Tesla and Hertz Partnership: A New Era for Electric Vehicles

Hertz's Tesla Purchase Signals Strong Recovery and Market Shift

Hertz, a leading auto rental company, has demonstrably signaled its successful emergence from bankruptcy. This was evidenced by the announcement of a $4.2 billion agreement to acquire 100,000 Tesla vehicles this week.

Further bolstering this news, Hertz revealed that Uber intends to rent up to 50,000 of these vehicles for use by its drivers just two days later.

Potential Benefits for Tesla

However, the most significant beneficiary of this arrangement could ultimately be Tesla. The company is positioned to capitalize on its early entry into the rental market and the existing supply limitations experienced by competing automakers.

This could lead to an expansion of its customer base, attracting drivers who are considering transitioning to electric vehicles (EVs).

Unprecedented Scale of the Deal

The sheer magnitude of the deal is noteworthy, representing an unprecedented level of EV investment, according to Ivan Drury, an auto industry analyst at Edmunds.com.

“Rental companies have historically not been significant purchasers of EVs,” Drury stated. “This isn’t comparable to typical large-scale fleet sales.” (Hertz, Enterprise Holdings, and Avis Budget Group did not disclose the percentage of their fleets that are currently electric.)

He continued, “Hertz’s commitment to purchase 100,000 Teslas, with an additional 50,000 allocated for Uber drivers, introduces a fundamentally new dynamic within the rental agency landscape.”

Tesla's Production Capacity and Automaker Constraints

CEO Elon Musk confirmed that the sale is occurring at the standard retail price. This also serves as a clear indication that Tesla is prepared to fulfill a substantial order of Model 3 vehicles by the end of the following year.

Conversely, traditional automotive manufacturers may be facing delays due to existing backlogs of EV reservations from individual consumers, as noted by Michelle Krebs, an analyst at Cox Automotive.

“During the pandemic and the subsequent shortages of semiconductors and vehicles, automakers prioritized direct sales to consumers over fleet sales to rental car companies,” Krebs explained.

The Advantage of Experiential Marketing for Electric Vehicles

The benefits extend beyond simple revenue generation. A 2015 Enterprise Holdings survey – encompassing Enterprise Rent-A-Car, National Car Rental, and Alamo Rent A Car – revealed that approximately 62% of respondents who had a favorable rental experience with a particular vehicle model subsequently considered purchasing that model.

Historically, electric vehicles (EVs) haven’t been able to capitalize on this potential for consumer engagement within the conventional rental car sector. Currently, specialized startups have primarily addressed the demand for EV rentals. Companies like Nextmove and Future.rent, operating in Germany, focus exclusively on EV rentals, while Turo, a peer-to-peer car rental platform in the U.S., provides a selection of both electric and gasoline-powered vehicles.

Demand appears to be substantial, as evidenced by data from Turo. The number of Teslas available for rent on the platform has seen significant growth over the last five years. In 2014, only 67 Teslas were listed; by 2021, this figure had surged to 21,599. Overall, the number of EVs listed on Turo increased from 196 in 2014 to 26,956 in 2021.

Many Turo hosts have observed that their Tesla rentals are frequently utilized for extended evaluations rather than short trips. A Turo representative explained, “The standard test drive duration often isn’t sufficient for many individuals.” Potential buyers often experience range anxiety and desire to assess a Tesla’s performance on longer journeys. Hosts report that renters are effectively experiencing extended ownership through Turo rentals.

The Hertz Tesla rental program is expected to attract not only existing Tesla enthusiasts but also consumers interested in a prolonged test drive and those simply curious about EVs, according to industry analyst Krebs.

Krebs further stated, “This represents a valuable marketing opportunity for Tesla, which generally avoids traditional advertising.” Hertz is effectively providing the advertising through its partnership with Tom Brady, a 7-time Super Bowl Champion, allowing Tesla to benefit from the exposure. It’s important to note that Elon Musk, with 54 million Twitter followers, actively maintains public interest in both himself and his company.

Drury highlighted that automakers commonly leverage rental agencies to showcase their fully-equipped vehicles. “Consequently, for Tesla, this initiative functions as a comprehensive test drive facility.”

Potential for Anti-Rental Bias

A key consideration for Tesla, as noted by Drury, centers around the potential for the Model 3 to be negatively perceived due to its association with rental services and rideshare programs. The central question is whether a stigma attached to rental vehicles will impact the Model 3’s value. Will this agreement help dispel that stigma, or reinforce it?

Hertz intends to provide a “premium and differentiated rental experience” with its Tesla EVs. Rental rates are projected to align with Hertz’s current luxury vehicle offerings, potentially safeguarding the brand’s upscale image. Furthermore, Teslas utilized via Uber will not be restricted to the Uber Black service tier; availability will extend to UberX customers as well.

Impact on the Secondhand Market

A potential risk for Tesla also exists within the used car market, particularly if the number of Teslas in rental fleets expands significantly. A 2017 Edmunds report indicated that vehicles originating from rental fleets experienced a 9% price reduction in the secondhand market compared to those with different histories.

This is relevant to Tesla because the 100,000 Model 3s sold to Hertz will eventually be resold through auctions or platforms like Carvana, as per their new partnership. An influx of these vehicles could saturate the used car market, potentially diminishing the brand’s value or the value of the Model 3 specifically. While this initial order alone is unlikely to cause such an effect, it introduces a new factor to consider.

Tesla’s brand image and the Model 3’s resale value could be affected by this dynamic.

Despite potential perception challenges, similar large-scale fleet orders for EVs are anticipated in the future. This is especially likely as traditional automakers increase production of electric trucks and SUVs.