Hertz has become collateral damage in Elon Musk’s price wars

quote:

---

Rental agency Hertz is learning the hard way that Tesla cars didn’t quite turn out to be the appreciating assets Elon Musk famously predicted they would be.

And it can blame his strategy of driving volume through price cuts for that—as indeed it did on Thursday.

Hertz CEO Stephen Scherr said its underlying margin in the third quarter nearly dropped by half to 13% in large part owing to problems unique to its EV fleet, in which four out of five cars bear the Tesla badge.

“Had our fleet in Q3 been similarly sized but comprised solely of ICE [internal combustion engine] vehicles, our Ebitda margin would have been several margin points higher,” he told investors on Thursday.

In short, the declining value of the Tesla cars in Hertz’s fleet—a decline directly caused by Musk’s price cuts—has hit Hertz squarely in its profits.

The fact that this is happening to Hertz of all companies is ironic, as the rental agency is not just any customer of Musk.

When Hertz was fresh out of bankruptcy, an announcement by Scherr’s predecessor, Mark Fields, in October 2021 to purchase 100,000 Model 3 sedans worth an estimated $4.5 billion in revenue saw Tesla add $100 billion in value overnight. Thanks to the order, Tesla was able to spend nearly half a year in the rarified heights of megacaps worth north of $1 trillion.

---

quote:

---

Without explaining precisely why, Scherr said Hertz is suffering a higher incidence of damage specifically with its EV fleet, where the repair costs are roughly double that of a comparable gas-fueled car.

“Studies of current EV ownership evidence lower incidence of damage and collision than for ICE vehicles, not higher as we are experiencing,” he revealed.

Musk’s price cuts then become an acute problem when one of the Hertz EVs sustains so much damage that the cost of repair is more than the asset itself.

“Where a car is salvaged, we must crystallize at once any difference between our carrying value and the market value of that car,” Scherr explained. “The [price] declines in EVs over the course of 2023, driven primarily by Tesla, have driven the fair market value of our EVs lower as compared to last year, such that a salvage creates a larger loss and, therefore, greater burden.”

In short, Hertz then needs to book a noncash accounting charge. Together with the higher repair costs this led to significant profit margin headwinds.

---