This article is reproduced from the Autocarweekly public account.
Author: Financial Street Lao Li
In the field of secondhand electric vehicles, there are many people who have seen it, but few understand it. “In the Flower Town, the annual transaction volume of second-hand cars is between 300,000 to 400,000. Before 2020, there were almost no private electric vehicle transactions, and we didn’t dare to accept them due to the scarcity of the vehicles. But now, we are taking a bold move and starting to accept private electric vehicle transactions. The profit is still much better than for gasoline-powered cars, but now we are worried about battery problems.” This is the response from a used car dealer in Flower Town, Beijing, during Lao Li’s research on the second-hand car trading market last week. This shop is one of the few in Flower Town that specializes in accepting second-hand electric cars and has achieved profitability.
In Tianjin, which is adjacent to Beijing, Lao Li also communicated with the local automobile circulation association. The person in charge said: “Before 2019, the residual value of electric cars was very low, and only a few cars could be found in the entire Tianjin market. Starting this year, the monthly transaction volume of second-hand pure electric cars in Tianjin is about 70 to 80 units, mainly from economic brands. Private sources account for about 50% of the monthly transaction volume, fluctuating up and down, and this proportion will certainly increase next year.”
Over the years, people’s impression of second-hand electric cars can be roughly divided into two categories: the first is complete ignorance, and the residual value was never considered when buying a car; the second is aware that the residual value is very low, but they do not care because they are not short of money. The market is always changing. Recently, Lao Li visited many car companies, industry organizations, and second-hand car trading markets because of his interest in the second-hand electric car project. Lao Li himself is also an electric car owner. Today, let’s talk about why the residual value of our electric cars is low and when our cars will become valuable.
An imminent market with a still chaotic system
Everyone is familiar with the traditional second-hand car market, characterized by one word: chaos.
A senior industry insider told Lao Li that the reason why the second-hand car industry is chaotic is because the entry threshold is low, there are many local snakes, and the industry has almost no honesty. Therefore, neither Guazi nor Ershouche can unify this market. In 2020, the total transaction volume of China’s second-hand car market reached 14 million vehicles, and no single independent legal entity had a market share of more than 5%. The total trade volume of offline stores concentrated in Beijing Flower Town was only 400,000 units, and the peak transaction volume of the online e-commerce giant Guazi was only slightly more than 300,000 units. The remaining tens of millions of units were divided among small car dealers scattered throughout the country.
## Introduction
As a translator in the automotive industry, I am responsible for English translation, spelling proofreading, and wording modification. Here is the improved version of the original Markdown text below.
When people go to the automobile city to check out new cars, there are always many people holding signs that read “buying cars at a high price” on the roadside. They are the used car dealers who widely exist across the country and constitute the largest foundation of China’s used car industry. Senior Li truly understands the meaning of “many small make a great.” Earlier, Senior Li visited some investment funds for second-hand car e-commerce, and everyone generally agreed that this market is really difficult to do. Even with great strength, it is still unable to compete with tens of thousands of family-owned stores.
For more than a decade, traditional second-hand cars have formed a relatively complete industrial chain, but pure electric second-hand cars are completely different. They are more confusing than traditional ones, and whether you are a user, a small dealer, or a large dealer, there is no set of universally recognized methods for valuation.
When Senior Li was visiting the Flower Village, many car dealers said that they did not refuse to buy second-hand new energy vehicles, but they were afraid to do so. Traditional second-hand cars can be checked through experience or small instruments such as flaw detectors. However, these methods cannot deal with power batteries.
A car dealer in the Flower Village told us, “Currently, we have no way to evaluate whether the battery will explode or to assess the performance level of the battery. Last year, a store across the street received a car, and the customer’s vehicle caught fire in less than a few days after the purchase, and they are still in a lawsuit.” When leaving, the car dealer boss added that this market (pure electric used cars) will become bigger and bigger in the future. He hoped that automakers or industry institutions could help find ways to test battery performance.
How do car dealers making profits from used electric cars determine the state of batteries? According to two profitable electric car dealers in the Flower Village, they mainly rely on gambling now. They only buy non-operational vehicles after 2019 and earn the price difference from the market perception. For example, models like Guangzhou Automobile Aion S can make six or seven thousand when in good condition, which is impossible to achieve with traditional cars. They are also afraid of lawsuits, but there are also many lawsuits for gasoline cars in the Flower Village. They believe that since lawsuits are inevitable, it is better to make more money instead.
