Hertz Places Order for 100,000 Tesla Vehicles

The order, to be fulfilled between now and the end of next year, is a sign of the growing momentum in the shift toward electric cars.,

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Hertz orders 100,000 Teslas, and both companies’ shares shoot up.

The Tesla order would give Hertz one of the world's largest fleets of rental electric vehicles.
The Tesla order would give Hertz one of the world’s largest fleets of rental electric vehicles.Credit…Arnd Wiegmann/Reuters
  • Oct. 25, 2021Updated 2:14 p.m. ET

Hertz, the car rental agency, said on Monday that it had ordered 100,000 Teslas, a bold move for a company just emerging from bankruptcy and a sign of growing momentum in the shift to electric vehicles.

By the end of next year, when the Tesla order is completed, electric vehicles will make up more than 20 percent of Hertz’s global vehicle fleet, the company said.

“Electric vehicles are now mainstream, and we’ve only just begun to see rising global demand and interest,” Mark Fields, Hertz’s interim chief executive, who previously led Ford Motor, said in a news release. “The new Hertz is going to lead the way as a mobility company, starting with the largest E.V. rental fleet in North America and a commitment to grow our E.V. fleet and provide the best rental and recharging experience for leisure and business customers around the world.”

The company declined to comment on the value of the deal. Bloomberg, which reported the news before the announcement, said the order would generate about $4.2 billion of revenue for Tesla, suggesting that Hertz was paying close to face value for the vehicles. Car rental firms typically demand deep discounts for large vehicle orders.

Hertz customers will be able to rent a Tesla Model 3 in some major markets in the United States and Europe starting in early November. The company said that it planned to install thousands of chargers at its locations and that it was teaming up with football quarterback Tom Brady to promote its E.V. offerings in a marketing campaign.

Share prices for Tesla and Hertz were up about 10 percent by early afternoon.

The deal could benefit both companies, said Michelle Krebs, an analyst with Cox Automotive.

“This is unique, and it’s really allowing Hertz to differentiate itself from other rental car companies,” she said. “For Tesla, it’s a great deal because it exposes Tesla’s E.V.s to a much wider array of consumers.”

A large order from Hertz could also help Tesla balance production and manage a shift in demand for its more affordable vehicles. In recent quarters, sales of the Model 3 compact sedan have declined and have been outstripped by those of the Model Y hatchback.

In the months ahead, the company plans to start making the Model Y at plants under construction in Austin, Tex., and in Germany near Berlin. Ramping up those plants could leave less production for its plant in Fremont, Calif.

Sales to rental fleets can have some drawbacks, however. Rental sales are normally a low-margin business, and the cars usually come back into the market as low-mileage used cars. Hertz and its peers typically keep cars for six to 12 months and then send them to auction houses that supply dealers with used vehicles. Over time, this steady stream of former rental cars can cause demand and prices for new cars to fall and can lower the value consumers get for cars they want to trade in. Most luxury auto brands avoid selling cars to rental companies.

It is unclear how Tesla and Hertz have structured their sales agreement. Sometimes rental companies buy cars outright at a discounted price. They can also lease the vehicles, and sometimes automakers agree to buy them back at a set price. This substantially lowers the initial cost for the rental company and enables it to offer attractive daily rental prices.

But it leaves the automaker with considerable risk, because those used cars will eventually sit on dealer lots with low mileage and at prices below those of brand-new models. If auto sales slow, the automaker may end up buying back cars for more than the rental companies paid.

Overreliance on rental sales was one of several ills that helped push General Motors, Ford and Chrysler into trouble during the financial crisis in 2008-9.

For now, Tesla does not appear to face too much risk because the global shortage of computer chips is limiting how many cars automakers can produce and has pushed up demand for and prices of used cars significantly. At Carvana, a large used-car dealer, a 2018 Model 3 with about 30,000 miles sells for about $43,000, about the same as a new one from Tesla.

Hertz filed for bankruptcy in May 2020, falling victim to mounting debt and a devastating blow to its business caused by the coronavirus pandemic. But the quick economic and travel recovery provided a lifeline, setting off a bidding war for the company. Hertz emerged from bankruptcy in June, just as travel started to surge in the United States because of widespread availability of coronavirus vaccines. The bankruptcy allowed the company to shed much of its debt, freeing it to invest in modernizing its fleet.

The travel rebound has also been good for car rental firms, which sold off vehicles to survive the early stages of the pandemic. While they have struggled to rebuild their fleets because of the chip shortage that has held back auto making, that constraint on supply combined with the increase in travel has pushed up rental car prices and use. In August, Avis Budget Group and Hertz reported strong results for the second quarter of the year.

After months of its stock trading in the less-restricted over-the-counter market, Hertz this month also announced plans to list its shares on Nasdaq.

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