COVID-19 Disrupts Auto Sector and Fleet Operators Need to Cope
At this point it is an understatement to say that COVID-19 has deeply impacted the automotive business in Canada and globally. We don’t know exactly for how long this crisis will last or how deeply it will hurt our economy. However, we can make some educated assumptions as to how COVID-19 is, and will affect the auto sector and what fleet managers need to carefully consider, at least in the near future.
From a macro perspective, right away, it is realistic to expect overall new auto sales to dip, perhaps as deep as 80% versus last year through April, May and June. After all, this has been the case in hard hit nations such as China and Italy. That said, I am not suggesting our Canadian experience with the virus will be as severe as those examples; that I cannot comment on authoritatively.
At Canadian Black Book, we are forecasting two likely scenarios for the auto sector. We are suggesting that the most likely scenario is that Canada experience negative GDP growth from Q1 to Q3, along with a drastic increase in unemployment. This would likely result in a 25% decline in new vehicle sales for all of 2020 to a level around 1.49 million units.
Our second scenario is bleaker, whereby our economy falls into a deeper recession due to a prolonged social distancing regime well into the fall. In this case we estimate new sales to dip further up to a 40% decrease in annual sales to 1.19 million units in 2020.
In both scenarios, we expect a drop in wholesale prices of 1-6 year old vehicles, versus pre-COVID-19 prices. In the short-term (3-9 months) we can most likely expect a 15% decline in wholesale pricing compared to our expected baseline. That said, in the more extreme recession scenario, that number could dip past the 22% mark.
Most likely, market demand for used vehicles that are in good condition will increase, as Canadian households and businesses tighten up budgets. This will keep pricing for these used units strong. We especially see opportunity at the lower end of the market, for cars at $10,000 or less.
Canadian Black Book has lowered our 12 month residual value forecast 4% from the March-April forecast. Looking out further, to 36 month residual values, we believe it is most likely that there will be a rebound close to pre-virus levels with just a 1% negative adjustment. Again, I caution that if we do experience deeper recessionary forces, that 36 month residual could be 10% lower. Currently, it is our position that when we look out to 60 months, we see 0% impact at the moment.
It is our expectation that overall fleet numbers will fall in North America, both in total numbers and as a percentage of industry sales. Obviously the daily rental business, especially airport based, is under siege. Those in charge of rental fleets are under pressure to find the best strategies to cope. Do they sell? Or do they keep fleet units on the road for longer than they normally would?
Fleet vehicle type will play into such strategies as businesses defer purchase and new supply is delayed. We anticipate, in our mild recession scenario, that values will go down on average by 15%. That number is calculated such that we see an 11% fall for cars and a 16% dip for light trucks, vans, SUV. Given we are in recessionary times we do expect pickups of all sizes and commercial van values to be hit a bit harder as business defer purchase of vehicles until the economy improves.
What fleet operators need to consider, is that there will be delays for sourcing new product. There is a massive global supply chain disruption that will take much of 2020 and well into 2021 to iron out. Currently, there is no certainty as to when auto plants and parts makers will come back online. Couple that with logistics (trains, trucks, boats) that are likely operating at less than peak efficiency and we can assume that delivery dates will be pushed back.
Fleet buyers may have to be flexible as shortages of certain trims/models and it is very likely as mentioned, delivery dates could be less firm than you like. Much of this disruption could force some fleet operators into the used market. One to two year old vehicles, with low mileage, good condition, even some OEM warranty left and commanding less upfront capital investment, could be a very attractive option.
What is clear is that buyers will have to put a focus on working closely with OEM or dealer fleet sales staff to find the right solutions, in these unprecedented times. It may in fact be a good time to buy, if budgets allow. Interest rates are at historic lows. Fuel costs are in a free fall, which may help justify the purchase of trucks, vans or SUVs. With postponed lease returns, there will be a glut of good used off-lease vehicles in the coming months. We will see some aggressive pricing and incentives while OEMs face an uncertain future. So it is not all bad news!
By: Brian Murphy, VP Research & Analytics, Canadian Black Book