Car dealers make more profits from electric vehicles mainly because the residual value of these cars is low when purchased and sold at a high price.
There is a story behind the low residual value. Before 2019, 30% of the residual value of the three-year operating electric vehicles could not be reached. The main reasons were: First, most of the electric vehicles before 2019 were gasoline-to-electric vehicles, with short endurance and poor condition. Second, the update speed of pure electric vehicles at that time was very fast. After the endurance was improved, old cars could not sell for a good price, and the residual value was naturally low.The used car dealers in Huaxiang said: “A class A electric car that cost 180,000 yuan new will only be worth a fraction of that after three years, and it’s not even guaranteed to find a buyer.” Therefore, before 2019, the private pure electric used car market was in a dire situation where “car owners don’t want to sell, dealers don’t want to take them, and nobody wants to buy.”
Since 2019, the situation has changed. From the end of 2019 to now, the range of economical electric cars has remained stable at 450-550 kilometers, and the condition of the cars has improved significantly compared to before, resulting in a gradual increase in residual value. However, the overall residual value is still not high, with three-year-old cars stabilizing at around 50%. Some dealers’ profit strategy is as follows: when buying cars, they use low residual value and unsafe batteries as reasons for making lowball offers, but when selling cars, they use the battery as a guarantee and raise the price.
The person in charge of the China Automobile Circulation Association told Lao Li: “Traditional used car industry has developed rapidly in the past decade, and policies have been continually improved. In the past, there were restrictions on the number of vehicles that could be transferred between provinces, but now they have been opened through pilot programs. This means that the national automotive inventory can now move around more easily, which is certainly a boon for the used car market.” But faced with an anarchic market system, they don’t have many solutions. Despite consistently advocating for regulation and oversight, the healthy development of the pure electric used car industry can only be pushed forward by sound guidance and regulation in the market.
Who Can Win the Electric Car Valuation Game?
In the traditional used car market, it is often said that there are no unsuitable vehicle conditions, only unsuitable prices.
Equitable pricing is the principle of used car transactions and the foundation upon which the used car industry has been allowed to develop freely over the years. There are now several companies in the industry that use pricing algorithms for traditional used cars, with well-known companies such as Jingzhengu under Yiche, and Car300 in Nanjing, among others. Each company’s pricing method is similar: the company establishes a database that integrates transaction prices, vehicle condition information, etc. from various used car platforms. Based on big data, the company creates a pricing algorithm, and after the user enters their vehicle’s VIN code, the company is able to provide a market reference price.
This method works well in the traditional used car industry, but it doesn’t work for the electric car industry. Lao Li learned from an industry veteran during research that everyone in the industry knows the pricing method for gasoline-powered cars is not suitable for electric cars. However, there is no specialized valuation method for electric vehicles in the industry, so everyone has to use the same method.Why does the traditional car pricing method not work for electric cars? The main reason is the battery problem. Traditional used cars are relatively easy to determine the condition, and after experience and equipment judgment, the pricing offered by the transaction platform is generally close to the fair value recognized by the public. The valuation model of the valuation enterprise is based on the transaction platform, so the price given is naturally not far from the fair value.
However, electric cars are different because it is difficult to judge battery performance, and with a small transaction volume and less experience, different dealers will give a huge difference in valuation for the same car. Naturally, the estimated price will not satisfy buyers or sellers. In addition, valuation companies do not have access to battery data and cannot judge the condition of the battery. If the initial data source is inaccurate, no matter how advanced the model is, the estimated price will not be accurate.
Guazi, the largest platform in the used car e-commerce industry, has not been involved in the electric car business mainly because it is difficult to evaluate the true performance of electric cars. Dealers are also unwilling to deal with electric second-hand cars for the same reason.
A Guazi representative said: “The most important thing for electric car transactions is to establish an industry-recognized residual value evaluation system for electric cars, and be able to demonstrate the condition of the car in multiple ways. Currently, for consumers, manufacturers, and used car dealers, electric cars are still new, and there is no unified testing standard or price reference system for batteries. There are potential risks such as fire after sales, so both used car dealers and large platforms like us are not willing to offer higher prices, and even refuse to buy.”
