Automotive News Canada - August 2020 - v2 - 29

* AUGUST 2020

Sales optimism comes with a warning
to expect 'more twists and turns'
CONTINUED FROM PA GE 1

July in Canadian automotive history, according to
DesRosiers' numbers.
The firm estimates automakers will sell 1.5 million
new vehicles in 2020, while
Scotiabank estimates 1.6 million. In May, Scotiabank forecast 1.35 million and in June
the number was upped to 1.5
million. DesRosiers was consisent at about 1.5 million
through the same period.
Both use proprietary formulas to estimate monthly sales
and forecast annual totals.
Before the pandemic, analysts generally were predicting vehicle sales would total
about 1.9 million in 2020.

CONSUMER CONFIDENCE
"The Canadian auto market is benefiting from a very
solid rebound in activity,"
said Rebekah Young, director of fiscal and provincial
economics at Scotiabank
Economics.
"This is consistent with
broader retail sales across
Canada. This is likely a
result of a combination of
pent-up demand from the
lockdown as well as new
demand from pandemic-driven concerns around alternative modes of transportation."
According to the
Conference Board of Canada,
the index of consumer confidence inched up 2.8 points in
July to 82.5. It had increased

16 points in June to 79.7.
Robert Karwel, senior
manager of J.D. Power's
automotive practice in
Canada,
described
the industry
as "decently healthy,"
which means
automakers
might be able
to pull back on
Young:
incentives.
Auto is
Early in
consistent
the pandemwith
ic, DesRosiers
broader
said autoretail sales
makers might
across
be willing to
Canada.
spend billions
FILE PHOTO
on incentives
to spur purchases, but
that might no
longer be the
case as dealers start to get
back on their
feet.
Karwel:
DesRosiers
With low
inventory
said incenon dealer
tives come in
lots, there's many forms
no reason
and what
to "get real automakers
crazy with
have done
incentives." during the
FILE PHOTO
pandemic is
extend - or even defer for
three or four months - payment plans.
He said we're still living
in "one of the most generous
periods of incentives," but it
won't last.

He said automakers, distributors and dealers themselves are all offering some
sort of incentive.
"This go-around, you're
seeing car dealers doing a
lot, they're cut to the bone as
a result of the pandemic," he
said of their offerings.
That will eventually stop.
"But I do see factory-level
incentives until we're clearly
out of this."
Incentive spending peaked in 2018 when new-vehicle sales were riding high at
just above two million units,
Karwel said.
"In 2019, there was a pullback in volume and pullback
in retail. Fewer Canadians
bought cars. A lot of these
brands said, 'Ah, because we
have to expect we're going
to sell fewer cars this year,
we're going to flip from
expanding market share to
preserving profit.'
"The quickest way to do
that is to pull back on incentives."
Incentive spending topped
out at $6,300 per transaction
in 2018, according to J.D.
Power. It fell to $5,500 in 2019
and stands at about $5,900 in
2020.

EASY ON INCENTIVES
Supply will also dictate
how much money automakers offer. Karwel said dealership lots are depleted and
retailers are still struggling
to get inventory from plants
that were idled during shut-

downs induced by the pandemic from March into May.
"If a lot of manufacturers
are dealing with supply limitations, there's no reason to
get really crazy with incentives," he said.
Scotiabank's Young suggested depleted inventory
could lead to some buyers
switching brands, "given
supply constraints on
high-demand vehicles where
North American production
is still ramping up to meet
this stronger rebound."
It's uncertain how long
the recovery will take or
how strong the market will
remain.
March and April were
forecast to see a record
number of leased vehicles returned, Karwel said.
But those terms have been
extended into late summer
and early fall and will be
replaced with new lease contracts or purchases.
"The extent to which
this sales success was pentup demand from the 'lost'
spring versus a more sustainable recovery remains
to be seen," DesRosiers said.
"The long-term implications
of COVID-19 on the economy
and the automotive market
are far from clear and will
likely include more twists
and turns.
"For now, however, the
sales picture is strong, and
the automotive industry has
some much-needed positive
news." - ANC

'Bubble' of leased vehicles returning
CONTINUED FROM PA GE 3

into showrooms, they also keep them
out of the market longer than shorter-term financing or leasing terms, said
Karwel.
It would then be incumbent on
automakers and dealers to entice buyers back to the market sooner or risk
depressing the new-vehicle sales market in the long term.
"It's a little bit problematic from
that side, but we're not going to argue
that right now in Canada, that's the
winning strategy," Karwel said.
Automakers began pushing zeroper-cent, long-term financing, in part,
because they lacked confidence in predicting residual values during the early
months of the pandemic, when showrooms and auction lanes were forced to
shut down.
They also offered to extend leases on about 40,000 vehicles that were
due to expire in both April and May,
said Karwel. At Hyundai Canada, for
instance, about 11 per cent of customers
with leases set to expire between March
1 and July 28 took advantage of the
company's lease-extension program, a
spokeswoman said.
The extensions are "creating a bubble of leased cars which have yet to
come back, on top of the vehicles scheduled to come back in July, August and
September," said Karwel.

