Tesla's price reduction harms European leasing customers, hidden sales risks emerge?

According to the financial news app Zhitong Finance, Tesla (TSLA.US) is working hard to appease European leasing companies who are dissatisfied with the frequent price reductions by the car manufacturer, leading to a significant decrease in the value of their fleets. At the same time, slow service and high maintenance costs from Tesla have also left corporate clients feeling dissatisfied.

Nine Tesla executives revealed that the company is taking measures to address these issues, including offering informal discounts on new car purchases from inventory and addressing widespread complaints about service, maintenance, and orders. Fleet managers and leasing companies have felt that Tesla has overlooked these issues over the years.

Previously, Tesla had lowered retail prices to boost sales in response to weak global demand for electric vehicles and intensifying competition, especially from Chinese electric vehicle manufacturers like BYD. However, this move has hurt profits with its largest customers in Europe, where fleet purchases account for nearly half of Tesla's car sales.

In general, leasing companies purchase new cars and arrange lease contracts based on the price they believe they can sell these vehicles for at the end of the lease term. However, sudden price drops weaken the residual value of these vehicles, leading to losses for leasing companies.

Richard Knubben, General Manager of Leaseurope, a leasing industry group based in Brussels, stated that "continuously reducing the asset value of fleet buyers is the worst-case scenario."

"Tesla is now actively telling our members: we can give you discounts, compensate you," Knubben said. "But Tesla's residual value is dropping too fast, and I'm not sure if the discounts they offer are sufficient."

Tesla did not respond to requests for comment.

While the decrease in Tesla's resale value and the strained relationship with fleet customers are well known, actions taken by Tesla to address these issues have not been reported before.

An executive from a large European car leasing company mentioned that starting from mid-2023, Tesla has been offering informal end-of-quarter discounts on its models, which have continued until now. If leasing companies have inventory, the highest price for purchasing Model 3 and Model Y can reach up to 2000 euros (2134 dollars).

Tim Albertson, CEO of Ayvens, stated that Tesla's service has improved, but the decrease in resale value has caused damage. "Tesla has understood this and is providing solutions to help us address this issue," he said. He declined to provide details on Tesla's efforts to mitigate losses for Ayvens' electric vehicles.

Arval, the car leasing department of BNP Paribas in France, is in discussions with three Chinese car manufacturers to purchase electric vehicles after suffering losses due to Tesla's stock price decline.

Bart Beckers, Deputy CEO of Arval, mentioned that Tesla is working to address maintenance and service issues, but new competitors seem to be avoiding Tesla's mistakes and focusing on maintaining strong resale values for cars At the same time, Tesla is also facing the same issue of resale value as rental car companies. Hertz (HTZ.US) has been selling Tesla vehicles in the US market, while German competitor Sixt has stopped purchasing these vehicles. Sixt stated that Tesla and other electric vehicle brands have lower residual values, leading to a €40 million (USD 42.7 million) decrease in their 2023 earnings.

Key Customers in the European Market

Fleet customers are important in any automotive market, but especially in Europe. Companies there often lease a large number of company cars for employees, partly due to related tax incentives.

Data from market research firm Dataforce shows that last year, Tesla's sales to rental and car rental companies accounted for 44% of its sales in the UK and 15 EU countries.

In the first quarter, Tesla's fleet sales in these countries decreased by 2.3%, while the overall market grew by 3.5%. Despite the decline in Tesla's fleet sales, the business share of rental and car rental companies in Tesla's markets increased to 49%.

After a long period of significant growth, Tesla's sales and profits have declined globally. The automaker announced an 8.5% decrease in global deliveries in the first quarter, the first decline in four years.

According to Dataforce, fleet sales in these 16 European countries saw a 57% growth in 2023 compared to the previous year before declining. According to the European Automobile Manufacturers' Association, Tesla achieved the same percentage growth in all its sales in Europe.

Until recently, Tesla had a first-mover advantage, meaning European corporate customers had few alternatives to electric vehicles to meet internal climate goals or EU emission targets.

However, this situation is rapidly changing. Fleet managers and rental company executives indicate that Chinese automakers, including BYD, are introducing lower-cost electric models to Europe and actively competing for Tesla's corporate customers. Traditional automakers like Volkswagen and BMW are also producing increasingly competitive electric vehicles.

Interviews with a dozen corporate fleet managers revealed that slow and expensive Tesla service has been another pain point for European rental companies and their customers. Most declined to disclose their names as they are actively seeking solutions to their issues with Tesla. They mentioned that Tesla's repair times are too long and costs are much higher than other vehicles, partly due to expensive parts.

Unstable Customer Relationships

Nevertheless, Tesla has indeed satisfied some fleet customers. Octopus Electric Vehicles, the car rental department of UK energy company Octopus Energy, has around 15,000 electric vehicles, with about 5,000 being Teslas.

The company's CEO, Fiona Howarth, stated that as an electric vehicle pioneer, Tesla needs time to figure out service operations, while traditional automakers are now facing similar challenges with their electric vehicles. She mentioned that **during the COVID-19 pandemic, Tesla's resale value was artificially inflated and now needs to be lowered "We have a very good working relationship with Tesla," she said.

Lorna McAtear, fleet manager of the UK energy company National Grid, described a more unstable relationship with Tesla. She has been collecting maintenance cost data and found that Tesla's maintenance costs are three times the industry average. It is understood that the company has 2,000 vehicles, with over 500 of them being Tesla cars.

McAtear mentioned other issues including a cumbersome ordering system and cars arriving with defects. For example, she said Tesla delivered many electric cars with deformed windshields and refused to repair them under warranty. Unless the issues are resolved, she plans to recommend removing Tesla from their fleet. Meanwhile, Tesla's major competitor in China, BYD, has started supplying vehicles to National Grid.

McAtear stated that she pushed for a face-to-face meeting with Tesla representatives in mid-April. During that meeting, the automaker promised to improve services, fix the ordering system, and hold additional meetings and provide a "roadmap" to address prominent issues, which made McAtear feel "we finally have customer service."

She mentioned that the automaker had not been responsive in the past: "For years, people have been frustrated that the fleet couldn't communicate with Tesla."