Hertz is dumping thousands of EVs. This may be why.

The headline we (and others) are using to describe Hertz selling off some of its substantial fleet of EVs is true. Hertz is dumping 20,000 EVs, a not-insignificant portion of its roughly 50,000-EV fleet (as of October) and a third of its total EV fleet globally.

According to a filing with the Securities and Exchange Commission related to the sale, Hertz "expects to reinvest a portion of the proceeds from the sale of EVs into the purchase of internal combustion engine ("ICE") vehicles to meet customer demand."

But consumer demand is just a portion of the total picture.

Many of the EVs that Hertz owns are used for its rideshare rental program with companies like Uber. As a recent investor conference in October, Hertz executives signaled that there are many factors that influenced its decision to pull back on EVs—even before the sale of 20,000 EVs was announced.

Repairs strain the bottom line

The instigating factor seems to have been repair costs for rideshare EVs, which were much higher than expected. This is not maintenance costs, which Hertz notes are lower than ICE vehicles, but rather collision repair costs. According to Johann Rawlinson, Hertz VP of Investor Relations, "collision and damage repairs on an EV can often run about twice that associated with a comparable combustion engine vehicle." The difference is significant enough that it weighed significantly on Q3 earnings.

In fact, according to Stephen Scherr, Hertz's CEO, "there's quite a bit of the cost element that relates to the Teslas as opposed to others." Scherr pointed to GM's EVs, which benefit from a larger parts and repair network nationally and lower parts and labor costs for repairs. Note that a full 80% of Hertz's EV fleet is Tesla models.

Tesla recall in China:More than 1.6 million Tesla electric vehicles recalled in China for autopilot, lock issues

In response, Hertz apparently moved many rideshare EVs into the regular rental business, which oversaturated it, hence the company's comments about aligning with consumer demand by purchasing more ICE vehicles.

Consumer demand for Hertz's EVs has to be viewed through the lens of the company moving its assets from one part of the business to another not to match consumer demand, but rather to try to avoid significant unanticipated costs in another part of the business.

EVs losing value

Another factor to put Hertz's sale in context is the plummeting value of EVs in general spurred by Tesla's steep price cuts recently. Hertz's investment in EVs predates the price cuts. In other words, Hertz bought high and is selling low. Per Rawlinson in October, "The MSRP 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."

If you've read this far and are coming to the conclusion that Hertz's "EV problem" is, in reality, a "Tesla value and repair costs problem," you're not alone. It's difficult to draw conclusions about EV suitability for the rental car market when so many cost factors conspired against Hertz's mostly Tesla fleet.

In October, Hertz indicated that future EV acquisitions would benefit from lower purchase price and lessons learned from its Tesla fleet. Given Scherr's comments, we'd assume that it would strongly consider parts and labor costs in its calculus—and unless it comes to some deal with Tesla holding those costs down, that points to the company acquiring EVs from different automakers.

EVs are only 11% of Hertz's total fleet, so the 20,000 EVs the company is going to sell off by the end of 2025 represent 4.4% of the entire fleet. This does not seem like a permanent retreat from the EV business for Hertz, but rather a reallocation of a small portion of its overall assets in an attempt to hold costs down.

Hertz has not reneged on its agreements with GM and Polestar to buy a significant number of new EVs, but it's not clear if its timeline will change. Scherr, in an interview with Yahoo! Finance, indicated the company is interested in GM's less expensive upcoming EVs and that the overall EV strategy is intact, even if it will take longer to achieve.