Canadian Black Book: COVID-19 Automotive Market Update July 28, 2020
July 28 2020
The month of July has flown by. As a country, Canada continues to make significant efforts to manage the current health crisis at hand, and the auto sector perseveres, given the hand that 2020 has dealt us all. With only four days left in July, the industry waits patiently to count the sales results for the month. Only a portion of OEMs are voluntarily reporting monthly sales this year, and it makes it much more challenging to have a clear picture of the successes and struggles of the various brands. Many brands are only reporting on a quarterly basis, a trend that was started in the U.S. market by the Detroit Three. This year especially, it would be constructive to have greater transparency around sales reporting throughout the industry.
On the wholesale values front, we continue to see much stronger values in July. After thirteen weeks of sharp declines (from late March until mid June), this past week saw continued strengthening in wholesale values of 0.15% for Cars and 0.19% for Trucks/SUV/Crossovers. Values have not gone up sharply, but rather have hit pause and seen much smaller weekly changes in the past four weeks. The biggest gains for cars were from the Sporty Car Segment at 0.41%. It is no coincidence that that segment is right in the middle of the prime selling season for the fun-to-drive vehicles. The most significant declines for the car products were from the Luxury Car Segment which declined by 0.20%.
On the truck side of the market, around 80% of all vehicles on the roads these days, the largest gainer was the Sub-Compact Crossover segment at 1.16%. The biggest loss was the business fleet favorite Compact Van Segment at -0.43%. These may seem like very small variances; however, they are weekly values and, if extrapolated over 52 weeks, they would make for a massive value adjustment.
Feedback that Canadian Black Book observed from the marketplace this week remains consistent. Inventory levels on lots are much tighter than expected. The renaissance of sales in June, which has carried into July, has depleted stocks below the comfort levels of many used car retailers. As a result, bidding at auctions remains intense with sales rates often cresting the 95% mark. We do expect values to soften once supply levels rise and consumers fully realize the economic predicament the country finds itself in.
DesRosiers Consultants released their year to date sales by province results this past week. Manitoba posted the best result, with the smallest decline of 25.3%, outperforming the down market by almost 9% from January 1st to June 30th. Manitoba also had comparably few COVID-19 cases - 384 according to the most recent data. Not surprisingly, it was Ontario that has suffered the most year to date, with a decline of 37%, as compared to the industry that is down by 34%. Ontario had very severe shut down orders as did the province of Quebec, which was down by 33.9%, very close to the industry average. For the duration of 2020, or until a vaccine is available for COVID-19, a province’s success in managing COVID-19 and avoiding future lockdowns will most certainly have a bearing on a given province’s auto sales success.
Statistics Canada also released their retail sales statistics for May 2020 this past week, which is the most recent month with available data. The results include used car dealer’s sales results. April sales, as measured in dollars, was down 66% from the previous year. However, May produced a much more positive result, showing a more reasonable decline of 35% when compared to the same month in 2019. Normally that would be an apocalyptic number, but the trend of slowing the damage is fantastic news given recent history and the economic climate at hand.
After a virtual shutdown in the spring, it is apparent that the business of exporting vehicles to the U.S. market has increased in volume significantly. Prices in the U.S. have strengthened significantly when compared to the Canadian market. The weaker dollar, along with stronger prices in the U.S. market, makes Canadian vehicles more attractive than ever for export to our southern neighbour.
The implementation of the USMCA trade agreement, effective July 1, does create a small 2.5% import tax speed bump for many vehicles. The impact is more significant on pickup trucks and two seat vans, which were not made in the U.S. They will be subject to a 25% duty, making them virtually untouchable for export.
Bloomberg provided an update this past week to its Bloomberg Nanos Canadian Confidence Index Consumer Sentiment study. The weekly study trend shows that the recent rebound in consumer confidence has stalled. The trend, illustrated by its study during May and June, was very encouraging, but it has now hit a flat spot in the recovery for July. Year to date, the index has made up about half of what it lost in March and April. It is notable that, according to the index, 59% of Canadians feel the economy will worsen over the next six months. This is an improvement compared to the 80% of those surveyed in April, yet still speaks to weak consumer confidence, which we expect will have a negative impact on demand for new and used vehicles.
This past week also saw the issue of Scotiabank’s monthly Global Auto Report. The bank notes that, at the midpoint of 2020, global vehicle sales are down by -29%. Scotiabank observes that the recovery of the global market will take several years while wading through many potential risks that will challenge economies. Scotiabank expects that the year will end with auto sales being down by 20%, suggesting a much sunnier second half to 2020. The report further goes on to suggest that global auto sales are certainly benefiting from the current rebound. Pessimism around diminished vehicle use, more people working from home, and cuts in household spending do not appear to be having the expected negative impact. In fact, the strength of the current rebound in demand is outstripping supply in some markets and vehicle segments. This is creating inventory challenges for some dealers while potentially adding price pressures for consumers.
