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This week, a big announcement was made in the rental car industry. Hertz is ordering 100,000 electric vehicles to build up its electric vehicle rental fleet by the end of 2022, Tesla's market cap surpassed $1 trillion on Monday. This is going to be the great catalyst for rental car firms to switch to electric vehicles as part of their fleets.
The 100,000-vehicle arrangement between Hertz and Tesla is a warning to the big car rental firms that an EV strategy will be required sooner than they had anticipated. Hertz is the first of a select handful of large rental car firms to make a significant investment in electric vehicles.
Following a period of market consolidation, the three businesses now account for as much as 95% of automobile rental agencies at airport terminals: Enterprise owns Alamo and National; Hertz owns Dollar and Thrifty; and Avis and Budget are now one company. However, Hertz is the only company that has offered electric vehicles in any meaningful way to date, and its concentration has been on a tiny market of luxury renters who use its premium services like Ultimate Choice.
Consumers could choose among high-end electric cars from Porsche and Tesla, among others, in the 'Ultimate' vehicle category, although fleet numbers were just a few hundred compared to the 100,000 Teslas in the Hertz contract.
Hertz considered the affluent renter, combined with an EV fascination factor, as sufficient justification for experimenting on the business's profits. This year, the company began collaborating with a leading European consulting firm to better understand how it can adapt its business model, operations, and infrastructure to accommodate more electric vehicles.
If demand hasn't been strong enough to support a large investment in an electric vehicle fleet, the Hertz acquisition could signify that the moment has come. However, the rental car business faces significant economic challenges as a result of previous reservations about EVs.
The Tesla story gives Hertz another option to differentiate itself in a consolidated rental car business as it prepares to return to the public market with a fresh stock offering following restructuring under private equity backers and with former Ford CEO, Mark Fields in as interim-CEO. But, in the end, EV fleets will be an issue that all of the big rental vehicle companies will have to address as part of their sustainability obligations and new economic opportunities.
Because of the size of their bulk purchases, Tesla has long been seen as untouchable. However, it now signifies a turning point not only in market interest in electric vehicles, but also in the supply that Tesla can create as its factory operations expand throughout the world, including to Austin in the United States. This news is a clear indication from Tesla that they are capable of producing a huge number of vehicles.
The Hertz-Tesla partnership is for Model 3 sedans, but the size of electric vehicles for rental has been an issue outside of the luxury market, with sedans being too tiny for many renters' preferences, but that is changing as more crossover EVs and other hybrid vehicles are produced. In the second quarter, the crossover utility segment accounted for half of all EV sales.
While the US government has not made the carbon footprint of the automobile rental industry a priority, the pressure is expected to grow in the future. Enterprise's carbon offsets program and a long-standing research association in the biofuels area are examples of how vehicle rental companies incorporate sustainability into their business strategies.
In recent years, shareholder advocates have pursued the issue with automobile rental firms, urging them to expand their EV purchases. In 2020, EVs were mentioned in a Hertz shareholder climate resolution as part of a larger discussion on climate change. At the moment, Hertz's basic rental car company offers only three hybrid electric vehicle alternatives for consumer rentals at limited locations, with no all-electric vehicles.
While Hertz has taken steps to improve energy efficiency for its operational facilities, the impact of the company’s fleet remains insufficiently addressed. Until now.