational lease, but the structure of the costs will be different, i.e. different amount per source than for operational lease of ICE cars. The main costs will come from car purchases, car maintenance, insurance and other services that the leasing company is prepared to include in the operational lease offer. Key resources in this business model are the same as for other car leasing companies. Possibly a database for statistics on for example battery use and status could complement the key resources. DISTRIBUTION CHANNELS The cars and any other possible parts of the value proposition are distributed through the same channels as leasing companies use today. REVENUE STREAM The main revenue comes from leasing contracts. An additional revenue stream may be possible from selling battery data and possibly from using the car as an advertisement platform, but these additional revenues are not included in the calculations made for this business model. Key activities for the leasing company are primarily the same as today. There may however be an additional value in collecting battery-, use-, and charging statistics for key partners to use in the learning process for this relatively novel technology application. The value of that information is currently unknown and treated as a bonus. VALUE PROPOSITION The value proposition of this business model should be compared with leasing of an ICE car on a per-km basis since the financial lease cost will be higher. However, together with running costs the total cost of the allelectric car becomes much more comparable, even lower. A new car can be leased by car rental companies, carsharing companies and other new-car lease customers at about the same price and on the same terms as comparable new ICE cars when comparing the total mileage cost. A second, third and possibly fourth rental scheme is then designed for the private household customer segment. The older the car, the more economical is the all-electric car compared to a corresponding ICE car. After three to five leasing sequences, the car is 8 years old; its economical residual value is estimated to zero, and typically the battery warranty period ends. The car and battery may have residual values above zero, which in that case will improve the case economically. 1 Available at (read )

4 BUSINESS MODEL SENSITIVITIES BUSINESS MODEL DEVELOPMENT The strength of the all- electric car leasing chain business model will mainly depend on the gap in mileage fuel cost, purchase price, and in service and repair costs relative to ICE cars. Of these, it is only the purchase price that currently is unfavorable for all-electric cars. Purchase prices of all-electric cars are expected to decrease due to annual battery improvement and this will improve this business model s competitiveness relative to ICE car lease. The all-electric car leasing chain also becomes more and more competitive for the customer as the car becomes older. This is due to the relatively lower influence of the higher initial purchase price. The business case also improves for the customer with a higher annual mileage, which is because of the lower energy cost for an all-electric car. However, a high annual mileage gives a higher depreciation since the battery warranty ends after a certain mileage. It is also important that the fuel price gap remains. The larger the price gap between electricity and petrol/diesel is the better it is for this business model. ICE cars are expected to become more and more fuel efficient, not least in Europe because of EU s ambitions on reducing CO2 emissions from cars. This is a potential threat to the viability of the business model. Battery technology improvement might make it difficult for the leasing company to set the residual values within the leasing chain exactly at the optimal levels. However, if the business is viewed from above, battery technology improvement will also lead to decreasing prices on new all-electric cars relatively to ICE cars. So even if the profitability of one specific all-electric car will go down, the profitability of another, newer all-electric car will go up. This business model is developed within the BeliEVe project (Business model innovation for Electric Vehicles). More information about the project can be found at Initially, this business model had a focus on the car rental business. The overall idea was that if all-electric cars could take a substantial share of the annual flow of rental cars in Sweden, they would quickly enter the usedcar market (within 18 months) and hence both become common on the market and help establish a used-car value both important issues for quickly commercializing electric cars. Interviews with rental companies revealed that the residual value that leasing companies were prepared to set on allelectric cars after months made the business case very unprofitable. This gave birth to the leasing-chain idea that would eliminate the residual value issue. Another obstacle was trickier: Car rental customers normally have specific objectives where the rented car is one means to achieve the objective. The customer doesn t want any perceived additional risk and therefore tends to avoid new technology and other disturbing issues that may cause range anxiety, uncertainty about how to charge/ fuel, where to do it and so forth. Therefore the car rental companies don t believe there will be any great demand for all-electric cars. Plug-in Hybrid Electric cars and Range Extender cars may be demanded if price competitive. The business model therefore evolved to focus less on car rental. It doesn t matter who is the first customer in the leasing chain. It can be a private household who wants a new car; it can be used as a company car, a rental car or a car in a carsharing service. The only thing that eventually matters is that the cost is competitive to that of a comparable ICE car.

5 SPONSORED BY: VIKTORIA SWEDISH ICT AB LINDHOLMSPIREN 3A, SE GÖTEBORG, SWEDEN