Ford Credit Faces Potential Losses Amid Declining EV Residual Values
Ford's financial arm, Ford Credit, may encounter significant losses due to lower-than-expected residual values of off-lease electric vehicles, reminiscent of challenges faced during the 2008 financial crisis.
Ford Motor Company's financial subsidiary, Ford Credit, is confronting potential profitability challenges as off-lease electric vehicles (EVs) return to the market with residual values significantly below initial projections. Historically, Ford Credit has been a substantial profit contributor, accounting for approximately 15% to 20% of the company's earnings, despite representing only about 5% of annual revenue.
The profitability of Ford Credit hinges on accurately forecasting the residual values of leased vehicles. If actual resale values fall short of these projections, the company faces financial shortfalls. A similar scenario occurred during the 2008 financial crisis when economic downturns led to decreased vehicle demand and values, adversely affecting Ford Credit's earnings.
Currently, the automotive industry is witnessing a surge in off-lease EVs entering the used vehicle market. Experian estimates that off-lease EV volumes will peak in 2028, with nearly 800,000 units expected. By the end of 2026, EVs are projected to constitute 15% of off-lease used vehicles, up from 7.7% in the first quarter.
Industry experts anticipate that the resale values of these EVs could be approximately $10,000 less than automakers' initial projections, with potential losses ranging from $5,000 to $20,000 per vehicle, depending on make and model. This discrepancy could result in an industry-wide loss of about $8 billion for models coming off lease in 2028.
Data from the Automotive News Research & Data Center indicates that Tesla and General Motors led EV lease volumes last year, with approximately 228,000 and 102,000 leases, respectively. Ford's EV leases numbered just over 52,000, positioning it behind its competitors.
While the current situation is less severe than the 2008 crisis, automakers with captive finance arms, like Ford Credit, may still face losses from off-lease EVs. Investors are advised to monitor this development through 2028, as it could impact the automaker's financial performance more than previously anticipated.