CURRENT WHOLESALE MARKET OVERVIEW
Canadian Black Book’s Automotive Analyst team has a combined 70+ years of insight and experience in the automotive industry. Through ongoing communication with dealers, remarketers, finance companies and vehicle manufacturers, our analysts track vehicle prices in order to independently chart and report the market via daily price updates. In addition, our survey personnel attend (virtually at the present time) major auctions in Canada each week.
• Auctions in Canada continue to operate almost exclusively online. • Given the large gathering of people that make up a major market auction in Canada, it is difficult to estimate when auctions will reopen. • There remains one physical auction operating in Quebec (ESP Auto Auction in Lachine, Quebec) and two independent auctions (Jardine Auctioneers in Fredericton, New Brunswick and Great Northern in Moncton, New Brunswick). • This past week, we have seen values strengthen for both Cars and Truck/Crossover/SUVs. • Currently, low levels of supply are thought to be the force behind the strengthening in prices. • The virtual auction lanes often have more than 300 participants, making for fast paced bidding for the most desirable units.
Auction volumes have continued to be strong this past week. Across Canada, we estimate that auctions are still putting through between 70-80% of the volume of vehicles they had in pre-COVID times, despite all the restrictions and reliance on online only options. It remains Canadian Black Book’s expectation that as we continue through the summer, overall volume at auction will grow and perhaps exceed levels versus last year. Currently, however, overall supply in the market remains tight, forcing many retailers to retain trade-ins rather than sending them out to the wholesale market for resale.
Since the beginning of the crisis through May, minimal trade-in activity, lease return activity, and virtually zero repossessions reduced the number of vehicles available for sale at wholesale. We are expecting increased repossessions over the duration of 2020. The return of repos, more normalized lease return activity (including all those deferrals) along with downsizing of some corporate fleets, will help to provide more stock in the coming months.
Sales rates also continued to stay strong this past week. Several lanes showed sale rates of over 95%, certainly a brighter result compared to what the industry has gotten used to seeing, of late. Across the industry, these solid sales rates seem to be the new normal for bidding. There is a sense of urgency to fill empty spots on used car lots and perhaps to offset expected shortages on the new car side of the store. These unprecedented high sales rates are positive proof that demand at wholesale is strong at a time when supply levels are lower than ideal. Sales rates as a metric are important as an indicator of how “hot” the block is on a particular day.
The Canadian wholesale market has certainly embraced online auctions to a level that was previously thought to be impossible.
CURRENT WHOLESALE PRICE TRENDS
Market Level View
The strengthening of prices in the Canadian used wholesale market continued last week. After thirteen weeks of general decline, last week marked the fifth week that values held their ground or increased on average. Each of the 22 vehicle segments that Canadian Black Book tracks tells a unique story, making it important to look below the surface and beyond the industry average or Car/Truck average number. Furthermore, different brands also have distinctly unique performance.
The week ended with Cars increasing in value by 0.15% on a volume weighted basis. This is a mild increase, yet after an extended period of declines, it is the upward trend that is important. This follows an increase of 0.10% the previous week. These wholesale price metrics cover 2012 to 2018 model year vehicles. Of the nine car segments, all but two increased in value. It was only the Luxury Car and Prestige Luxury Car segments that declined. Prestige Luxury Car fell by 0.20% and the Luxury Car Segment fell by a very small 0.06% over the course of the week. The biggest gains were observed in the Sporty Car segment at 0.41% and in the Premium Sporty Car segment at 0.33%. Sub-Compact cars were in third place, up by 0.32%. The pause in car value losses has made it into its fifth consecutive week. Over the remainder of 2020, it remains Canadian Black Books’ expectation that values will fall again before a longer lasting rebound and strengthening in 2021.
When volume-weighting is applied, overall Truck segments (including pickups, SUVs, and vans) finished the week with a 0.19% boost to their wholesale values. This past week’s uptick in values signals that the Canadian market continues to enjoy price stability in values after the long-protracted losses seen in the early going of the pandemic crisis. The past four weeks have been split, with two weeks witnessing positive gains in values and two weeks seeing negative price pressure. Those four week’s market changes average out to 0.04%, illustrating a virtually flat month of July. This follows 13 weeks of steep decline, where the average change in prices was 0.51%. Of the thirteen Truck/SUV/Van/Crossover segments, eight were up in value last week and five saw declines.
