Why Hertz’s big Tesla deal is such a blockbuster

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Tom Brady walking past a line of electric cars in a Hertz parking lot in a commercial.
Tom Brady is the face of an ad campaign promoting Hertz’s new electric fleet. | Eric R. Davidson/Getty Images for Hertz

The car rental giant is making a huge bet on electric vehicles — and bringing Uber along for the ride.

Tesla became a trillion-dollar company this week after the announcement of a massive deal with Hertz. The rental car company said it would purchase 100,000 Tesla Model 3 sedans by the end of 2022, and that sent Tesla’s stock price north of $1,000 a share. Two days later, Hertz revealed that Uber has committed to renting as many as half of these electric vehicles to its ride-share drivers. Hertz even recruited Tom Brady to promote its new fleet.

These developments are clearly good for Tesla, and they bode well for the EV industry as a whole. But the other companies involved are making riskier bets. Hertz is spending an estimated $4.2 billion under the assumption that, when its Tesla rentals become available next month, the cars will be so desirable that its customers will pay higher rates for what the company says will be a “premium and differentiated rental experience.” Hertz has said that the cost of renting a Tesla will be “similar” to its premium and luxury car rates, which vary based on pick-up location and the reservation date. For reference, renting a Jaguar XF sedan, which costs roughly the same as a new Tesla Model 3, at New York’s LaGuardia Airport costs upward of $300 a day before taxes and fees.

Meanwhile, Uber is offering drivers a small subsidy and discounts on certain charging stations if they agree to pay $334 a week to rent a Tesla from Hertz. The ride-share company thinks this new rental approach could lay the groundwork for a future, more environmentally conscious business model, despite the fact that the company has a mixed record when it comes to leasing cars to drivers.

To get a sense of how each of these companies will approach the new Tesla rental market, we took a look at the math. Hertz’s deal with Tesla is worth billions, while Uber could spend millions in perks to woo drivers to rent EVs instead of less-expensive vehicles. Of course, it will be customers who decide whether these investments pay off for the respective companies.

Tesla is making more than money

Tesla only stands to gain if these bets pay off. All the company has to do is produce its biggest order ever. The price of the deal is particularly high because Tesla is charging the sticker price on all of the Model 3s — currently, a Model 3 starts at $43,990 — even though discounts on bulk orders are more typical in the car rental industry.

There’s more than just money on the table, too. Making Tesla vehicles widely available as rentals and for Uber rides will also introduce the company’s brand to many more potential customers. For example, Tesla famously does not have a marketing department, but it’s getting a lot of attention in Hertz’s latest ad campaign, which shows Tom Brady surrounded by Model 3s.

Hertz is betting billions on a greener future

More is riding on this deal for Hertz. The car rental giant filed for bankruptcy last year after the pandemic sidelined the travel industry, and it only started to bounce back when two investment firms bought a majority stake in the company in March. Now, it looks like Hertz is hoping that a pivot to electric vehicle rentals might give the century-old company a second life. In fact, Hertz plans to launch a dedicated portal for EV rentals, and says that more than 20 percent of its fleet will be electric by the end of next year.

This calculation assumes that Tesla will deliver the promised vehicles on time, which may not happen. The company has missed production goals in the past and is still navigating the worldwide semiconductor shortage, which has devastated auto manufacturing.

Potential customers might not want to pay a markup to rent a Tesla, especially since rental car prices are still higher than they were before the pandemic. Then again, the novelty of driving a Tesla could be enough to reel customers in. Plenty of people haven’t had the chance to drive an electric vehicle at all, so a rental experience could give them an introductory opportunity to do so without spending more than $40,000 on a Model 3.

Uber’s business model is shifting gears

Though Hertz is marketing its Teslas as a premium product, the vehicles it rents to Uber will be available on all tiers of rides, including the budget-friendly UberX service. While Uber drivers with Teslas will be also eligible to list their vehicles on the platform’s higher-end Uber Comfort Ride and environmentally focused Uber Green service levels, there won’t be a dedicated way for an Uber customer to book a ride in a Tesla.

The success of Uber’s new deal with Hertz obviously depends on whether or not it can convince drivers to sign up for the rental program. Uber drivers can already rent other cars through an existing partnership with Hertz, which advertises a weekly rental base rate of $214 per week, excluding fees. While renting a Tesla would be more expensive, Uber has promised that the cost will eventually drop from the current $334 per week to $299 and possibly even lower. Uber is also offering Tesla drivers an extra dollar per trip (up to $4,000 annually), and any Uber driver with an electric vehicle can get discounts at EVgo electric vehicle charging stations.

“It’s clear EV’s and self-driving cars are the future of the automotive industry, and [Uber wants] to have a front seat to their impact on large-scale mobility,” said Gad Allon, an operations, information, and decisions professor at Wharton. “This collaboration allows them to begin and envision the future of their model.”

Still, this plan has its limits. Less than 10 percent of Uber drivers currently rent their vehicles, so the Hertz deal doesn’t affect the vast majority of drivers. The company also has a sketchy history when it comes to supplying drivers with cars. In 2017, Uber shut down its Xchange Leasing business, which provided vehicles to drivers who couldn’t find other financing; the program was losing too much money. Xchange Leasing was also criticized for saddling drivers with abusive financial agreements. Some believe that Uber’s latest rental collaboration will also leave drivers worse off.

“Whether they are renting Teslas or Toyotas, drivers that Uber traps with car rental schemes will still get caught in cycles of unending debt,” a spokesperson for Gig Workers Rising, an advocacy group, told Recode.

But even if Hertz and Uber cash in on their bets, Tesla will still be the company with the most to celebrate. Hertz said on Wednesday that if the Uber partnership is successful, the company could expand the program to include 150,000 cars over the next three years, which would require that Hertz buy at least 50,000 more Model 3s. That, of course, is great news for Tesla.

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