Lessons from China: Can Leasing Accelerate the Transition to EVs?

Fleet operators in the United States are well aware that electric vehicles are the future. Now the question is less about if and more about when and how to transition. According to an upcoming Rocky Mountain Institute report, Steep Climb Ahead: How Fleet Managers Need to Prepare for the Coming Wave of Electrified Vehicles, corporate sustainability goals, existing or anticipated government mandates, and attractive economics are among the top motivators driving US fleet managers to consider electric vehicles. But despite promising commitments, US fleets are still struggling to move past small-scale pilots to large-scale full-fleet deployments.

Moving from pilots to full electric deployments is not a trivial problem to solve, but US fleets don’t have to solve the problem alone. Fleet electrification efforts are being undertaken by leaders across the globe. And by sharing learnings across borders, fleets can gain a global context for the problems they are trying to solve, borrow applicable solutions, and avoid potential missteps.

One such global leader in fleet electrification is the City of Shenzhen, located in the southern province of Guangdong, China. Shenzhen is the first city in the world to electrify 100 percent of its taxis and municipal buses, and is rapidly electrifying its logistics fleets. This was the focus of RMI’s recent report series Fully Electrifying Delivery Vehicles: Insights from Shenzhen.

From 2015 to 2020, the number of electric vehicles in Shenzhen logistics fleets grew from nearly 0 to over 80,000. Electric logistics vehicles (ELVs), mostly minivans and light-duty trucks, now represent 35% of all logistics vehicles in Shenzhen. This rapid change is in-part the result of a portfolio of ambitious national and municipal policies, including financial and non-financial incentives for EV purchase and wide-spread charging station deployment. However, in this post we highlight one unique enabler of Shenzhen’s rapid electric logistics growth which we believe holds insights for global fleet electrification efforts: flexible full-service vehicle rentals.

 

EV Rentals Unlocked Logistics Electrification in Shenzhen

Of the 80,000 ELVs deployed in the City of Shenzhen, 95% of them are rented, typically for 1-2 years.

These rental agreements are “full-service.” While the specifics of the agreements vary based on the offerings of the rental company and the needs and requirements of the renter, they typically feature numerous services on top of vehicle rental. In the case of the largest vehicle renter in Shenzhen, DST, included in light-duty vans and truck rental agreements are offers for charging station coordination, vehicle licensing services, insurance, vehicle maintenance, road-side rescue, and telematics monitoring and data analysis.

One unique feature of the rental agreements in Shenzhen is their flexibility in duration. In 2015, when the ELV market was just getting started, rental agreements tended to be shorter (weeks to months), which provided logistics companies a way to employ new ELV technology without long-term commitments. As the market has matured, rental durations have been creeping up in duration—with 1–2 years now a common length—reflecting the increased confidence of renters in the vehicle technology and its ability to suit their needs. Now, weekly or monthly rentals are predominately used for incremental increases in fleet size to meet seasonal changes in demand.

These flexible and full-service rental agreements have been a key enabler of the rapid ELV adoption in the city, despite the fact that logistics EV technology, economics, and infrastructure have yet to reach full maturity. The agreements provide a number of advantages to logistics fleets which help ease their transition to EVs:

• High Capital Cost Reduction: The clearest benefit of any vehicle rental or lease is the elimination of a high capital expenditure. ELVs in Shenzhen still cost on average 25% more than their conventional counterparts, making outright purchase infeasible for many logistics companies. The much lower monthly cost of an ELV rental compared to outright purchase has enabled companies unwilling to pay the high price tag premium for an ELV to still electrify their operations.
• Risk and Uncertainty Reduction: Fleets that own their own vehicles face a number of risks: risk of vehicle failure leading to unexpected costs or early retirement, risk that the residual value of the vehicle will be lower than expected due to battery degradation or the rapid advancement of vehicle technology making current technology obsolete, and risk that a start-up EV manufacturer will go out of business leaving warranties void and eliminating the only source of replacement parts. By renting rather than owning vehicles, fleets can shift all of these risks and uncertainties onto the rental company, which is much better able handle them because it can spread the risks over a much larger fleet.
• Flexibility: Fleets renting vehicles can test whether EVs work for their duty-cycles and have flexibility to switch vehicle models if their initial choice doesn’t work or the nature of their business changes. While most rental terms are now 1–2 years, short-term rentals are still used to incrementally scale the size of the fleet up and down with the seasonality of logistics demand. As in the United States, the busy season in China is often December–January, when fleets increase their size to meet increases in e-commerce demand. This allows logistics companies to avoid the oversized fleets needed to meet peak demands.
• Ancillary Services: Many of the large rental companies in Shenzhen offer not just vehicle rental but also other services that ease the transition to EVs. One useful service is charger consultation, whereby rental companies will coordinate the sizing, procurement, and installation of charging stations in a warehouse with a third-party charging provider. This can drastically reduce the effort required for fleets that want to electrify. When in-warehouse charging installation is difficult, some rental companies even coordinate with third-party EVSE providers to build public infrastructure near those warehouses to enable fleet electrification.

The rental business model has grown in Shenzhen, not just because there are benefits for logistics fleets, but because there are economic opportunities for rental companies. While the logistics company renting EVs benefits from lower capital commitments, reduced risk, and a simplified electrification process, the rental company is able to take advantage of economies of scale to turn a profit.

Rental companies often have bulk pricing when purchasing their fleets and when financing their vehicles and they receive financing rates that an individual wouldn’t have access to because they are able to spread their risk across many more assets. It’s these mutual benefits that have driven both demand and supply of EV rentals in Shenzhen over the past five years.

 

More Lessons from Shenzhen’s Experience

While renting in Shenzhen did not eliminate all of the barriers to fleet electrification, it did facilitate early-stage growth. This generated learnings to tackle some of the more difficult electrification barriers. For example, as electric logistics in Shenzhen grew, many logistics companies encountered problems with available land for charging infrastructure and long permitting times for installation. These problems have been identified and are now being addressed in successive rounds of policymaking.

The existence of rental companies offering flexible, full-service EV rentals has been a key enabler for rapid growth in Shenzhen’s electric logistics market. By reducing upfront capital commitments for EV usage, transferring risk and uncertainty, and simplifying the process of fleet electrification, these rental agreements have allowed fleets to begin integrating electric vehicles into their operations immediately. Without these advantages, many logistics companies would have otherwise waited for more mature technology and economics.

The barriers that Shenzhen faced when beginning its logistics electrification efforts are not wholly unique. In many regions of the world, fleet electrification is slow-moving because EVs are pricier and riskier than conventional gasoline vehicles. Flexible and full-service rental models, similar to the ones offered in Shenzhen, could reduce those barriers and kick-start fleet electrification in the United States and other regions around the world.