Will Hertz’s big Tesla buy make EVs mainstream?

Tesla found a new way to break the internet Monday: Sell 100,000 Model 3 electric sedans to Hertz, the recently bankrupt rental car company.

Much of the ensuing commentary focused on Tesla’s value shooting past $1 trillion, which propelled CEO Elon Musk’s personal fortune to stratospheric new heights. 

But the deal, worth approximately $4 billion based on the list price of the Model 3, raises broader questions about the next stage of growth for the electric vehicle industry. 

Fleet purchases of EVs have been gaining traction among ride-share operators, school districts, transit agencies and delivery companies. But until Hertz made this very big bet to put Teslas in major U.S. markets and a few European cities, rental car companies were not in the picture. 

The deal could prove to be a bellwether, said Dave Mullaney, principal on the Carbon-Free Mobility team at nonprofit think tank RMI.

“People buy cars for emotional reasons; corporate fleet decisions are much more motivated by economics,” he said. ​“Does this mean that the economics have really turned?”

The conventional wisdom is that fleet electrification smooths out some of the challenges faced by individual early adopters. Fleet operators can invest in central charging depots and assign professionals to manage the energy flows and charging schedules. And to the extent that professional fleets have predictable routes, it’s easier to ensure those vehicles have enough juice to get the job done.

Hertz is definitely a fleet operator, and the company said it will build its own network of chargers for customers to use. But the actual usage will look much more like that of individual passenger vehicles.

“As is the case with personally owned cars, rental cars must be able to drive any distance, in any direction,” said Pavel Molchanov, an equity analyst covering the energy sector for Raymond James.

How big an opportunity is this for the electric car market?

Rental cars make up about 1 percent of light-duty vehicles on the road in the U.S., Molchanov said. That was 2.3 million rental cars as of 2019. 

Hertz is converting one-fifth of its fleet to Teslas. But it’s just one player in the rental industry.

“In the grand scheme of things, it is not very much, but given that U.S. EV sales are barely 500,000 this year, every little bit helps,” Molchanov said.

In other words, cracking the rental sector won’t ensure EV dominance of the light-duty market. A January analysis by RMI found that the U.S. needs to shift 70 million vehicles to electric by 2030 to keep on target to limit global warming to 1.5 degrees Celsius. (Canary Media is an independent affiliate of RMI.)

But electric cars are still in the ramp-up phase, where increasing volume brings down costs and makes future purchases more affordable. If other rental companies start to worry about losing customers to Hertz and buy EVs of their own, they could give the young EV industry a welcome boost in its early years.

And an even bigger impact could result from millions of customers trying out an EV without having to actually buy one.

“So many people have feelings about EVs but have never been in an EV,” Mullaney said. ​“This is the point where people are going to have a way to experience it.”

Did this deal justify a surge of more than $100 billion in Tesla’s market cap?

Hell no! That bump was worth more than the current market cap of Ford ($63 billion) or GM ($84 billion), which sell many more cars. The Hertz purchase endorses Tesla’s status as a carmaker with mass appeal, but it doesn’t create new business prospects commensurate with the biggest carmakers on earth.

But Tesla, like other EV manufacturers, is a ​“story stock,” with a valuation ​“driven by sentiment and momentum,” Molchanov said. 

Rapid uptake by an incumbent car rental brand tells a story about EVs winning in unexpected places, and that seemed to resonate with investors far more than, say, the federal reprimand Tesla received on the same day about the dangers of its automated driving service.

What’s this mean for drivers?

More choice.

I rented a Tesla Model 3 for a Canary Media reporting trip this summer, not wanting to burn gas while reporting on the transition to clean energy. But I had to turn to Turo, an app that lets you rent personal cars from their owners.

It was my first time driving a Tesla, and it felt like taking off in a spaceship. Sure, I had to watch some YouTube videos for answers to basic operational questions (How do you turn it off? Oh, you don’t?), and factor in extra time for charging. But the seamless electric acceleration and lack of any tailpipe emissions made it far more enjoyable to drive than the forgettable sedans I’d rented previously. Driving electric for a day makes it easier to imagine doing it regularly.

Soon, customers will be able to get that experience from Hertz. People who don’t want to switch can still have their clunky internal-combustion options. People who want something that feels like the future will now have an alternative.

“Rental companies will need to look at EVs as a key differentiator moving forward,” said Vic Shao, CEO of smart electric-charging startup Amply, in an email. ​“Hertz is a first mover, and we expect continued and rapid scale.”

Hertz’s move to offer a green option tracks with changes at Uber, which now offers ​“eco-friendly” rides for a slight upcharge. Similarly, Google rolled out ​“most fuel-efficient” routes as a navigational option on its maps earlier this month.

If drivers love the Tesla option and gravitate toward Hertz because it’s the only rental brand that has it, that’ll put pressure on competitors to hop into the EV market. Maybe they could get a deal on Chevy Bolts in the wake of the massive LG battery recall.

What could go wrong here?

Two execution challenges jump out: Ensuring customers have a good experience with electric driving and turning Hertz into an electric charging company. They are related but distinct.

Installing chargers at rental locations won’t be the hard part, Molchanov said.

“What matters much more is addressing the range anxiety of car renters (just like car buyers) about being able to drive where they need to go, without needing to worry about accessibility (and speed) of public charging,” he noted in an email. ​“The backdrop is that charging infrastructure is situated very haphazardly from state to state.” 

A driver can rent a Tesla in California and stand a good chance of finding chargers along the way to where they’re going. On my trip this summer, I had plenty of Tesla charging options even in the midst of the Mojave Desert. Dropping Teslas into, say, Nebraska will be more challenging. Hertz will need to ensure there’s sufficient charging infrastructure in the markets where it offers electric rentals, so drivers don’t end up stranded on their first EV voyage.

But if building some chargers is eminently doable, operating them effectively is still an acquired skill.

“Just like any other EV fleet, these vehicles need to be charged and ready to go with minimal disruptions, cost-effective charging and guaranteed performance for their fleet,” said Shao. ​“They can’t be stuck in a situation where their charging operations fail and EVs aren’t available for customers.”

Shao, who runs a charging company, believes the way for Hertz to go is to partner with charging specialists to ensure reliable and cost-effective charging at scale.

Whether Hertz tries to go it alone or partner, it will have to grapple with a question of exclusivity: Tesla uses its own charging plug, which is not compatible with other EVs. 

Tesla already has a Supercharger network of fast-charging stations around the U.S. and Europe, so it wouldn’t make a ton of sense for Hertz to replicate a Tesla-only charging network. But Tesla has been slow to offer adapters that would allow its customers to use generic public chargers. 

If Hertz wants those adapters figured out, its 100,000-vehicle order may be enough to get Tesla’s attention.