A swell in used vehicle supply and a shortage of new vehicle inventory could have significant implications over the coming months.
On June 9, Canadian Black Book (CBB) released its latest COVID-19 Automotive Market Update. Since the entire economy was turned upside down in March, the automotive sector has seen significant upheaval.
Wholesale vehicle prices plunged in April, while a steep decline in retail sales was also witnessed as businesses closed as a result of provincial lockdowns to contain the spread of COVID-19.
Although May witnessed a rebound in vehicle sales, most of that was attributed to pent up demand from the end of March and April, while during May, CCB’s price index, which tracks 2-6-year-old vehicles continued to decline, with a drop of 3.20 points (by comparison, the index dropped 3.58 points in April).
Although sales have continued to recover in June as the economy slowly opens up again, there are headwinds on the horizon.
To help gain additional insight into how those potential challenges could impact vehicle sales through the remainder of this year and into 2021 and what this potentially means for dealers, Canadian Auto Journal spoke with Brian Murphy, Vice President, Research & Analytics at Canadian Black Book.
Canadian Auto Journal: Based on the data we’ve seen from April and May, how do you see vehicle sales volume, both new and used fairing over the next few months?
Brian Murphy: For the whole year we are expecting new car sales to decline by 25 percent. We don’t throw that number around lightly because that represents 500,000 vehicles, which is quite frankly, a staggering number.
That being said, we were happy (as I’m sure a lot of your readers were) to see declines in May by ‘only’ 44 percent.
Overall this year, we are down by 39 percent in terms of new vehicle sales and as of now, we’re expecting June to show stronger sales than April or May as part of a continuation for pent up demand.
Once that demand is satisfied, however, only then will we have a clear view of the natural state of demand in the marketplace and I think how things will play out largely depends on how many people go back to work and the level of consumer confidence.
Given that impending lease renewals are expected over the summer and into fall, how do you think that will continue to play on the downward pressure we’ve been seeing on both wholesale and retail prices in the used car market?
Lease renewals were one aspect we’ve been watching very closely, even before COVID-19. We’ve seen the number of lease returns increase since 2017 and for 2020 and 2021 they were expected to continue rising.
Compared to 2017, where we had approximately 340,000 lease returns, this year, predictions were on target for 430,000, so that’s an increase of 90,000 vehicles in the marketplace, which was already expected to put downward pressure on prices.
Although leasing companies have been working with their customers to facilitate lease extensions for 60-90 days, we’re still likely to see a significant increase in lease returns into the summer and fall this year.
For 2021, predictions for lease returns (pre-COVID-19) were 450,000 units for the year, so when you combine that with the level of uncertainty in the market, along with other factors such as fleet size reduction and rental returns and repossessions, there’s a lot of downward pressure on both wholesale and retail values in the used vehicle market.
How do you see the impact of the Hertz bankruptcy, other rental firms and fleets that are considering the reduction in their inventories on used car prices and demand?
Rental vehicles is another one of those categories where we are also facing extra supply this year. Although I’ve not yet been able to access Canadian specific data regarding the Hertz situation, if we take a look at it in general terms, one-tenth of the 300,000 units Hertz is planning to liquidate in the U.S.
still correlates to 30,000 vehicles here in Canada. At the same time, it’s important to consider that not just Hertz, but everybody in the rental car space has been impacted due to the steep declines in air travel (more than 90 percent).
In these circumstances, rental car companies can do one of two things—they can postpone future vehicle deliveries or try and dispose of the vehicles they currently have, which is something we expect to happen, so we are a likely to see more vehicles coming back off rental for the foreseeable future.
In Canada, about 225,000 rental vehicles are sold every year which is more than a tenth of the market, so any extra supply over and above the usual amount is likely to put further downward pressure on used prices.
That said, we might see some vehicles coming back from rental fleets sooner than normal and if these vehicles become available, extra low-mileage examples with only 10 or 15,000 km, could also present attractive buys for both dealers and consumers.
We’ve seen a lot of talk in some media channels about how different factors such as lease returns, along with deferred payment expirations, delinquencies and repossessions could impact the market at the same time. Do you have any thoughts on this, especially as there are signs that lenders are working with consumers to try and mitigate delinquencies?
At this point, I think anything that lenders can do to keep somebody driving a vehicle, even if the loan is delinquent will be preferable since repossessions are a significant source for the wholesale market and a flood of diminished value vehicles hitting the wholesale market could send prices plummeting.
At some point, however, we will see repossessions increase again which will further increase supply at a time when vehicle demand is already weak. Currently, however, that hasn’t transpired yet.