Some car sellers are also suffering. Many used car dealers have tricks up their sleeve during transactions. They first use the industry rule “bought at 100,000 this year, sold at 50,000 next year” to deceive customers. They also use battery decay theory to bargain. Battery decay theory is as follows: Generally speaking, the decay of battery performance is a long tail curve, and the decay rate is relatively fast in the first three years, gradually decreasing afterwards. After five years, the decay rate of battery capacity is usually only about 1% per year.
However, in actual use, the influence factors of battery capacity are diverse, such as temperature, charging and discharging methods and frequency, and user driving habits. Many users have expressed that the range of their vehicles has not decreased significantly after one year of use, but they cannot provide an industry-recognized report, so some customers are at the mercy of the car dealers. Some dealers in Tianjin said that the profit margin for electric second-hand cars in the Tianjin market is much higher than that of fuel cars. The profit margin for fuel cars is generally about 5%, while they can get more than 10% in electric car transactions, as long as there are no safety issues. It is a profitable business.In Li’s view, there is no reference model for pure electric second-hand cars, and both automakers and car dealers are “feeling their way” forward. However, in the process of incremental development of electric second-hand cars, a set of recognized rules will definitely be formed.
Where Are User Rights and Industry Future Heading?
To achieve long-term development, pure electric second-hand cars must become a regulated business. Ensuring the condition and safety of the vehicle is essential. Both automakers and car dealers want to increase residual value, while the buyers of used cars are willing to decrease residual value. Finding a balanced price between the two is crucial.
Some industry experts’ opinions also confirm Li’s viewpoint. The China Automobile Dealers Association experts stated that the current lack of a regulatory system in the electric second-hand car industry is an issue. However, nobody can develop a regulatory system. Neither industry institutions nor automakers have the resources to promote healthy industry development.
Some automakers have taken action concerning residual value in the past few years. Through official certification, exchange, and repurchase policies, the manufacturers increase the vehicle’s value and provide new buyers with confidence. At the same time, through the aftermarket valuation, they strengthen customer stickiness and loyalty.
The earliest corporation to engage in the second-hand car business was Tesla. Tesla carried out official certified second-hand car business, but then “flipped the car” due to its lack of experience. Among the new forces, WM and XPeng have developed more steadily. Apart from learning from Tesla’s official second-hand car certification, WM has released a repurchase plan. After car owners purchase this service, they can enjoy a depreciation of 61.8% within three years, and the difference will be compensated by the official. XPeng’s G3 model also introduced a policy of 3 years and 6 times the residual value of repurchase, and the difference between the original and the current price will be compensated by the official. Among traditional manufacturers, Geometry Automobile even launched a policy of repurchase at a 30% discount, and if the repurchased model is still a Geometry model, the new car can continue to enjoy a discount of 30%.
However, these policies are only expedient measures. Automakers subsidizing users cannot fundamentally solve the problem, nor is it easy to operate in the market. Although automakers have high technical capabilities and a large amount of data to do vehicle inspection and pricing, the problem is that certification of the automaker’s second-hand car prices is usually high, resulting in a lack of price credibility. Even if automakers set prices objectively and impartially, users still believe that prices are inflated or the vehicle condition is not real. Therefore, automakers are struggling to make this business profitable.
Some start-ups also want to enter this field, but not everyone can benefit from electric second-hand cars. Only a few start-ups can do power battery detection. Some investors told Li that their traditional car valuation companies incubated could solve this problem, except for the power battery issue.
In the past, as product technology continued to iterate and new cars with better performance and higher cost-effectiveness emerged, it was difficult for the pricing system of used cars to stabilize. Consequently, there would be a chain reaction of excessively high turnover rates and unstable pricing of used cars, which was inevitable.
Now, from the perspective of electrification, pure electric vehicle products have gradually entered a stable stage, but they are still far from reaching high volume. Following a 2-3 year conduction effect, the residual value of new energy used cars will truly be recognized by everyone starting from 2022. Before that, whether an enterprise can step forward to solve the issue of battery evaluation is crucial for the healthy development of the industry.
As an ordinary user, being anxious cannot solve the problem. Waiting is the best solution to the problem.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.