With the increasing popularity and adoption of electric vehicles (EVs), many prospective buyers are curious about the overall costs associated with owning an EV. One crucial deciding factor in countries like India, is the depreciation, as it directly impacts the resale value and long-term financial implications of owning a vehicle.
In this, we will explore whether the depreciation cost of EVs is the same as that of conventional vehicles and the basics of the factors involved in depreciation for any type of vehicle.
Understanding Depreciation
Depreciation is the gradual decrease in the value of an asset over time. When it comes to automobiles, including both EVs and conventional vehicles, depreciation occurs due to factors such as wear and tear, technological advancements, market demand, and the overall condition of the vehicle.
It is a significant consideration for both personal and commercial vehicle owners, as it affects the resale value and trade-in potential.
The first term we should understand is the ‘Residual Value’
Residual Value
In the car industry, it’s typically depreciation using a term called ‘Residual value’, which is a percentage of the vehicle’s original cost that is lost. A low residual value for owners indicates that their item has depreciated significantly in a short time.
For instance, a car with a residual value (RV) of 40% would have lost 60% of its worth in three years or 36,000 miles (Industry standard). In some instances, the depreciation is calculated on the ‘Percentage Lost’.
In the above example, 40% is the Residual Value and 60% is the Percentage Lost.
Before moving on we should have an open mind on the process of calculating the depreciation cost of an EV.
Calculating EV Depreciation: No Ground Rule
Someone could argue that an internal combustion engine’s (ICE) lifespan is typically between 10 and 15 years, compared to a battery’s maximum lifespan of 5 years.
Thus an EV should depreciate much more quickly than an ICE car because of the battery’s comparatively short lifespan. However, the increase in the global demand for electric vehicles is negating this effect.
Due to their role in global environmental issues, a number of nations have imposed a ban on the sale of combustion engine-powered automobiles by the year 2035.
As a result of this and other such factors, it might be challenging to estimate the precise depreciation value of an EV.
Electric Vehicle Depreciation
Now let us look at the key factors involved in the depreciation of EVs
#1. Initial Purchase Price
One factor that affects depreciation is the initial purchase price of the vehicle. Historically, electric vehicles have had a higher purchase price compared to their conventional counterparts.
However, as the EV market continues to mature, prices have been gradually decreasing, making them more affordable and comparable to conventional vehicles.
#2. Battery Life and Technology
The battery pack in an electric vehicle is a critical component that influences depreciation. Early concerns about battery degradation and limited range have largely been addressed by advancements in battery technology.
Most reputable EV manufacturers offer warranties for their battery packs, providing peace of mind to owners. Additionally, as battery technology improves and becomes more affordable, the replacement cost of batteries decreases, positively impacting the resale value of EVs.
#3. Government Incentives and Policies
Many countries and regions offer various incentives, tax credits, and subsidies to promote the adoption of electric vehicles. These incentives can offset the initial purchase cost and positively impact the resale value.
It is essential to consider the availability and longevity of these incentives when assessing the depreciation of EVs. Also, several cities charge congestion charges and sometimes EVs have an exception from those charges.
#4. Growing Demand and Market Perception
As the demand for electric vehicles continues to rise, their market value is expected to stabilize and potentially appreciate in the future.
The increased awareness and concern for environmental sustainability are driving consumer preferences towards EVs, which can positively impact their depreciation rates compared to conventional vehicles powered by fossil fuels.
#5. The Badge on The Vehicle
Another element that might affect depreciation is the car’s manufacturer, with some companies having higher residual values than others.
For instance, automakers with a reputation for dependability will frequently have their vehicles lose less value than those who don’t, and the same is true for companies that typically produce vehicles with low operating costs.
Also, another factor is desirability. great residual values will be held by companies of in-demand vehicles with great badge appeal as well as those who produce popular body types like SUVs. similar to how petrol and diesel vehicles operate.
Finally, let us look at the depreciation of EVs from an insurance point of view because that is also a very important factor in deciding the depreciation cost of vehicles.
#6. EVs & Insurance Companies
Electrical vehicles are currently depreciating at the same rate as traditional vehicles in India. This is due to the Insurance Regulatory and Development Authority of India‘s (IRDAI) well-planned schedule.
However, a number of well-known players in the Indian insurance sector contend that this shouldn’t be the case given the battery’s contribution to the EV’s overall cost and its relatively shorter lifespan as we discussed earlier.
However, it is challenging for insurers like anyone else to pinpoint the precise depreciation date for EVs. Even though the number of EVs on our roads is growing day by day, still the share of EVs on the road is less compared to their counterparts.
As a result, it is anticipated that once there are sufficient numbers of EVs on Indian roads to justify an actuarial examination by its insurers, both the vehicle insurance companies and the IRDAI would be able to establish the depreciation rate for an EV.
Now let us look at the factors affecting depreciation for conventional vehicles.
Conventional Vehicles and Depreciation
#1. Fuel Price Volatility
Conventional vehicles are heavily reliant on fossil fuels, and their depreciation can be influenced by fluctuations in fuel prices. If fuel prices rise significantly, vehicles with poor fuel efficiency may experience higher depreciation rates, as consumers may prefer more fuel-efficient options.
#2. Maintenance and Repair Costs
Conventional vehicles generally have more complex mechanical components, which can result in higher maintenance and repair costs compared to EVs. These additional costs can affect the overall depreciation of conventional vehicles.
#3. Technological Advancements
The automotive industry is continuously evolving, with advancements in technology and safety features becoming more prominent.
As conventional vehicles become outdated in terms of technology, their depreciation rates may be impacted, especially when compared to newer models with advanced features.
Conclusion
While the depreciation cost of electric vehicles and conventional vehicles share certain similarities, several factors set them apart. The initial purchase price, battery technology, government incentives, growing demand, and market perception all contribute to the depreciation of electric vehicles.
On the other hand, fuel price volatility, maintenance costs, and technological advancements impact the depreciation of conventional vehicles.
As the electric vehicle market continues to grow and mature, depreciation rates are expected to stabilize, making EVs a viable long-term investment.
It is essential for prospective buyers to consider these factors and conduct thorough research before making a decision. Additionally, it is crucial to evaluate individual circumstances, such as anticipated usage, available incentives, and regional market conditions, to make a wise decision.
