Taking stock and looking ahead
Canadian Black Book and J.D. Power’s 2020 TalkAuto@Home conference offered a detailed overview of the automotive industry from a variety of angles, provided in one-hour webinars spread throughout the week of November 16.
During his session, Brian Murphy, Vice President of Research & Analytics at Canadian Black Book, looked back on historical references to offer some much-needed perspective.
“In difficult times we often look for words of wisdom from others who have also gone through difficult times, and this quote from Winston Churchill is one of my favourites and has been for a very long time,” said Murphy. “If you are going through hell, keep going.”
In doing a situational analysis with his team to understand what was going on in the market, Murphy said they looked for similar situations in history that they can learn from to understand how the COVID-19 crisis will unfold for the industry.
The Great Depression (1929-1939), World War Two (1939-1945), Black Monday (1987), September 11 attacks (2001), and the Financial Crisis (2008-2009) were all discussed, but they were fundamentally different in nature; Murphy said we are, at least in modern times, in uncharted territory.
“The only thing that has happened to the world that is very similar to this is the Spanish Flu,” said Murphy. “So obviously it happened a hundred years ago, but it was most like COVID in that some 55,000 Canadians died, 675,000 Americans, and the number of people around the world that passed away is still up for debate.”
As for the Financial Crisis, the 2008-2009 event saw GDP decline by 2.9 per cent, unemployment rise to 8.7 per cent, vehicle sales drop by 11 per cent in 2009 (and did not fully recover until 2012), and leasing at the time stopped. Furthermore, wholesale values were already falling and reached a net decline of approximately 10 per cent.
“This time it’s very different,” said Murphy.
In 2020 the closure of non-essential businesses was mandated, with auto retail deemed non-essential in certain provinces early in the pandemic, and wholesale auctions closing in-person auctions in Canada and the United States. The auto industry was unplugged: there were no sales, no lease end terminations, no trade-ins, no repossessions, and no wholesale activity.
To put the situation in perspective, if we look at what happened in April when the industry sold only 47,000 new vehicles, Murphy said the last time it was this low was in January 1971. “This is just a crazy decline in sales,” he said.
As of the end of the third quarter, new vehicle sales were down 23.7 per cent, and it is estimated that sales were down 21.6 per cent as of the end of October. Murphy also said they believe there was a large amount of pent-up demand from March, April and early May that had an impact on sales from May through July.
The sales shortfall, he said, will reduce future supply in that there will be fewer 2020, 2021, and 2022 model year vehicles in market in both Canada and the U.S. So far, the industry has sold around 360,000 fewer new vehicles this year than the same period in 2019.
As for used vehicles, the situation is different. “We’ve seen the Canadian used car market essentially outperform the new car market in terms of sales,” said Murphy, who pulled figures from Statistics Canada representing the dollar value in sales by used car dealers in Canada.
“You can see that it dropped by 67 per cent from February to April and then it bounced back, almost like a rubber ball falling off a very tall building, and it’s now better than new vehicles,” said Murphy. “There was a 200 per cent increase in sales after it hit rock bottom in April. And we think there is an upside for used car sales in Canada.”
Murphy said some Canadians may be looking to substitute their used vehicle for a new one, and that the industry environment is very positive when it comes to exports to the U.S. market.
BEVs to grow significantly
Jeff Schuster, President of Americas Operation and Global Vehicle Forecasts, LMC Automotive and 2020 TalkAuto speaker also pointed to some positives: in the short-term, the industry’s performance is better than expected. But there is a lot of risk as we look ahead to 2021.
“We are optimistic on the future of the auto industry for the return and regrowth, and recovery as well,” said Schuster. “I think a vaccine is definitely additional good news that will hopefully project some positives into the industry as we look at the end of the 2021/2022 period. And I think what we do between there and how we get there is going to be a bumpy road.”
He said the industry needs to be prepared for that situation, but that overall it should still perform in a way that he considers manageable. On the Battery Electric Vehicle (BEV) front, Schuster said the long-term projection is that the market will grow substantially. It will be “extremely competitive” in its low concentration of overall volume, but the opportunity is strong in both Canada and globally, he said.
“Overall, you’re looking at up to 120 BEV models by 2030 in the marketplace, so that represents almost a third of all vehicles available for sale, about 25-30 per cent,” said Schuster. “And you see that progression over the next two years, there is a significant number of models coming into play.”
