Hertz +10% ahead of share offering, Tesla +13%. But why does Tesla get into low-margin rental fleet sales if there’s strong retail demand?
By Wolf Richter for WOLF STREET.
Hertz touted today that it had made a deal to buy 100,000 vehicles from Tesla for the US and Europe by the end of 2022, and that in just a few days, “beginning in early November and expanding through year end,” you can rent a Model 3 at select Hertz rental locations. Customers will be able to use Tesla’s charging network. In addition, the company said it will build out its own charging infrastructure at its rental locations over the next two years.
This is an astounding announcement, but not for reasons touted.
What does it say about Tesla’s retail demand when it can deliver cars to a rental fleet in just a few days? Those cars must already be sitting around somewhere, no? The talks have been going on for a while. But where are the cars coming from that you can rent from Hertz in a few days?
Tesla’s website shows that if you order a Model 3 now, the estimated delivery date is in June 2022. Are a bunch of 2021 model-year Model 3s sitting on a lot somewhere that Tesla can deliver to Hertz in a few days? Or did Tesla build those cars for Hertz and set them aside?
And 100,000 vehicles would account for about 10% of Tesla’s current annual capacity. Why not sell them through its retail channel and get full price – if there is enough retail demand for them?
For Tesla, this announcement was a propaganda coup. Tesla shares jumped by 12.7% today on this deal, to $1,024.86, giving it a market value of over $1 trillion.
If GM had announced that it sold a whole bunch of cars to a rental fleet instead of through the retail channels, it shares would have dropped.
For Hertz, this announcement is an EV propaganda coup that got its new shares to spike by 10% to $27, just as insiders are preparing to sell a large stake via a public offering.
These “selling shareholders” have not yet been named in the preliminary S-1 registration statement, filed with the SEC on October 15, which is full of blanks to be filled in later. But Hedge fund Knighthead and PE firm Certares bought Hertz out of bankruptcy last May with a $6 billion winning bid. Currently, the market cap, after today’s well-executed propaganda coup, is $12.8 billion. I mean, every little billion counts.
Hertz new shares [HTZZ], which were issued at the beginning of July and still trade over the counter, had shot up to $35 a share after trading started in July, but then fell by over half in September to around $16 a share. Then in late September, the price began to rise. Who knew what of the talks with Tesla?
And what does it say about the legacy automakers that have been caught asleep by EVs and that are now struggling to wake up, and now have models either on the road or coming soon, but in the US still cannot produce any of them in large enough quantity to satisfy retail demand, much less rental demand?
The backdoor is wide open: Hertz’s grand announcement of its “ambitions,” as it called this – getting 100,000 Teslas and installing its own charging network at its rental locations – “could be affected by factors outside of Hertz’s control, such as semiconductor chip shortages or other constraints,” Hertz said.
Selling vehicles to rental fleets is a low-margin business that automakers don’t tout and that investors consider low-quality sales. When the percentage of fleet sales to overall sales is large, investors consider them a negative. And automakers are hounded for it. And that’s why automakers don’t tout those deals.
Rental fleets in the US buy between 2 million and 3 million vehicles in a normal year, and automaker such as Ford, GM, FCA, and foreign brands make huge deals. But they do it quietly. In their monthly or quarterly sales reports, they disclose what percentage of their total unit sales went to fleets. But they try to downplay this.
During the semiconductor shortage that has caused production to get slashed, automakers have been prioritizing high-end models sold through the retail channels, and have been deprioritizing the low-margin sales to rental fleets, leaving rental fleets to complain since spring that they’re not able to get enough new vehicles. That’s how rental sales fit into the value chain of automakers: at the bottom.
But the rental business keeps factories running when there is excess capacity and not enough retail demand, and that’s a good thing for everyone, even if those rental units don’t make money.
Sales to rental companies fall into two categories: “At risk” sales, where the rental fleet is responsible for selling the unit when it comes out of rental service, and is “at risk” from the resale value of the vehicle; and program sales where the rental fleet sells the vehicle back to the automaker under a predetermined formula, similar to a lease, and the automaker takes on the risk of the resale value of the vehicle.
According to unnamed sources that talked to Bloomberg, the deal is valued at $4.2 billion for 100,000 vehicles. Hertz in its announcement – which is short on details but long on propaganda – didn’t specifically say that they were all Model 3s, but only that the vehicles that will be available in November through the rest of the year will be Model 3s.
What version of the Model 3, and what other models, are included in the 100,000-vehicle deal? Hertz could have said that all 100,000 cars will be the base Model 3. But it carefully didn’t say that. It said, “Beginning in early November and expanding through year end, customers will be able to rent a Tesla Model 3.” But what about in 2022? And it added, “Customers who rent a Tesla Model 3 will have access to 3,000 Tesla supercharging stations throughout the U.S. and Europe.” And that’s it, in terms of what models and versions it will buy.
Rental cars tend to be equipped with upscale packages that cost the automaker little but add large dollar amounts to the vehicle’s retail price. That’s where a big part of the heavy discounting of rental sales is made possible, and that’s why rental cars generally are well-equipped.
But we don’t know the specifics about the Tesla deal, not even if all 100,000 vehicles will be base Model 3s, of if it will later include some Model Ys, or a mix of versions, which would be typical for a big rental car deal.
Bloomberg asserts that the $4.2 billion deal divided by 100,000 vehicles would price the vehicles close to list (at $42,000 each). Tesla’s website lists the base Model 3 at $43,990. But we don’t know what’s in the deal. So was the statement that the price is close to list just more hype that the unnamed sources were able to get Bloomberg to cite to cause Tesla shares to jump?
There is a promo aspect for automakers with rental deals: Renting a car can function like an extended test drive. If people are impressed, they can end up buying that type of model when they’re in the market for a new vehicle. In this case, Tesla – and EV makers in general – can benefit by the exposure of non-EV owners to EVs.
Rental cars can cheapen the luxury brand. When 1 to 2-year-old rental vehicles are taken out of the fleet, with 15,000 to 50,000 miles on them, they appear on the used vehicle market.
These vehicles look similar to their new brethren, but cost a lot less in normal times. In our craziest times ever, pricing in the used vehicle market has gone bonkers. But in normal times, these rental vehicles compete with new vehicles and can restrain pricing on new vehicles. A number of brands do not participate in large-scale rental fleet sales for that reason.
Prices of used Teslas have held up well in the used vehicle market. This rental deal indicates that there are going to be a lot more low-mileage Teslas coming into the market a year or two from now that then compete with new Teslas.
However this deal is going to turn out, one thing seems to have worked perfectly: Hertz’s selling shareholders in the upcoming share offering got a 10% boost. And Tesla got a 12.7% boost.
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