As we enter a new decade, dealers can expect to face headwinds from a sluggish market and the nuisance of cumbersome government policy, but otherwise smooth sailing.
We can’t say for certain what lies ahead in 2020, but Canadian car dealers can expect some of the issues and uncertainty from the previous decade to seep into the new one.
This year is expected to be similar to 2019 with a slow decline in sales anticipated, according to Brian Murphy, VP Research & Analytics, Canadian Black Book. In an interview with Canadian auto dealer, Murphy said they expect the decline to be about two per cent or approximately 35,000-40,000 units.
“(In 2019) if you look at the numbers, it’s the luxury brands that took a lot of the hit, and then so did General Motors,” said Murphy. “But we expect a bit less of that (in 2020), so hopefully it will be smoother sailing for luxury brands and smoother sailing for GM. We expect to be down a little bit, but not drastically.”
This should be interpreted as good news by the dealers, as Canadian Black Book does not expect the market to fully rebound. The not-so-good news comes from the dreaded R-word, which last year made its way around the North American automotive industry. That potential issue has seeped into 2020 and Murphy said there is still a risk of a recession. The questions is, how big and how severe will the recession be?
“There are many economists calling for a recession for the U.S., because of what’s been going on in the bond market,” said Murphy.
Even towards the end of 2019, Murphy said the short-term bond yields were higher than the long-term bond yields. Historically, this has indicated that there is a recession in the U.S., but only 50 per cent of the time has it signalled a recession in Canada.
“Our forecast is that we don’t expect a recession this year, but we think the risk over the next four years is significant,” said Murphy.
Another issue that may carry over from 2019 is a tax proposed by the Liberal government that targets luxury cars, boats, and personal aircrafts. Murphy said they believe it may only affect a small portion of the market (approximately 30,000 cars in Canada), but that it also depends on how the parameters of the tax are defined. The tax would be imposed on cars of more than $100,000, but would it be applied to the base MSRP? Or would it include PDI, and perhaps added options and other factors?
“How will it be defined in terms of commissions? Because it could affect vehicles that are a lot lower priced,” said Murphy, adding that the idea is still in its infancy — it only exists in a Liberal Party policy document. But for some dealers, that’s enough to justify concern.
Perry Itzcovitch, CADA Past Chairman and Vice President of the Hyatt Automotive Group, which includes Mercedes-Benz Downtown Calgary in Alberta, said he believes government regulation and encroachment will present big challenges in 2020.
“How will that affect us? In today’s world, it’s not just luxury cars that are over $100,000,” said Itzcovitch. “You can get into a loaded up SUV or truck, domestic or import that falls over that $100K category, and the reality of it — look what happened in British Columbia. They have actually generated less revenue by implementing a tax (in a marketplace) that consumers are just not participating in.”
The case with British Columbia is an interesting example of how the federal luxury tax would create a double tax for certain provinces. According to CADA Economist Oumar Dicko, CADA believes provincial jurisdiction such as B.C. have already taken the steps or implemented some forms of luxury taxes, and the federal luxury levy will result in a tax on tax scenario in that province. He said dealers in B.C. see the tax as difficult, particularly in an environment where sales are decreasing all over Canada.
“With the luxury tax proposal on the Liberal platform, this will make for a scenario where you have a tax on tax, like in provinces such as British Columbia,” said Dicko. “We think this is going to have a massive impact on the industry and the automotive sector as a whole.”
The impact could hit sales, critical jobs in the industry, and it could impact the investment that several dealerships have made in this segment of the market.
Also of concern is how the government perceives the tax. Currently, it’s aimed at a small portion of the auto sector (some 1.5 per cent of the total automotive industry, according to Dicko), and so the federal government and policymakers may not think that it will have a large-scale impact. “But for the reasons that I have already discussed, it will,” said Dicko.
The concern is that the Liberal government, which has a minority mandate, will need the support of parties like the NDP to be able to continue to govern, and that the luxury tax will be extended as a result to ensure that support. “Now we have a tax, where the proposal is a tax of 10 per cent on vehicles of $100K and more, but we could be in a scenario where the parties on the left are proposing a luxury tax on vehicles that are more than $50K,” said Dicko.
Further complicating matters, the tax could also be seen as a non-tariffs trade barrier to members of the European Union, potentially creating tension between the EU and Canada. Dicko said more than 95 per cent of the vehicles in Canada that would be targeted by the luxury tax are European-made. “That is a simple fact.”
A landmark agreement was signed between the two nations in 2016, The Canada-European Union (EU) Comprehensive Economic and Trade Agreement (CETA), and approved by the European Parliament in 2017, according to the Government of Canada. It’s being applied on a provisional basis, but ratification is still ongoing.
Finalizing agreements with the EU is known to be a long and drawn-out process; this achievement by Canada could be overshadowed by a tax that could feel like a tariff.
Asked whether the Europeans verbally expressed their concern for the tax, Dicko said
CADA met with the ambassador of Germany, and senior diplomats of the British High Commission and the European Union Delegation in Ottawa. Their comment was that they see the tax as an issue.
“Taxing vehicles that are overwhelmingly European-made and imported from the European Union can be seen as a non-tariffs barrier, and that may impact the spirit of the free trade agreement,” said Dicko. “This is why we are meeting with (these) officials, who see it as a potential issue.”
In a CADA Newsline article, Tim Reuss, President and CEO at CADA, also said the proposed tax could violate the spirit of CETA — and potentially endanger its ratification.
As for the dealers, particularly those like Itzcovitch, there will always be business elements that come into play that they will have to deal with. But the unforeseen is the political aspect, and the luxury tax fits right into that category. “I’m more concerned about governmental regulations and government encroachment on businesses across Canada than I am with the actual marketplace,” said Itzcovitch.
The most dealers can do is wait to see what will come of the proposed luxury tax, while CADA continues its advocacy efforts.
2019 carryover issues aside, there are still a range of opportunities for dealers to enjoy this year, whether it’s in the used vehicle market or in continuing to embrace and adapt to a changing industry, which includes a growing consumer interest in electric vehicles and car-sharing, and developments in autonomous and connected driving and technology.
2020 will be an interesting year — not one that should not rise to the level of serious concern — but one that will require dealers to stay focused on their goals and plan ahead where they can.