The strongest performers for the week of July 20th were Sub-Compact Crossover/SUVs, which strengthened by 1.16%, and Sub-Compact Luxury Crossovers, which were up by 0.96%. The largest decliners were the Compact Van and Full-Size Van segments which shrunk by 0.43% and 0.40% respectively.
The graph provided below (Canada – Weighted % Change in Value by Segment for 2- to 8-year-old models) shows the week-over-week change in value for wholesale prices in the Canadian market. Cars are displayed in blue and light trucks are shown in red. The light trucks also include Vans, SUV/Crossovers and Pickup Trucks. The data set commences in March of 2020, just before the impact of the COVID-19 virus. The past five weeks illustrate the roller-coaster nature of the market now. After many weeks of steady decline, the downward trend has arrested itself and begun to show much more positive results. Feedback from the marketplace has been that inventories remain very tight. Used cars are a bit harder to come by, due to increased demand as well an extended period with minimal trade-ins, repossessions, and wholesale auction activity. Many dealers who would (in years past) send a given unit to auction are now keeping it on the lot and trying to retail it themselves. We expect that this boost in pricing will hold until supply rebounds and true consumer demand is understood in this challenging environment.
Segment Highlight – Full-Size Luxury CUV/SUV
With gas prices about $0.20 a liter lower than the same time last year, surely that is reason enough for more Canadians to make the leap to purchase a Full-Size Luxury CUV/SUV? Of course, a wise consumer should not bank on fuel prices staying low for their entirety of ownership. It is safe to say that fuel efficiency is not at the top of the purchase rationale when buying a Full-Size Luxury CUV/SUV. It is much more about the long list of luxury accoutrements, the significant capacity to carry many people in limo-like comfort, and to be able to tow heavy cargo when needed. Although many in this category are superbly capable off road, we can assume that many of these luxury haulers will venture off pavement very rarely.
This high-priced segment includes such long standing favorites as the Cadillac Escalade, the Lexus LX570 and the Lincoln Navigator. The upper echelon of the SUV kingdom also includes several of the Range Rover line as well as the Mercedes-Benz GLS-Class. Some of the recent news in this segment includes the superb BMW X7 and the completely new Cadillac Escalade. Over the years, the entrants in this segment have grown even more luxurious. With all manner of sophisticated suspension technology, these large machines often handle better than any vehicle with that sort of mass should be able to.
Each year, the volume sold in this segment accounts for less than 1/3 of a percent of total sales in Canada. With prices easily crossing the $100,000 threshold, it is understandable that volumes remain low compared to many equally capable and more affordable options.
It was July of 2019 when this segment achieved its highest retained value for two to six-year-old vehicles. Since that time, values have weakened slightly, and in March the impact of COVD-19 furthered the weakening of the segment. The Full-Size Luxury CUV/SUV segment has gone down by 4.5 Canadian Black Book Used Vehicle Value Retention Index points, or 3.4%, in value. This is considerably less than the 6.3% fall seen across the entire market since March. This segment is made up of vehicles that are very popular in the U.S., where the high dollar value and high margin opportunities make them ideal for export when used. Export is a major factor that helps keep values in this segment sturdy.
The best Full-Size Luxury CUV/SUV at retaining value based on our 2020 Best Retained Value Awards is the Mercedes-Benz G-Class. The boxy G-Class, often called the G-Wagen (short for Geländewagen) traces its roots to a vehicle that was originally developed as a military vehicle, first used by the Argentinian army. Today, the Canadian forces operate a number of them in active service. The vehicle has had an interesting and varied history. It is often in military use in global warzones, a style icon for the rich and famous, has frequently transported Popes, and the list goes on. The second-place vehicle in this segment for retained value is the Lincoln Navigator and third place was claimed by the Range Rover Sport.
With the switch to more fuel efficient EV and PHEV options, it will be fascinating to watch how these large vehicles are recreated to be more environmentally friendly and more economical for day-to-day use. It is reasonable to expect they will be one of the last categories to make the transition. All that said, when our team has an opportunity to evaluate one of these vehicles, it is always an enjoyable experience.