He also advised paying attention to new startups like Nikola, Rivian, and Lucid Motors, which he called “boutique” startups. Dealers would need to keep an eye on their success levels as they move into the market; their success will dictate the further volume growth that is expected by 2030, which will be about eight per cent of the total Canadian market (of light vehicle volume) at that point.
Schuster said these types of startups will initially be looking to develop vehicles for the North American market, but will also sell units and expand in other markets, such as in Europe and China.
“I would probably argue we are a little on the conservative side for our markets, and I think that is partially due to where the incentives are,” said Schuster. “If we see an incentive boost, and we saw that in 2018 in Canada when that was first put in place, that does help.”
Schuster said taking some of the risk away from the consumer and providing them with a benefit, such as a rebate or another type of incentive, will lead to more BEV volume. But there is also the issue of cost to consider — and that includes the cost of the battery, in addition to public knowledge around how batteries are impacted during cold weather in Canada.
To the credit of the federal and some provincial governments, incentives are being offered to help boost adoption — and funding is being provided to increase infrastructure across the country.
“I think with some additional mandates, with further growth and expansion of the infrastructure, (and) maybe an increase in incentives, those things can obviously have some pretty profound impacts on the growth rates (in terms of) volume expectations,” said Schuster, adding that BEV volume is anticipated to increase, significantly.
In a virtual “fireside chat” between J.D. Ney, Canadian Automotive Practice Lead at J.D. Power and Don Romano, President and CEO of Hyundai Auto Canada, Ney said the company’s latest Mobility Confidence Index revealed that nearly 70 per cent of Canadians said they have never been inside an electric vehicle.
Romano said consumers need to learn about the technology and products to become comfortable with them.
“Imagine an autonomous vehicle. Would you go out and just buy one today? I think you would have less than five per cent of the people saying yes, and those five per cent are watching Star Trek right now,” said Romano. “It’s just not something everyone is going to grab onto until they are comfortable. It’s human nature, it makes sense.”
Romano said one of the things the company is working on is its Hyundai For Hire service that was launched in 2019. Currently, the service allows consumers to rent a Hyundai vehicle (insurance and all) in the Greater Toronto Area (GTA). While the plan may be to eventually expand that service, Romano said it has allowed the OEM to learn how to “work that kind of business.”
“The real long-term advantage is to be able to allow people to learn about our new technologies without having to make a purchase commitment,” said Romano. “We ultimately believe, and based on our research, that once they become comfortable and understand how it works, their confidence level rises in the product and they buy the product.”
Romano indicated that businesses must now think differently about how they are going to expose customers to new technologies. That advice also goes for how consumers want to buy their vehicles, and the online venue appears poised for growth.
During the virtual conference, Jon Sederstrom, Managing Director of Strategic Initiatives, J.D. Power, discussed the current state of digital retail.
He said that OEMs and dealers will need to define their intended brand experience, identity the best platform(s) to fit their desired brand experience (and there is not a one-size-fits-all platform), and work together to solve the complexities of selling a car online if they want to sell more units.
In referencing a 2014 Forrester Customer Experience Study, Sederstrom said great experiences with some companies set customer expectations for experiences with all companies.
“In other words, if a person can order shoes online and return them when they don’t fit, if they can get numerous quotes for insurance products online, and if they can sign mortgage contracts online, they are rightfully going to question why the auto industry can’t provide a similar experience,” said Sederstrom.
He said the industry needs to do a better job with providing customers with options. And while not all consumers will want to do the entire car-buying process online, a larger percentage of people will do part of the process online.
“It’s our responsibility to provide that flexibility and freedom to choose their own adventure, to chart their own path, and to create off-ramps throughout the process that allow the customer to transition to the showroom whenever they want to, without losing all of the progress that they have already made online,” said Sederstrom.
He said most of the digital retailing implementations are not intended to sell cars online, but are more often considered to be enhanced lead forms in disguise — and which are looking to have consumers provide more information about themselves and what they are looking for.
According to Sederstrom, some of the components dealers will need to work on include areas such as penny-perfect pricing (the car price with the dealer discount, OEM incentives, taxes and fees, etc.), and a guaranteed or firm trade offer, real-time finance and lease offers.
They will also need to work on integrating an e-Signature experience (which some provinces require the legislation for), and test-drive and return policies.
