In a volatile market, dealers return to fundamentals
I am writing this article just after Canada’s overtime loss to the USA in the men’s Olympic hockey tournament gold medal game.
From a hockey perspective, it was an incredibly entertaining and exciting game, and we did earn a silver medal.
However, a loss to the U.S. at this time, given the US’s economic aggressiveness, is hard to swallow. Emotions are running deep for all Canadians for a number of reasons.
We are living in times of persistent, unpredictable change, driven largely by the annoying policy changes from our neighbour to the south.
Our country’s federal government has responded in two broad ways. First, by attempting to expand our interprovincial and global trade reach. Second, by maintaining some sort of negotiating relationship with the US to preserve and, ideally, improve our current trade relationship.
This article is published in late April. By that time, the world could be completely different.
Nonetheless, last week’s US Supreme Court decision striking down the tariffs was welcome news. It did not take long, however, for the White House to impose a new 10 per cent tariff on every country in the world, including Canada.
Certainty will not be known until the details in the fine print are analyzed. The immediate pre-market reaction, however, is very negative, with stock markets indicating a sharp downward movement.
This seemingly emotional reaction, like the many before it, makes it virtually impossible to predict the future with any degree of certainty.
There is no question, at least in the short term, that our US-centric automotive manufacturing and assembly base is and will remain under significant pressure as the White House seeks to pressure them to relocate all production to the USA.
This is especially true for new-vehicle dealers as they attempt to meet the investment expectations of the brands they represent, the numerous expectations of the consumers they serve, and provide reassurance to employees whose lives depend on their business acumen.
However, depending on your point of view, all is not bad.
There seems to be an environment of short-term pain for the potential of long-term gain. In the short term, things could get quite rough in certain areas of the country.
However, the increase in global trade demand and domestic industrial investment could provide much-needed independence and security in the longer term. We just need time to get there.
The federal government seems to be tying certain trade opportunities with foreign actors to the stipulation that products be produced in Canada and employment benefits be provided to Canadians.
The foreign actors appear to be engaging in a positive way, but only time will tell.
As the Prime Minister and his trade delegates travel the world in search of opportunities, Canadians are being asked to see a path to a more prosperous future.
The recent trade deal involving Chinese EVs in exchange for Canadian agricultural benefits, with the promise of a deeper trade relationship in the near future, could be such an opportunity.
Only time will tell the degree to which Chinese auto manufacturers will assemble their vehicles and source their component parts in Canada.
This is a giant shift in direction, but in many ways not dissimilar to several decades ago when the Toyota and Honda plants opened in Ontario.
Today, they have become the mainstay of Canadian vehicle manufacturing and assembly.
For years, the Detroit Three have worked seamlessly with Canadian parts suppliers and assemblers to provide an efficient vehicle production process.
Those days may be over, or at least significantly disrupted over the next three years.
There is no question, at least in the short term, that our US-centric automotive manufacturing and assembly base is and will remain under significant pressure as the White House seeks to pressure them to relocate all production to the USA.
Yes, there will be risk, and it might be too steep for some to jump in. But for those with the savvy instinct to invest, the returns could be substantial.
As a result, many Canadian jobs are at stake in the short term, waiting for the new Canadian automotive strategy to take hold and for cooler heads to prevail.
CUSMA negotiations this spring and summer could provide some much-needed answers.
Canadian new-vehicle dealers have no choice but to follow the ebb and flow of this disruption.
As long as franchised dealers have a fresh supply of new vehicles to retail, their business cycle should not be significantly uprooted.
As we are seeing, used vehicles, parts, service, financing, detailing, and body repair have become their short-term future and focus.
For some dealers, this has always been the case. For others, it’s uncharted waters.
For years, new-vehicle unit sales were the target. After all, dealers are franchised new-vehicle retailers.
However, the focus has shifted.
New-vehicle sales are only an enabler to create downstream profitable revenue activities.
In the old days, used vehicles were sacrificed to boost new-vehicle unit sales. Today, the opposite is true.
With new-vehicle margins and supply compromised, the used-vehicle trade-in and resale are the goal, creating a pathway to cross-departmental profitable revenues.
The potential opportunity created by additional foreign brands, with varying efficient propulsion options, entering the Canadian market is enormous.
In time, new, lower-priced (not necessarily) models from new-to-Canada brands could prove to be a shot in the arm for Canadian new-vehicle retailers, as the dealership model dominates over agency and consumer-direct strategies.
In all likelihood, some dealership facilities could be repurposed, and some greenfield ones will be required.
Some investment will be required regardless.
Yes, there will be risk, and it might be too steep for some to jump in. But for those with the savvy instinct to invest, the returns could be substantial.
In the short term, I see no reason why Canadian dealerships cannot capitalize on the current opportunities.
Those opportunities lie in embracing the life of the vehicle.
Some dealers do this already. Those that don’t should.
Increasing market penetration in the highest-margin areas of our businesses is not a bad strategy for dealers.
In fact, it sets us up perfectly by providing a solid foundation to seamlessly increase our businesses if and when new brand entrants do arrive.
Until then, it’s business as usual.
