Polestar’s CEO has identified a major flaw in the EV market—and it’s bad news for customers who have already bought in

Thomas Ingenlath, CEO of Polestar, has confirmed how the company is attempting to navigate the industry-wide issue of EV resale values.

It’s a common notion that when a customer drives their shiny new car off a dealer’s lot, the value of the vehicle automatically goes down. And this is the problem EV disruptor Polestar is currently facing—and trying to outmaneuver, via changes to its big EV deal with Hertz.

Car resale values are often turbulent but in a fast-evolving sector like electric motors—buffeted by price competition, supply issues and questions over long-term feasibility—that turbulence is all the more pronounced. According to a 2023 study of 1.1 million motors by iSeeCars.com, electric vehicles on average have lost 49.1% of their value over the past five years.

And this is where a deal between Volvo spinoff Polestar and rental giant Hertz has come somewhat unstuck. In an interview with the Financial Times Polestar’s CEO, Thomas Ingenlath, confirmed the business has agreed to suspend a purchasing agreement originally planned to last until 2027.

In 2022 Hertz signed a deal with both Polestar and Elon Musk’s Tesla to buy tens of thousands of cars to fulfill its pledge of having 25% of its fleet go electric. The deal for 65,000 Polestars was estimated to be worth approximately $3 billion, while Hertz’s deal with Tesla was for 100,000 vehicles.

But late last year Hertz said it was offloading 20,000 Teslas from its U.S. fleet, with its resale site showing some vehicles were up for grabs for as little as $20,000. The car in question, a Model 3, is roughly half the price of new standard Model 3 vehicles currently on sale, whose entry-level prices begin at $38,990.

Slumping resale values won’t be welcome news to the more than 10 million EV customers around the world, many of whom jumped on the EV bandwagon in their bid to do their part for the planet. Even before the industry was facing a potential deluge of second-hand rental cars, customers were blighted with product recalls and said they were ‘duped’ by overnight price slashes as rival brands fight to remain price competitive.

Polestar deal with Hertz

Polestar wants to avoid seeing the market flooded with supply of cheaper vehicles bearing its badge, an eventuality it has now avoided with a new relationship with Hertz. To that end, Ingenlath says his company has agreed to waive Hertz’s purchase agreement—which so far has seen 20,000 EVs sold between 2022 and 2023—in return for the rental group’s promise not to sell Polestar vehicles too quickly or cheaply.

Hertz has agreed to “keep the cars longer than a year, we work with them, and we have the right to first refusal whenever they want to take them out of the fleet,” Ingenlath said.

This would mean that instead of Hertz selling the cars independently, thus setting its own prices, Polestar could take the vehicles back in order to keep a floor in place for price tags.

Although Ingenlath’s confirmation of the evolved deal came this week, it’s been coming down the track for a number of months. The CEO said it was last autumn when he first heard from Hertz boss Stephen Scherr, who asked if the purchasing agreements for the U.S. could be suspended.

However, the deal is far from dead. Ingenlath said there is a “clear intention” to go back to the drawing board with Hertz in 2025, at which point the companies would review whether it was time to restart sales in the U.S.

Hertz did not immediately respond to Fortune’s request for comment.

Polestar’s problems

Polestar has thus far enjoyed support outside of tussles for the top spot in the EV market. Where Elon Musk’s Tesla has been forced to pivot in response to major newcomers like China’s BYD, Geely-backed Polestar has remained steadily in the top 10 U.S. sellers without being in such a public rivalry.

But in recent weeks Polestar investors may have begun to question whether the company—which expected to deliver between 60,000 to 70,000 vehicles in 2023—is too small to survive.

Last week large Polestar shareholder Volvo Cars said it would cease any and all further funding in the brand and revealed plans to reduce its 48% stake in the company, in part through a “distribution” of stock to its own investors including its Chinese parent company, Geely.

“Our focus is on developing Volvo Cars and concentrating our resources on our own ambitious journey,” the Swedish premium carmaker said.

Keen to calm fears among investors, Polestar said talks to fill its funding gap of $1.3 billion are “well advanced.”

“We have successfully ramped up production and started sales in China, Europe and Australia of Polestar 4,” Ingenlath added.

And, he said, Polestar 3’s first customer deliveries are expected to start this summer.

This story was originally featured on Fortune.com