Sometimes, what seems obvious to car buyers may actually be wrong. For instance, which of the following statements are true?
A. A $25,000 compact SUV costs less than a $55,000 compact SUV.
B. A $55,000 compact SUV costs less than a $25,000 compact SUV.
The answer? Well, it depends!
Most car buyers look solely at the purchase cost (or monthly payment) when contemplating the purchase of a car. That’s logical; they have to come up with the cash, or borrow it, before they can drive the car off your lot.
Fleet buyers, on the other hand, tend to look at the total cost of ownership (TCO) when assessing how to minimize the cost of a new vehicle. They look at the purchase price, sure, but they also factor in fuel costs and maintenance — using assumptions about how long they’ll own the vehicle and how many kilometers they’ll put on it.
Today, electric cars still have higher sticker prices than comparably-sized gasoline-engine vehicles. But the answer to our opening question — when looking at it through the lens of TCO — mainly depends on three criterias:
1. Where do you live?
2. How much mileage will you put on the vehicle?
3. And (most importantly) is the $55k SUV an EV?
Skeptical? Let’s do the math together for someone who (a) lives in the suburbs north of Montreal; (b) drives approximately 45km (one-way) to work, five days a week; and (c) plans on keeping the vehicle for 10 years.
1. PURCHASE COST
Assuming a 2 per cent interest loan for 72 months (including taxes and fees), the $25,000 SUV (with a gasoline engine) has a total purchase cost of $26,500. If the $55,000 SUV is electric, it’s eligible for both the Quebec provincial EV incentive of $8,000 and the federal EV incentive of $5,000. Both of these can be applied to the cost at the time of purchase. Hence, the financed cost is actually $42,000, making the total cost of purchase to the customer $44,600.
Given that the buyer drives more than 20,000 km to and from work each year, a total of more than 250,000 km over 10 years can be expected. With this amount of mileage, neither vehicle will likely have a high resale value so any difference there will be minor.
So, at this point in our calculation the $25k gasoline SUV is about $18,000 cheaper than the $55k electric SUV. But we’re not done yet.
2. OPERATING COST
Assuming 8L/100 km fuel consumption at $1.25/L (typical for the greater Montreal area), the $25k (gas-powered) SUV will cost $25,000 in fuel for the 250,000 km of ownership.
The $55k SUV (EV) on the other hand will cost only $4,000 in electricity costs* plus $1,000 up front for the purchase and installation of a home charging station. (That number is after tax, but includes a QC provincial home charging incentive of $600.) In total, the owner of the $55k electric SUV will have an energy related cost of $5,000 over 250,000 km. In other words, the cost of operating the $55k SUV (EV) will be $20k less than that of the $25k (gas-powered) SUV.
3. TOTAL LIFETIME COST
For a Quebec buyer planning 250,000 km of ownership mileage, the purchase incentives plus the difference in gasoline versus electricity costs results in the $55k SUV (EV) being a less expensive choice than a $25k SUV (gas) — about $2,000 less expensive.** The concept that a $40k, $50k, or even $55k SUV in this case, can be less expensive than a $25k SUV is completely foreign to the vast majority of Canadian car buyers. However, it is an important concept for dealerships to grasp and explain to customers to be successful in navigating the unique market of governmental incentives and ZEV mandates we are entering.
The federal incentive structure that was enacted in the spring of 2019 distorts the “natural” market pricing of EVs by only applying a rebate to models with at least one trim level that costs less than $45k. Consequently, some automakers have started to price base models of EVs just under $45k, with the well-equipped version $5k or even $10k higher.
There has always been pressure and incentives for dealers to sell “better equipped” vehicles. Nothing new there. But, in the new reality of EVs and ZEV mandates, OEMs will increasingly want their dealerships to sell $55k and higher SUVs (EVs) to Canadian buyers who have never spent more than $25k on a vehicle. That’s not a small jump. That’s more than double the sticker price.
Right now, with demand for EVs generally exceeding supply in Canada, this hasn’t been a major issue for most dealers — yet. However, as EV supply ramps up in the coming years, dealers who have mastered the art of demonstrating to customers that the fully loaded and more expensive SUV (EV) actually costs less than the gas-powered SUV with only half the purchase price will rise to the top of the chart.
They will be some of the highest performing dealers in both sales performance, and in terms of customer satisfaction. Indeed, those with staff who specialize in fleet sales may find themselves asking the fleet sellers to educate the retail side of the house.
The other key factor in our example, is whether the driver takes the toll bridge into Montreal on his way to work. If he does, then the $55k SUV (EV) goes from being $2,000 less expensive to being $18,300 less expensive over 10 years, thanks to the free pass on the toll bridge for EVs.
In other words, for someone in that situation, a $55k SUV (EV) actually costs less over 250,000 km than buying a used $7k gasoline-powered SUV. (And we’re not even factoring in whether a $7k gas-powered SUV that will last 250,000 km can be found.)
