The challenges ahead

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The challenges aheadCanadian auto sales have been on a growth ride for the last number of years, with the industry achieving record sales volumes in each of the last three years.

In fact, last year we were just shy of the 1.9 million units sold in Canada, with sales of 1,898 units.   

These sales numbers were about 2,500 units shy of the forecast DesRosiers Automotive Consultants had laid down for the year, but I’d say they were pretty darn close. 

So where does the industry go from here? 

While DesRosiers shows continued sales growth through 2018 to over two million vehicles a year before falling back to something shy of 1.9 million in sales for 2020, the significant economic turmoil that the world has witnessed over the last two months may alter those projections, at least in the near term.    

You may recall that December sales were actually down 1.9 per cent, although in the context of the average December sales over the last five years, sales were still almost 13 per cent ahead of the five year average.   

But recall that December was the first month in almost three years where sales did not advance on a year-over-year basis. Is this just a blip, or is it a harbinger for a plateaued or falling sales market moving forward after a sustained period of growth?

That said, depending on incentive levels and low cost financing, if manufacturers are prepared to offer deals that are too good to resist, there may yet be some growth left in the Canadian market.

Without being too pessimistic, let’s look at the challenges the vehicle sales market faces.   

In January the Parliamentary Budget Office announced that the indebtedness of Canadians had increased at a rate far greater than any other G7 country, with the debt-to-income ratio expected to hit 174 per cent up from 171 per cent in late 2015.   

If manufacturers are prepared to offer deals that are too good to resist, there may yet be some growth left in the Canadian market

For some, that ratio was at just 90 per cent in 1990. Increased concerns about indebtedness could cause at least some new vehicle intenders to stay out of the market, regardless of how good the deal is.

Next, consider the challenges of the stock market.   

The TSX Composite Index hit a 52 week high on April 15 of last year at 15,524.75 and touched a 52 week low of 11,531.22 on Jan. 20 of this year. While the index did manage an 8.2 per cent increase prior to the end of January, the TSX was still down 1.9 per cent, marking the first negative January since 2010.   

With investment portfolios subject to the vagaries of an increasingly volatile market tied largely to the price of oil, there may be a growing reluctance to spend money from depreciated investments on depreciating assets.


After reporting a drop of 12.1 points in December, The Conference Board of Canada said consumer confidence fell a further 10.9 points in January. That puts Canadian consumer confidence at its lowest level since the end of 2011.    

Consumers with falling confidence levels are generally wary of spending money on big ticket items.

The lackluster loonie also plays a role for the prospects of continued vehicle sales growth in Canada.   

On Jan. 29, 2015 the loonie was sitting at US $0.79. That same day a year later, the loonie had fallen a full eight cents, or 10 per cent of its value, to US $0.71. That’s after touching a 13 year low of
US $0.69 on Jan. 20.   

The lower loonie will eventually have manufacturers looking to increase prices on imported vehicles to Canada as a result of the lower exchange rate.   

With the loonie’s value tending to follow the price of oil, it is not likely to rebound significantly, with oil slated to stay below $40 a barrel through 2016.

Increasingly stringent GHG emission standards from 2011-2016 will have added roughly $1,050 to the price of a vehicle and $1,420 to the price of a truck in 2016, compared to 2010.   

The second tranche of even more stringent GHG emission standards from 2017-2025 will require fuel efficiency improvements of five per cent per year from passenger cars and 3.5 per cent per year initially from trucks.   

The lackluster loonie also plays a role for the prospects of continued vehicle sales growth in Canada.   

Considering that typical fuel efficiency improvements have typically been in the one per cent per year range for the past decade or so, these standards will require investments in additional technology that will translate into higher prices for consumers.

The overall economic picture has also turned less robust than economic forecasters had originally envisioned for 2016. 

In October, the Bank of Canada had forecast two per cent GDP growth in 2016.   

But in late January, CIBC World Markets downgraded its month old GDP forecast of 1.7 per cent GDP growth for 2016 to 1.3 per cent GDP growth.   

This more somber economic forecast may cause consumers to have second thoughts about a new vehicle purchase.

On the plus side, DesRosiers Automotive Consultants has noted that there is strong replacement demand for the record number of vehicles sold from the 90s to the mid-2000s.

DesRosiers has also noted that used vehicle prices have been increasing, making new vehicles a more viable alternative for some used vehicle purchases.

The weakened loonie is also a bit of a double-edged sword. Certainly some of the contribution towards the record sales set last year happened because vehicles were purchased in Canada by Americans. 

It is unclear what the quantum of that number of vehicles might be but those sales did have an impact. This may also be the case for 2016.

In 2015, Ontario and Quebec had sales increases on a year-over-year basis of 5.9 per cent and 5.6 per cent respectively — more than double the national level of 2.6 per cent.   

As Canada’s two most important sales markets continued, better-than-average sales growth could assist in supporting higher overall sales in 2016.

I believe 2016 will prove to be a challenging year for automotive sales in Canada, but manufacturers and retailers have always proven themselves to be resourceful, innovative and determined in times of economic challenge. 

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