The Canadian Black Book analyst team released a comprehensive look at the country’s automotive wholesale and retail landscapes as auctions, dealers and finance companies all navigate the business challenges brought on by COVID-19.
Analysts began their report by recapping last week’s auction activities at Manheim and ADESA that moved online without in-person bidding in the interest of health and safety. Canadian Black Book acknowledged it might be the last timeframe when robust sales data arrives for analysts to review.
“As many provinces mandate non-essential services to close, it is expected that all auction activity, other than purely digital platforms will pause operations due to the current crisis,” analysts said in their update shared this week with Auto Remarketing Canada.
After watching computer screens and gathering from other sources, Canadian Black Book arrived at a couple of other assertions stemming from last week’s wholesale activities.
“Our industry analysts monitored several auctions and a variety of lanes throughout the week. We noted that there were an impressive number of online bidders for the auctions given the recent change in formats,” analysts said.
“Actual changes to values this week, through our analysis, were not significant and were quite normal in many respects,” they continued. “Our experts even noted that some vehicle prices have exceeded our expectations.
“It is expected to take several weeks for the impact of COVID-19 to be fully realized in the marketplace,” analysts added.
Immediate market reactions
Canadian Black Book identified five immediate actions taken by various parts of the automotive industry to pivot operations because of the coronavirus pandemic. Analysts mentioned:
• Many manufacturers are establishing programs to both help existing owners and to further incent those considering purchasing in the near term.
• The incentive of “90 days no payments” appear as an offering for multiple brands making an effort to attract new buyers. “We will be monitoring these incentives carefully,” analysts said.
• For existing customers, several OEMs are asking owners to contact them directly if they need assistance making payments during the crisis.
• Most manufacturers are temporarily stopping manufacturing on both sides of the border of parts and vehicles. Some manufacturers will work in partnership with medical equipment companies and government to produce products needed for the front lines of healthcare.
• When parts and vehicle production resume, it is expected there will be a period of many months of catch-up and the remainder of 2020 will face selective product shortages/delays caused by the massive disruption to the supply chain. Some vehicle model years may be shortened in length and vehicle introductions rescheduled.
Changes within retailing and likely recession
As of the time its update, Canadian Black Book pointed out that Quebec and Ontario issued orders mandating the closure of all but essential services. Analysts noted that Quebec and Ontario also indicated that car repair facilities are essential and can remain open.
“It is perhaps a grey area with respect to vehicle sales operations, so we will watch for a clarification in the coming days,” analysts said.
Canadian Black Book conceded an expectation that retail sales for March will be down by more than 60% industry wide. By comparison, the firm mentioned China and Italy both saw 80% sales decreases in February.
“It is our projection that we will experience a recession for the Canadian economy as a result of the COVID-19 health crisis,” analysts said.
Canadian Black Book spelled out two possible scenarios in terms of a recession. They were:
1. Mild Recession Scenario: Negative GDP growth in Q1-Q3, causes a significant drop in consumer confidence and a large increase in unemployment. This will result in a 25% drop in new sales to 1.44 million units in 2020.
2. Severe Recession Scenario: If there is a prolonged social separation policy due to coronavirus, followed by a deep recession, we foresee a 40% drop in new sales to 1.15 million units in 2020
Canadian Black Book went on to pinpoint four positive and negative factors that will determine new-model sales volume in 2020 and a 2021 recovery. They included:
• Low interest rates
• Credit is available to prime consumers
• Increased OEM incentives are expected to help stimulate the market.
• Low gas prices will help the popular SUV and truck segments.
• Unemployment will increase substantially (at least temporarily).
• Global supply chain issues will constrain the availability of some products.
• There will be a substantial drop in consumer confidence resulting in the purchase of fewer big-ticket items or what economists call consumer durable goods.
• There may be a substantial reduction in fleet/rental purchases in 2020 and possibly 2021. It is expected that leisure and business travel will be reduced in 2020, and corporate fleets may defer vehicle replacement until the economy improves.
More insight on wholesale-price impact
Canadian Black Book wrapped up its latest analysis by using its mild-recession scenario to compile an initial forecast on how wholesale prices might change.
Analysts explained that in the short term — the next three to nine months — they project a drop in wholesale prices compared to a pre-virus baseline projection for the summer selling season.
In the most likely scenario of a mild recession, Canadian Black Book sees an overall drop in wholesale prices of 12% compared to baseline. Here’s an example involving 3-year-old models this summer (2018 model year). Analysts project a 14% drop in wholesale price for SUVs and light trucks and an 8% drop in wholesale price for cars.
“This is our preliminary outlook and will be revised as there is greater certainly around closure of dealerships and the duration of these closures,” analysts said.
In its longer-term outlook for residuals (36-month residual values of upcoming 2021 models, in the summer of 2023) Canadian Black Book indicated the effect of the pandemic will be felt, but most values will return to almost the pre-virus baseline.
Specifically, analysts project a modest 3% decrease in wholesale values across all segments.
“The Canadian Black Book team will provide frequent client updates as the situation does continue to change on a regular basis,” analysts concluded.