Supplementary evidence from SMMT (ELV0134)

Inquiry into Electric Vehicles

Additional Evidence from the Society of Motor Manufacturers and Traders (SMMT) following Oral Evidence provided on 6 September 2023

Further to the evidence provided to the Committee by SMMT’s Chief Executive Mike Hawes in an oral evidence session on 6 September, please find within SMMT’s response to the extra questions posed by the Committee.

Could you expand on the meaning of ‘getting the second-hand market to work’ for EVs. Is that around reducing the cost of second-hand cars, increasing the availability of second-hand cars or addressing barriers to people’s trust in second hand vehicles?

It is necessary to see change across all three of those aspects of the second-hand market for electric vehicles (EVs). Currently, new EVs are more expensive to purchase in the first instance than a traditional petrol or diesel vehicle, so naturally may still be relatively expensive in the second-hand market – which continues to be a limiting factor in consumers’ ability to access them. However, as more new vehicles enter the market this will naturally expand supply and should help lower prices over time and therefore enable more consumers to access them, which in turn will help combat misconceptions about the product and enable more consumers to access the benefits of EVs – which includes lower running costs, a smooth driving experience, quietness and reduced emissions.

At present the battery electric vehicle (BEV) market is growing rapidly, but still only represents a very small proportion of used volumes. The market in Q2 2023 was up 81.8% to over 30,000 units, which represented a new high of 1.7% of all transactions (up from 1% in 2022). This helped volumes in the H1 2023 rise 74.3% and market share rise to 1.5%. However, this remains under a tenth of the new car market, where BEVs currently have more than a 16% market share.

Small volumes can mean fluctuations in residual values (RV). RV is important as it not only gives people confidence to invest (knowing their asset will still have a good value at the end of their ownership period), but it is also key for new car finance schemes. Typically, a new customer accessing the vehicle through a personal contract purchase (PCP) or similar scheme, in effect pays the difference between the initial new car purchase price and its second-hand, or residual, value. Weak residual values mean higher monthly payments and so weaker demand.

Finally, increased supply will help get the market ‘to work’ better, but those supporting enablers also need to be in place, especially considering some used car buyers may be less affluent and may not own their own home, and therefore will not have access to the benefits of home charging. In particular, this will put greater importance on the rollout of and access to a comprehensive public charging system. With the cost of using a public charger currently higher than charging at home (it incurs 20% VAT as opposed to just 5% VAT on home charging), this could limit demand. Public charge points also need to be conveniently accessed, to ensure the consumer has an all-round good experience. Ultimately, there is a need to pull all the levers available to deliver a rapid and equitable transition, to make these new vehicles as affordable and accessible as possible to all consumers. This includes having a stable and supportive tax regime (e.g.: not pressing ahead with the expensive car supplement on vehicle excise duty (VED) on BEVs in 2025, as was set out by the Chancellor in last year’s Autumn Statement) and any other measures that can help ownership costs and enhance the experience of consumers. 

N.B. used plug-in hybrid electric vehicle (PHEV) transactions rose by 43.3% in the first half of 2023 to account for 2.4% of all transactions, whilst hybrid electric vehicles (HEVs) saw a 29.5% rise in volumes to a 2.9% market share. The overall used car market was up 4.1%

Could you reflect further on whether the current drop in used EV prices is a positive or a negative development in your view? Would you (SMMT) like to see a reduction in the differential between new and second hand EVs or not?

SMMT does not hold price data, so we are unable to comment on this fully.

It is likely to be a balancing act. The industry is looking towards achieving price parity (the total cost of ownership) of electric versus ICE vehicles, which will help greatly in smoothing the transition. As noted earlier, lower prices enable greater accessibility, but if residual values are too weak then consumers would not wish to invest and the extra burden on new car purchasers’ monthly payments etc. would likely lower demand, so curb supply to the used market.

We also note there are some distortions in the market from some OEMs cutting new BEV list prices, which then means nearly new products face a sudden sharp loss in value, which can weaken overall RVs. Step changes in technologies could have similar impacts. Markets tend to function better with a degree of certainty and the emerging nature of the EV market will likely take a little time for this to be in situ.

Additional data:

Used car transactions – market share by fuel type

Source: SMMT