I was miserable by Tesla! The largest car rental company in the United States said that 100,000 electric vehicles have become a "cancer" in performance

Tencent News "High Beam" by Ji Zhenyu from Silicon Valley

Hertz, the nation's largest car rental company, recently released a striking third-quarter earnings report, and although the quarter's revenue increased slightly, the earnings indicator fell short of previous market expectations. Stephen Scherr, the company's chief executive, said on a post-earnings conference call that earnings metrics could have exceeded expectations if it weren't for the drag on the EV business.

The problem with Hertz's electric vehicle business that Scherr is referring to is actually referring to Tesla. Tesla's electric vehicles currently account for 80% of all electric vehicles in Hertz's fleet.

In 2021, Hertz, which had just emerged from bankruptcy, announced the purchase of 100,000 Tesla electric vehicles to realize the electrification transformation of its car rental business. Boosted by this news, Tesla's market capitalization managed to stand at $1 trillion at the end of 2021.

However, things did not turn out as Hertz expected, and now, with Tesla's continuous price cuts and high maintenance costs, Hertz's once high-hopes electric vehicle business, or more precisely, Tesla's business, has become the biggest "cancer" dragging down the company's performance.

For Tesla, this news has become the latest negative news in recent days. The company's just-released third-quarter earnings report has already shown the EV company's decline, with successive price cuts and promotions not only failing to boost sales, but dragging down profit margins, and Tesla's stock price losing ground, falling more than 13% in a month, which has caused Tesla investors to re-examine the company's valuation.

The head of the U.S. equity market of a Wall Street mid-cap hedge fund told Tencent News "High Beam" that Tesla's premium in the past was largely based on investors' advantages in its rapid growth, technology and brand, and now if these factors fade or even disappear, the premium given in the past will be difficult to maintain.

Tesla has become a "cancer" in performance

On October 26, local time in the United States, Hertz, the largest car rental company in the United States with a market share of 36%, announced its third-quarter financial report. Despite an increase in overall revenue to $2.7 billion, driven by an increase in the number of trips, the company's overall revenue increased 8% year-over-year to $2.7 billion, earnings were disappointing, with adjusted EBIT for the quarter sliding 42% year-over-year to $359 million.

In its statement to investors, Hertz deliberately highlighted the phrase "Profit margins are affected by a particular cause" in bold yellow.

In the conference call that followed, Hertz executives also focused on this "special reason" in more detail, and the core keyword was "Tesla".

Stephen Scherr, CEO of Hertz, said bluntly at the conference, "11% of the company's fleet is electric, of which 80% is Tesla, and there is a lot of spending related to Tesla compared to other cars." ”

"Throughout 2023, the decline in the suggested retail price of electric vehicles, mainly driven by Tesla, has made the overall market price of our electric vehicles lower than last year, so the lower residual value will cause greater losses and burdens."

Specifically, Tesla's electric vehicles have significantly impacted Hertz's operating results in two ways. First of all, Tesla's recent continuous price reductions have led to a lower residual value in the accounting recognition, which makes Hertz, which bought Tesla cars at a high price in the previous period and included them in the balance sheet, have to be included in higher depreciation, which directly affects profits.

On the other hand, Hertz's high repair costs also made Hertz miserable. In addition to leasing electric vehicles to users, Hertz also cooperated with Uber to lease Tesla electric vehicles to Uber drivers for revenue sharing, but the exceptionally high breakdown rate of Uber drivers driving Teslas has seriously dragged down Hertz's performance.

Hertz said that the maintenance cost of an electric car is almost twice that of a regular combustion engine vehicle.

"Considering the impact of EV depreciation, breakdown repairs and average revenue per vehicle, we estimate that our operating margins could be several points higher if all of our vehicles were conventional fuel vehicles." Stephen Scherr said.

There is no discount for the purchase of 100,000 Teslas

Car rental company Hertz was the first victim of the global travel industry to be hit hard by the pandemic, and its business fell off a cliff and filed for bankruptcy in May 2020. In 2021, Knighthead Capital Management, an investment firm specializing in distressed debt, and other investors poured $6 billion into Hertz to help bring the nation's largest car rental company back to life.

Less than four months after getting rid of bankruptcy, in November 2021, Hertz announced the purchase of 100,000 Tesla electric vehicles, planning to fully promote the electrification of its car rental business.

Although Hertz did not disclose the total value of the large order, according to Bloomberg reports at the time, the total value of 100,000 Teslas reached $4.2 billion, which means that the average price per car is $42,000 - even for such a large order, Tesla did not give Hertz any discount. Subsequently, Tesla CEO Elon Musk also confirmed the news on Twitter, saying that Tesla sold Hertz electric cars without any discount, and the price was the same as that sold to consumers.

"Tesla is facing much higher demand than production, so we'll only sell cars to Hertz at the same profit margin for consumers." Musk tweeted at the time.

The above series of news also directly pushed Tesla's market value to $1 trillion.

Electrification strategy is slowing down

However, according to the data released by Hertz, Hertz currently has a total of 50,000 electric vehicles, according to its CEO Stephen Scherr revealed that "80% are Tesla" to roughly calculate, Hertz's Tesla electric vehicles are only 40,000 at most, 60,000 short of the goal of 100,000.

However, given Tesla's serious drag on Hertz's performance, it seems that this plan may be on hold. Stephen Scherr said on the call that Hertz will continue to adhere to the electrification strategy in the long term, but in the short term, it will need to deal with the problem of dragging down the performance, which will slow down the progress of electrification.

He also mentioned that buying other EV brands, such as GM's EVs, could be a response. In addition to the large volume order for Tesla, Hertz previously announced an order for 65,000 Polestar electric vehicles.

"Like General Motors and other OEM brands, they have established a parts supply system in the country for decades, which is much more mature than Tesla." Stephen Scherr said,

He also pointed out that other brands of electric vehicles have lower failure rates and lower parts and labor costs than Tesla.

There is no doubt that saying this means that the largest car rental company in the United States has been deeply hurt by Tesla. Tesla's own performance has also declined recently. Tesla's third-quarter earnings report, released just last week, was the company's worst first-quarter earnings report in the past two years, and the continuous price cuts not only failed to bring about an increase in sales, but further depressed profits. Tesla's profit fell 44% year-on-year in the quarter, and its gross margin and operating margin fell to 17.9% and 7.6%, respectively, the lowest level in two years.

Tesla's stock price has fallen more than 13% in the last month due to poor results. Tesla's market capitalization of $1 trillion has now evaporated by nearly $400 billion since Hertz announced its $100,000 Tesla order target two years ago.