BERLIN – The shift away from cars with dirty combustion engines is running into a new hurdle: Drivers do not want to buy used electric vehicles (EVs), and that is undermining the market for new ones too.

In the US$1.2 trillion (S$1.6 trillion) second-hand market, prices for battery-powered cars are falling faster than for their combustion-engine cousins.

Buyers are shunning them due to a lack of subsidies, a desire to wait for better technology, and continued shortfalls in charging infrastructures.

A fierce price war sparked by Tesla and competitive Chinese models are further depressing values of new and used cars alike, threatening earnings at rivals like Volkswagen (VW) and Stellantis.

As most new vehicles in Europe are sold via leases, automakers and dealers which finance these transactions are trying to recover losses from plummeting valuations by raising borrowing costs. That is hitting demand in some European markets that were in the vanguard of the shift away from fossil fuel-powered propulsion.

Some of the biggest buyers of new cars, including rental firms, are cutting back on EV adoption because they are losing money on resales, with Sixt dropping Tesla models from its fleet.

“When a car loses 1 per cent of its worth, I make 1 per cent less profit,” said Mr Christian Dahlheim, who heads VW’s financial services arm. The issues with second-hand EVs, he added, have the potential to destroy billions of euros in earnings for the broader industry.

The problems are expected to intensify in 2024, when many of the 1.2 million EVs sold in Europe in 2021 will come off their three-year leasing contracts and enter the second-hand market.

How companies tackle this problem will be key for their bottom lines, consumer confidence and ultimately decarbonisation – including the European Union’s plan to phase out sales of new fuel-burning cars by 2035.

“There isn’t used-car demand for EVs,” said Mr Matt Harrison, Toyota Motor’s chief operating officer in Europe. “That’s really hurting the cost-of-ownership story.”

Companies can funnel battery-powered cars into mobility offerings and ride-sharing start-ups, but there is limited demand from these businesses.

Unwanted combustion cars often end up in Africa, where their poor state causes pollution issues. That market is largely shut to EVs because it has no viable infrastructure to charge them.

China offers a cautionary tale. Lucrative subsidies turned the country into an EV giant, but also produced weed-infested graveyards of abandoned battery-powered vehicles.

Any similar eyesores in Europe or the United States may strengthen calls from conservative politicians to roll back aid for the industry, with key elections coming up in the US and Europe in 2024.

Warning signs around EVs appeared early in 2023 when Tesla started aggressively cutting prices in an effort to prop up sales. That sparked a price war as other manufacturers followed, eating into profitability for some and pushing up already steep losses for others.

Prices for second-hand EVs slumped by around a third in the year through October, compared with a decline of just 5 per cent in the overall used market, according to sales data from iSeeCars.com, a website that ranks cars and dealers. Used EVs take longer to sell than petrol models even after significant price cuts, the group said.

In Germany, Europe’s biggest auto market, most new vehicles are first sold as company or fleet cars and then re-enter the private second-hand market one to three years later.

But with orders even for new EVs slowing, more and more used models are sitting in parking spaces longer than 90 days, meaning they have become “risk inventory”, according to the Deutsche Automobil Treuhand market researcher.

“One has to slash prices significantly just to get customers to look at EVs,” said Mr Dirk Weddigen von Knapp, who heads a group representing VW and Audi dealers.

Part of the problem is that the industry is handling second-hand EVs for the first time. While combustion-engine cars can be quickly valued via their age and mileage, there are no tests in widespread use that determine the quality of a battery, added Mr Weddigen von Knapp. The battery represents around 30 per cent of an EV’s value, a share that is expected to decline in the coming years, according to BloombergNEF.

To be sure, some EVs are performing well years after their introduction, with less-than-expected battery degradation, said Mr Mike Tyndall, an analyst at HSBC.

Tesla cars can sell quickly in the second-hand market because of the brand’s reputation as a technology leader and its regular wireless software updates. The quirky i3 electric car BMW introduced a decade ago has even developed a cult following.

Still, most consumers remain reticent about buying used EVs. Manufacturers are already working on new battery technologies, including solid-state, that promise cheaper cars with longer ranges and faster charging. The likes of Mercedes-Benz and BMW have announced plans to introduce several next-generation EVs around mid-decade. Volkswagen, Stellantis and Renault are developing models costing €25,000 (S$36,500) or less.

Ayvens, a fleet management company handling about 3.5 million vehicles, said the uncertainty around EV technology will convince more customers to lease rather than buy – accelerating a shift away from owning a car to driving it for a fee. BLOOMBERG