A complex set of circumstances resulted in a year full of surprises, but what can we learn?
The year 2002 will be remembered as one of the most complex in the history of the Canadian automotive industry, in particular for dealers selling new and used vehicles, because of rising interest rates to combat inflation and the threat of a recession, combined with the lingering effects of COVID-19 on the global supply chain.
Amid fears of a recession and growing inflation, the Bank of Canada raised interest rates seven times from March to December by a total of four percentage points, creating the highest borrowing costs since 2008.
Sales of new light vehicles totalled 1.48 million units, a dip of 9.2 per cent from 2021, and the lowest overall since 2009. Used car values dropped down about 10 per cent, from a rise of about 40 per cent the year before.
All and all, 2022 had a lot happening.
“It was definitely a tougher year, especially the last half, with increased interest rates and whatnot,” said Comox Valley Dodge dealer principal Carson Grant.
Paul Valentine, dealer principal of Valentine Volvo in Calgary, labelled 2022 as a strange year. “I think 2022 was unlike anything we’ve ever seen,” said Valentine, who has been in the dealership business for more than 30 years.
“With COVID, a European war, so many huge issues all coming together, it showed the world has a very, very fragile supply chain and at the end of the day cars are cars, it doesn’t matter if it’s a $20,000 one or a $100,000 one.”
— Paul Valentine, Valentine Volvo
“There were so many external factors it was tough to get your organization wrapped around the right balance of business as you would expect. Supply issues are still out there, depending on the continent. North American plants seemed to be busier than European plants, and Asian plants were busier than European plants. With Russia/Ukraine, the Chinese and the COVID outbreak, the supply chain was really frustrating.
“With COVID, a European war, so many huge issues all coming together, it showed the world has a very, very fragile supply chain and at the end of the day cars are cars, it doesn’t matter if it’s a $20,000 one or a $100,000 one. Cars are a luxury item and at the end of the day they are not a priority. We really saw car manufacturers can do all they want, but if they can’t get the supplies and can’t get their cars to market, the government is not going to do anything to help them because it’s not a necessity. It’s a luxury.”
Thomas Feltmate, Senior Economist at TD Bank Group, pointed to the continued global supply chain shortages and the rising interest rates for the drop in sales in 2022.
“When we look at the income ratios in Canada and we compare them to the U.S.—that’s where I’ve been doing a lot of my comparisons—there’s a definite story that income ratios are at all-time highs in Canada, whereas it’s a bit of a different story in the U.S.,” said Feltmate. “Interest rate sensitivity is definitely more of a thing in Canada, but it’s hard to disentangle the weak sales with how much of that is interest rate-related versus just supply chain issues. More recently we have seen sales start to tick up a bit in the U.S., whereas in Canada they remain a bit weaker.”
Valentine said the rising interest rates definitely impacted consumer spending.
“It goes from a pure depreciation with very little interest to depreciation plus a big hunk of interest,” said Valentine. “People are learning it’s a totally different market out there. That’s taking some time for people to wrap their head around it. It’s when there is such a massive change in the buying environment, the shock sets in.”
Robert Stein, president of Plaza Auto Group, said he expected rising interest rates in 2002, but not to the extent they did. “I didn’t think they were going to raise them seven times in a few months,” said Stein. “I didn’t think they would go up that quickly.”
Daniel Ross, Canadian Black Book Senior Manager Industry Insights & Residual Value Strategy, said interest rates created a new variable for buying new and used vehicles.
“On the new car side I don’t really see that much of a cooling, because that pent-up demand is still so high and we really haven’t seen a recovery from vehicle production,” said Ross.
“With used cars, they were already pretty expensive, but they were relatively inexpensive to get into. If you had to finance that vehicle, it wasn’t as expensive as a new car. They made it much more expensive on a cost-to-borrowing basis to afford a used vehicle. Interest rates increased to such an effect that nothing’s really inexpensive anymore, even when you look at a lower-priced vehicle in this crazy market. It slowed consumer confidence, and now about a third of consumers are not looking at buying any large items such as homes or vehicles. Inventory was starting to not be as much of a problem because that demand was slowing. Once those economic factors lean on each other, sort of move in that direction, prices will weaken.”
Feltmate said the latter half of 2022 resulted in “some unwinding” of the price gains on used vehicles from 2021.
“I think it’s happening in an environment where you’re starting to see some normalization in supply, more used vehicles coming to market and demand is probably receding,” said Feltmate. “It’s a combination of factors putting downward pressure on prices.”
Stein said some dealers are paying the price for buying used vehicles to have some inventory and are taking a loss due to demand dropping.
“It wasn’t like we were buying them cheap and making a huge amount of money,” he said. “We were paying a lot of money for the cars. We were overpaying. We had absolutely no choice but to overpay for the cars or we’d have no cars. Certain cars we bought two months ago drastically dropped in price and we’re going to have to take losses on them accordingly. The manufacturers are saying they will be able to give us a better supply of vehicles, but I’m not 100 per cent sure they can do it, but they seem to pretty confident.”
Though new vehicles were in short supply, dealers made more on sales because consumers had to pay MSRP prices without any incentives. Some dealers charged above MSRP. No-haggle car buying started to become more of a norm.
“Profit margins did kind of fatten up a bit in the sense that incentives came way in,” said Feltmate. “To some extent that was just more a reflection of the market. You had limited supply in an environment where demand was pretty strong, so that helped to put upward pressure on prices.”
He said manufacturers were placing a priority on producing bigger, more expensive models compared to entry-level models.
“We weren’t seeing a lot of those come to market because they didn’t necessarily carry the same margin,” said Feltmate. “In an environment where sales volume is down you have to kind of make up the difference somehow.”
Overall, Ross said 2022 showed recovery is in sight.
“We once said maybe we’d see semiconductor, supply chain improvement, but we really haven’t,” said Ross. “It started to inch its way into the market, but it’s so miniscule. It’s showing we’re going to recover, but it’s probably going to be late in 2023 into 2024, but at least we see the horizon coming, so 2022 was kind of a showing of things calming down, with levers that the government has leaned on to slow inflation and the consumer price index. That’s coming back into check, and now we sort of pause going into 2023 and see how those variables and what they’ve changed are going to affect the marketplace. We’re kind of seeing that now.”