Whether those vehicles will be able
to retain their residual value is uncertain, said Karwell. But, used-vehicle
pricing is up almost two per cent - an
indication that the market might be
able to absorb the thousands of vehicles
that will be coming off leases this quarter, he said.

INCENTIVE SPENDING UP
Many customers, especially those
inclined to choose leasing to lower
their monthly payments, could opt
for low annual percentage rate (APR),
long-term financing. And others, especially customers who now work from
home, might decide to leave the market
entirely, especially if their returning
lease is a second vehicle.
"Conceivably a bunch of people are
not going to re-lease a car right now,"
Karwel said. "They might go to the
used market to save a little money. But
they might not buy a new car."
According to J.D. Power, 43 per
cent of 84-month loans in June had an
APR from zero to 0.9 per cent, up from
17 per cent of those loans a year earlier. And incentive spending in the second quarter rose 10 per cent, driven in
large part by those long-term loans.

STABLE OUTLOOK
But some auto executives predict leasing rates will stabilize in the
remainder of the year.

In a June interview, Hyundai
Canada CEO Don Romano said the company "didn't have any idea" in April
and May about residuals going forward.
"We didn't know if the market was
going to be flooded with used cars," he
said. "And I can tell you right now, dealers can't get enough of them. Just the
opposite occurred."
The situation improved as more volume headed through auctions in June
and July, said Brian
Murphy of Canadian
Black Book.
"There's a lot of bidding going on for vehicles," said Murphy, the
company's vice-president of research and
Hairabedian: analytics.
John Hairabedian,
Expected
CEO of the Quebecrising prices
based HGregoire, said
for used
his dealership group
vehicles as
continued to buy used
COVID-19
vehicles during the
cases
darkest months of
dropped.
the pandemic, on the
FILE PHOTO
expectation that prices
would rise as COVID-19 cases in Canada
declined.
"That's exactly what we saw,"
Hairabedian said. "I think residual values are going to be just fine. There's
strong demand for used cars in the marketplace right now." - ANC

CADA: Wage-subsidy
extension will
help carry dealers
through 2020
CONTINUED FROM PA GE 3

structured to allow for further incentives toward the purchase of an electric vehicle, although Reuss warned
that it would be a mistake for the government to provide incentives to purchase green cars only.
"Don't gear it only toward that
because it might defeat the purpose.
There are already other programs in
place that are for pure plug-in or EV
promotion. Those would continue.
But if you're going to put something
in place and you want it to actually have an effect on the marketplace,
it's probably best if it's for all powertrains."
It was unclear whether the federal
government would adopt such a program. The government faces a surging deficit as tax revenue plunges
and expenditures rise during the economic crisis, while at the same time
new-vehicle sales figures have surpassed expectations. Those sales in
July were down an estimated five per
cent from a year earlier, and several
automakers reported year-over-year
gains.
The CVMA's Kingston said he was
confident the government would continue to be open to further spending.
The alternative, he said, would be
disastrous for the Canadian economy.
"I'm not worried yet about a situation where the government decides,
'That's enough, we're turning the
taps off.' They know what the impact
of that would be. It would be a much
bigger, prolonged economic crisis."

GOVERNMENT ON BOARD
Indeed, the government signaled
in July that it would continue to
spend to help keep individuals and
businesses afloat during the economic crisis.
That same month, the House of
Commons passed an extension and
overhaul of CEWS. The program previously covered 75 per cent of wages
up to $847 per employee for eligible
companies that showed a 30 per cent
decline in revenue. CEWS now will
cover businesses on a sliding scale,
with those hit hardest receiving the
most aid. The program was extended
through December.
Reuss praised the changes to
the program, saying they would
help dealers stay afloat through the
remainder of the year. About 86 per
cent of CADA's members have used
the wage subsidy, Reuss said, "and
they are hiring and rehiring because
of it.
"As revenues have started to
return, dealers were facing a cliff at
the 30-per-cent threshold. They need
certainty going forward. ... Now, we
have certainty."
It was unclear whether Canada's
auto manufacturers took part in the
program to subsidize worker salaries
at their factories. General Motors and
Fiat Chrysler Automobiles declined
to comment, while representatives
from Ford Motor Co. and Toyota
Motor Corp. did not return requests
for comment.
A spokeswoman for Honda Canada
said Honda of Canada Manufacturing
"has not submitted an application to
the CEWS program, yet intends to
participate." - ANC

Automotive News Canada - August 2020 - v2

Table of Contents for the Digital Edition of Automotive News Canada - August 2020 - v2