USED WHOLESALE PRICE PROJECTIONS
Wholesale Price Impact Under the Most-Likely Economic Scenario
Prices in Canada at wholesale have paused their steep decline that commenced in late March. It is hard to say if this pause signals the beginning of a significant rise in values, which has been the case in the U.S. market, or just a temporary break before values soften further. It is a clear example of the volatility in our current market, which typically does not have the up and down nature that we have seen this year. Remember that in June, the Canadian Black Book Value Retention Index, which tracks two- to six-year-old vehicles, went down by only 0.01 Index points. This puts the CBB Index 5.6% lower than one year ago. Earlier this year, wholesale prices were down 0.99% in March, 3.58% in April, and just over 3% for May. Last month our industry-wide index remained flat with no change at all. With the end of the month only four days away, we will soon tally up values for July and report those numbers next week.
Canadian Black Book’s outlook reflects a new economic reality – our team expects that projected values will continue to stay well below pre-COVID-19 projections over the next two years.
Short-Term Outlook (Fall/Winter of 2020)
We project a drop in wholesale prices compared to a pre-COVID-19 baseline this summer/fall as the Canadian economy suffers through the effects of COVID-19. We anticipate that wholesale prices will be 17% lower, on average, compared to pre-COVID-19 projections, during the remaining months of 2020. We expect to see continued declines over the summer months, with recovery commencing early in 2021. We also anticipate that older (more than six-years-old), less expensive vehicles in average condition will not decline as much due to increased demand for these units. The selective demand lift is expected to be driven by consumers seeking low cost, reliable transportation. COVID-19 and the resulting social distancing practices are expected to cause some regular transit riders and ride sharing customers transition to vehicle ownership which will fuel some incremental industry sales.
Long-Term Projections (36-Month Residual Values, Summer / Fall of 2023)
The effects of the pandemic will continue to be felt three years from now. However, we project that residual values will return to the pre-COVID-19 baseline as used supply will decline as a result of lost retail and fleet sales throughout the remainder of 2020 and into 2021.
Wholesale Price Impact Under a Severe Recession Scenario
In this scenario, we project a 25% drop in wholesale prices compared to a pre-COVID-19 baseline this fall/winter, with a very slow recovery in 2021. The effects of the pandemic and recession will still be impactful in 36 months, and we project a 10% market level decline of wholesale prices as compared to pre-COVID-19 projections for the second half of 2023. The differentiating factor between CBB’s Most Likely Scenario and the Severe Recession Scenario is our success at combating the spread of the virus. If a particularly large subsequent wave of COVID-19, or waves, were to push parts of the economy into lockdown mode, the recession would deepen further.
Again, over the past week, retail asking prices continue to decline. They have fallen by 1.75% since the first week of June. This analysis is based on Canadian Black Book’s daily review of vehicles listed for sale by retailers in Canada. Asking prices do not necessarily relate directly to the final transaction price, as retailers do have flexibility on each deal. We have seen used wholesale prices fall by 7.18% since the crisis began, a trend that has yet to be fully reflected in asking prices. Currently, we are consistently noting that supply of good used vehicles is short and as a result the need to lower prices at retail is not there. The country is currently in a severe recession, so we do expect lower asking prices in the coming months as consumer demand falls.
• After July, we will have a better sense of how strong this summer will be for retail sales. As we get further away from the re-opening days for retailers, there will be less pent-up demand in the market. When July wraps up, we expect to see less pent-up demand, which will also be the case in the months that follow. • More than halfway through 2020, sales are 34% lower than the same time in 2019. It is the expectation of the CBB team that new car retail sales will end the year down 25% from 2019 levels. • The disruption of new car supply will remain one of the key stories in the market for the rest of the year. For example, industry media reported that Toyota production globally would be 10% lower yet improving to a 2% reduction in August. Volvo reported shortages of parts that come from Mexico. With the U.S. now reporting more than 60,000 new cases of COVID-19 per day, we can assume that some interruption to vehicle assembly and parts production will occur despite all the precautions being taken.
New Vehicles Sales Outlook
Our New Sales Outlook remains unchanged from our last update. We anticipate a significant reduction in Canadian new vehicle sales in 2020 (both retail and fleet sales) due to weaker overall demand. This is the result of several factors, including fewer kilometers driven due to remote work arrangements and lockdown initiatives, high unemployment, and a severe erosion of consumer confidence. New sales were down 34% during the first six months of the year compared to last year. July and August will be telling months as there is expected to be fewer units sold due to pent-up demand in the monthly sales results.
In our base economic scenario (A), we project a 25% drop (compared to pre-COVID-19 projections) in new sales in 2020, to 1.436 million units. In a deep economic recession scenario (B), we project a 40% drop in new sales in 2020 to 1.149 million units. The deep recession, if it were to occur, would be brought on by extended lockdown measures due to multiple waves of COVID-19. In the longer-term, we expect new sales volume to return to pre-COVID-19 levels within five years. At this point in time, it appears that our Scenario A is the more probable one, unless of course there is a large resurgence of the virus in the coming months.
