Sustainable Column | Climate Issues Defeated? Tesla's Largest Customer Returns to Combustion Vehicles

Walking a tightrope between a beautiful and grand moral vision and the realities of a free micro-market, the issue of climate change has always been delicately balanced. The consensus reached at COP28 not long ago, heralding the "beginning of the end of the fossil fuel era," must also withstand the immense test of commercial logic.

Yesterday, news broke that Hertz Global Holdings, Inc., Tesla's largest customer and a strong advocate for electrification in recent years, plans to sell off one-third of its electric vehicles.

Hertz Global Holdings, Inc. has decided to use the proceeds from the sale of these 20,000 electric cars to purchase more gasoline-powered vehicles. This move by the largest car rental company in the United States to reinvest in fuel-powered cars inevitably puts the climate change issue in an awkward position.

In 2021, Hertz Global Holdings, Inc. enthusiastically purchased 100,000 cars from Tesla and planned to buy up to 65,000 electric vehicles from Polestar over the next five years. However, all of this now seems to be quickly dissipating.

In a filing submitted to the U.S. Securities and Exchange Commission, executives candidly stated that electric vehicles have been detrimental to Hertz Global Holdings, Inc.'s financial condition. Despite lower maintenance costs, the high cost of repairs and damages has resulted in a depreciation of $245 million.

This seems to highlight the dilemma of the climate change issue: if it is solely driven by top-down policies and moral pressure, it is more likely to lead to poor financial consequences for companies.

Unsustainable "Money Pit"

Having such a large fleet of electric vehicles in Hertz Global Holdings, Inc.'s rental fleet seems to be turning into a massive money pit. When explaining the reasons for scaling back the plan, CEO Stephen Sherrill stated that electric vehicles have repair and maintenance costs that are approximately twice as high as those of traditional internal combustion engine vehicles. This clearly provides the most direct strategic drive for profit-oriented companies.

Of the 100,000 Tesla vehicles acquired by Hertz Global Holdings, Inc., half were planned to be allocated to Uber drivers as part of a deal with the ride-hailing company. While drivers welcomed the Tesla vehicles, they also tended to drive them underground. Industry insiders analyze that this higher utilization rate could lead to significant damages—certainly more than Hertz Global Holdings, Inc. anticipated.

On the other hand, the decline in prices of electric vehicles in the new car market has also depressed the resale value of Hertz Global Holdings, Inc.'s used electric rental cars. **Currently, Hertz Global Holdings, Inc.'s used car page is flooded with Teslas, making it a good time for consumers in the market for a used electric vehicle to visit the Hertz Global Holdings, Inc. sales page. The price of the Tesla Model 3 is as low as $20,000, the price of a used Chevrolet Bolt is $21,000, and the price of a BMW i3 is slightly below $17,000.

Electric vehicles account for about 11% of Hertz Global Holdings, Inc.'s rental fleet, with Tesla alone accounting for as much as 80% of Hertz Global Holdings, Inc.'s electric vehicle fleet, making the relationship between Tesla and Hertz Global Holdings, Inc. very delicate.

"The suggested retail price of electric vehicles in 2023 has dropped, mainly driven by Tesla, resulting in a lower fair market value for our electric vehicles compared to last year, which in turn leads to greater losses and burdens." said Sheryl.

Tesla has indeed been leading the trend of significantly reducing car prices, causing other automakers to adopt the same approach to their electric vehicles. When automakers lower the prices of new cars, it depresses the value of these models in the used car market, leading to rapid depreciation.

For rental car companies like Hertz Global Holdings, Inc. that sell a large number of vehicles in the used car market, depreciation has a significant impact on their business and is a major factor in determining which cars are in their fleet.

The timing of Hertz Global Holdings, Inc.'s purchase of electric vehicles was not good and was the main financial consideration for this dramatic "turnaround". They bought Tesla vehicles at the highest price just before Tesla started significantly reducing prices to create demand in the face of rising interest rates, resulting in a sharp drop in the value of Hertz Global Holdings, Inc.'s Tesla fleet.

In addition, Sheryl also pointed out in a recent analyst conference call that Tesla's aftermarket for parts is not mature enough. As a relatively new company, Tesla does not have as many replacement parts and well-trained repair technicians as other automakers, which increases the cost of repairs and reflects the potential financial difficulties of hastily betting on emerging technologies from another perspective.

How to organically integrate climate issues into business propositions is still a "fundamental question".

The Real Logic of Demand

Hertz Global Holdings, Inc. once envisioned itself as an electric vehicle broker, ambitiously providing battery-powered cars to business travelers, ride-hailing drivers, and tech enthusiasts, injecting momentum into the electric vehicle revolution. However, the weak demand has dramatically changed its attitude. The fact that the demand for electric vehicles in the United States is declining is undeniable. The growth in electric vehicle sales slowed significantly last year, with only a 1.3% increase in the last quarter. The reason for this is that consumers are deterred by the high cost and interest rates. Xie Er also stated, "The rising costs associated with electric vehicles continue to exist." "The fact proves that efforts to solve this problem are more challenging."

Recently, when asked about the challenges faced by electric vehicles, such as the sluggish demand in the US market, Toyota's Chairman, Akio Toyoda, also stated that the automotive industry is gradually realizing that there is no single answer to reducing carbon emissions.

Although Akio Toyoda has always resisted full electrification, the current reality is that as the uncertainties of the electrification transformation increase, some multinational automakers have decided or are considering extending the production and sales time of fuel vehicles while slowing down investments in the field of electrification. According to reports, General Motors plans to extend the production time of its most profitable fuel trucks and SUVs by 10 to 12 years.

Despite the Earth continuously breaking temperature records, the replacement of pure fuel vehicles with new energy vehicles is likely to be a lengthy process. Taking the United States as an example, Americans have a lasting love for large vehicles. When gasoline prices began to soar in the mid-2000s, this relationship became unstable, leading to the entry of small, fuel-efficient cars such as the Ford Fusion, Chevrolet Cruze, and Honda Fit into the US market. However, from 2015 to 2022, gasoline prices remained low for a long time, reigniting Americans' enthusiasm for high-consumption vehicles. It may be too idealistic to expect the power to abandon fuel vehicles to come from consumer awareness.

From the perspective of carbon costs, there is a huge gap between electric vehicles and fuel vehicles. According to the carbon emission factor calculation recommended by the IPCC, the carbon dioxide emissions per liter of diesel and gasoline are 2.74 kg/L and 2.47 kg/L, respectively, while the carbon dioxide emissions per kilowatt-hour of electricity generation are 0.61 kg.

Unfortunately, consumers are reluctant to pay solely for carbon reduction. "Hertz Global Holdings, Inc. has learned a painful lesson. In many 'blue cities,' attempts to electrify public transportation have encountered many obstacles, including battery depletion in cold weather and difficulty finding available or convenient chargers. In San Francisco, a recent electric bus lost power while trying to climb a hill and rolled back into nine cars at the foot of the mountain." A recent article by an observer of the US automotive industry analyzed.

A more reasonable and solid business logic may be that technology has been improved, manufacturing has become more efficient, and costs have been reduced, which will ultimately convince most people that this investment is worthwhile, rather than companies or government agencies trying to force-feed a new technology to consumers.