Canadian Black Book: COVID-19 and the Canadian Auto Sector Update

March 24 2020
CBB

March 24, 2020

Auction Updates:

• Last week the largest Canadian auctions, Manheim and ADESA, moved to video broadcast of their auctions, without in-person bidding, in the interest of health and safety. The auctions were only allowing dealers on their lots to preview inventory prior to sale day. Late on Friday ADESA announced they will be suspending their physical and simulcast sales platforms for at least two weeks.
• 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.

Wholesale Market Impacts:

• 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.

• Actual changes to values this week, through our analysis, were not significant and were quite normal in many respects. Our experts even noted that some vehicles 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.

Market Reactions:

• 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.
• 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.

Automotive Retailing:

As of the time of writing this update, Quebec and Ontario have all issued orders mandating the closure of all but essential services. Quebec and Ontario have 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.

There is the expectation that retail sales for the month of March industry wide will be down by well over 60%. By comparison, 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.

We feel there are two possible scenarios:

• 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

• 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

Factors that will determine new sales volume in 2020 and a 2021 recovery:

Positive
• 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

Negative
• 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
• It is expected that leisure and business travel will be reduced in 2020 and corporate fleets may defer vehicle replacement until the economy improves.

Wholesale Price Impact (Mild Recession Scenario)

In the short term (3-9 months) we project a drop-in wholesale prices compared to a pre-virus baseline projection for the summer selling season. This is our preliminary outlook and will be revised as there is greater certainly around closure of dealerships and the duration of these closures.

• In the most likely scenario of a mild recession, we see an overall drop in wholesale prices of 12% compared to baseline. As an example, for 3-year-old models this summer (2018 model
year) we project a 14% drop in wholesale price for SUVs and light trucks and an 8% drop in wholesale price for cars
• In our longer-term outlook for residuals (36-month residual values of upcoming 2021 models, in the summer of 2023) we believe the effect of the pandemic will be felt, but most values will return to almost the pre-virus baseline. Specifically, we 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.