Additionally, along with repossessions, we could likely see many fleets cull their inventory, as businesses continue to review their situation and—in many cases—operate at reduced capacity. Those decisions are taking place across the country and we’re likely to continue seeing more fleet vehicles being liquidated, which will further increase supply in the used market.
New vehicle inventory is expected to decline significantly over the latter half of this year and into 2021. How do you think that will impact new-vehicle demand?
Here we are likely to see both short and long-term impacts. In the short-term, some consumers may not be able to get the exact new vehicle they want due to inventory shortages, so they might have to switch color, trim, or even models or brands to find a vehicle that fits their needs.
This is likely to significantly impact brand loyalty, since if a consumer can’t get the type of vehicle they want from their preferred brand, but an alternative offers a comparable vehicle, they will likely go with that. Looking more toward the longer-term (3-4 years) from now, we will see fewer 2020 and 2021 model year vehicles, which could potentially help used values.
We conducted a retailer survey not too long ago, where more than a quarter of dealers surveyed said they were concerned about obtaining new vehicle inventory.
Today, I think those concerns have only continued to grow and although OEMs have restarted vehicle production, it is going to take a while for that supply to build back up again.
Additionally, OEMs switching from 2020 to 2021 model year vehicles is going to be trickier than usual because of the COVID-19 pandemic and the various protocols required in addition to dealing with plant shutdowns for two months or more in the spring.
It’s not always fair to draw comparisons between the Canadian and U.S. markets but based on CBB data, do you see any notable similarities as well as differences emerging in terms of economic outlook as well as the performance of automotive retail sales and expected projections?
In the case of the U.S. and Canada, there are both similarities and differences and the current trend for new and used vehicle values is no exception. Both countries adopted different strategies when it came to COVID-19 operating restrictions and in the U.S., we’ve seen used vehicle values rebound quicker than they have in Canada. In terms of wholesale, we’ve also seen the U.S. rebound faster.
There was a point where no sales at auctions were skyrocketing in both countries because buyers and sellers had completely different ideas when it came to vehicle pricing. In the U.S. things have somewhat normalized while in Canada we are seeing some auctions were sell rates are pretty normal and others where people simply aren’t buying.
How things fare over the longer term will likely depend on how well the economy performs. Both countries face lingering unemployment for the foreseeable future and that will likely determine the outcome as will the risk of a second wave of COVID-19 and the time it takes to develop a vaccine.
These are factors that could slow business down, so I think it’s important to consider that there are many variables in the mix right now.
Where do you perhaps see the biggest gains and losses in individual vehicle segments, such as passenger cars and light trucks as we head into summer and fall?
I don’t think there are going to be too many gains, instead, we’re likely to see activity on the other side of the equation. In Canada, we saw values across the industry increase almost month-over-month during the last 10 years.
Then, from mid-March, we’ve seen them decline. Across the board, we’ve seen truck values in all segments decline around six percent, while passenger cars have declined by a little bit less (around 5.6 percent).
Within all the different segments we have seen notable differences and there’s been significant value declines in both the compact and subcompact crossovers segments. One segment we haven’t seen much of a decline is full-size vans—but these are often purchased for business use, so how businesses fare moving forward will have a big impact on that segment.
When it comes to passenger cars, we’ve seen declines of 8.4 percent for mid-size sedans, with compact cars declining 7.4 percent.
By contrast, subcompact cars have performed quite well, possibly because of the current market uncertainty and as Canadians look to economize and spend less overall, including their transportation needs.
With that in mind, we think lower-priced vehicles could perform quite well over the short and medium turn, though we still have to see how that plays out overall.
What advice would you give to dealers to help them manage inventory through 2020 and into 2021?
That is a really good question. It’s a bit of a cliché but vehicle sales are like a rollercoaster and right now we’re heading downward.
With declines expected to continue through November and into December, dealers need to take a look at how they manage their inventory, for if prices are declining every month and the longer a vehicle sits, the more its value tends to decrease.
Therefore, the ability to turn inventory quickly and efficiently becomes critical. If you end up hanging onto a vehicle for two months or more, its value could decrease by four or five percent, so the faster you’re able to turn it in a market like this, the better.
Anything else you’d like to mention?
I think it’s important for all of us to bear in mind that this current situation is temporary. It’s horrible but if we do see prices rebound at the very end of the year, there could be some good opportunities.
We’re likely to see changes in consumer buying behavior where people who might previously have bought a new car might go with something used, either because of limited new vehicle supply or maybe because they don’t qualify for financing on a new vehicle.
With that in mind, it is likely the used vehicle market could fare significantly better than the new car market as we end 2020 and move into 2021.