USED VEHICLE SUPPLY PROJECTIONS
Canadian Black Book maintains our projection of dramatically higher used vehicle supply in the wholesale marketplace for the coming months due to several factors: • Currently supply remains tight. Several months of reduced sales, and a subsequent reduction of trade-ins, has depleted the number of vehicles available to be bought and sold on the wholesale market. CBB views this as a temporary situation, with more supply expected in the coming months, especially as lease returns and repossessions begin to happen in greater numbers. • Delayed lease returns, resulting from lease term extensions offered by OEMs, are now coming back to market. • Extensive de-fleeting by rental car companies due to lack of consumer demand in the travel sector will continue. However, it is expected that these firms will try to do so slowly and strategically to avoid flooding the market and thereby reducing their own proceeds at wholesale auction. • Increased repossessions due to deteriorating economic conditions have commenced. It will take several months for the industry to be fully caught up with vehicles that need to be secured and sold. Insights from the credit reporting community suggest that fall will see a greater number of loans in default. • In Canada, 2020 and 2021 were already larger years for lease maturity volumes, with falling values and economic uncertainty; this may push lease return rates up due to fewer buyouts by lease holders. • There is the expectation of a reduction in the size of corporate fleets due to smaller operations and the desire to free up cash.
Short Term Lease Return Projections
When we began this year, lease maturities were projected to hit a record volume of more than 400,000 units for the year. Once the pandemic was underway and most manufacturing stopped, OEMs worked to facilitate lease extensions in order to push returns further into 2020 when they would be able to reliably provide replacement vehicles. Those vehicles are starting to come back to be remarketed this summer and into the fall. As a result, we project at least 60% more units will arrive in the second part of 2020 (compared to the pre-COVID-19 estimates) due to a slowdown in sales in March/April/May, along with expected turn-ins of the lease extensions.
Rental Unit Returns
Business and leisure travel remain stuck on the ground in Canada and around the globe. It is forecast by the IATA (International Air Travel Association) that all manner of travel will be severely curtailed until sometime after 2023. Air travel alone has fallen by more than 90% in Canada and carriers such as Air Canada have cancelled several routes and reduced staffing. With all this pressure on the travel market, and as a result rental car companies, the business is changing significantly for the sector. In a recent study conducted by IATA, 66% of respondents said that they would travel less for leisure and business in the post-pandemic world.
In a typical year in Canada, over 200,000 rental vehicles are sold to rental car firms. Generally, rental car operators keep these vehicles 12 to 18 months until they reenter the market as used vehicles. With such a significant reduction in business, the market will not have remarketed rental car units as a source of lightly used vehicles in 2021 and 2022 to the same degree as previous years. In the shorter term, we have not seen the large-scale resale of rental car fleets in Canada. These fleets recognized that large scale remarketing would apply additional temporary downward pressure on prices, due to the sudden influx of supply.
New reports in the media have indicated that Hertz has agreed to pay $650 million dollars to various lenders who have indirect ownership of the firm’s fleet of rental units. This puts the brakes on the legal battle over the fate of the vehicles. As part of this agreement Hertz, will suspend its work to cancel some of the nearly 500,000 leases. On May 22, Hertz filed for bankruptcy in North America as a result of the pandemic. The fleet size in Canada is unknown from public data sources. This past week it was reported in the media that Hertz will sell 182,000 units in the U.S. market over the next five months. If Hertz in Canada follows this push to remarket large numbers it will put downward pressure on prices for some models and segments.
In addition to Hertz, we do expect other car rental companies to reduce their fleet during the summer and fall months to match lower demand for airport rentals. This practice will lead to over 25,000 additional rental units hitting the wholesale market over the next six months.
Longer Term Used Returns Projections
With the reduction in retail and fleet sales over the next several years, we project approximately 8,000 fewer used units per month in the market in three years, compared to previously projected returns. This lower level of used inventory will be beneficial to used car prices as supply will be limited.
Given the economic situation Canada is facing, it is regrettable that default rates on vehicle leases and loans will rise. In June, Equifax reported that it expected delinquencies on debts of all types to rise by 25% in the next six months. Eventually, some of these delinquencies will lead to repossessions. These repossessions will push more vehicles to auction and, ultimately, the secondary market, increasing the supply of vehicles available for sale. Currently there are several lenders in the auto market who have interpreted Ontario’s rules and regulations related to COVID-19 as meaning there must be a pause in resale of repossessed units until early September. That factor is also slowing the flow of repossession to auction.