Never before have Canadian dealers sold so many new previous-model-year vehicles in the first quarter of a calendar year as they have so far in 2017, a sign the market is weakening, according to J.D. Power Canada.
The research firm says that 23 per cent of new vehicles sold in the first quarter this year were from the 2016 model year.
By comparison, 15 per cent of new cars sold in the first quarter of 2013 were from the 2012 model year. It is taking “substantially longer” for dealers to clear-out old inventory.
J.D. Power Senior Manager Robert Karwel said it’s one sign that automakers are overproducing.
“We can only count which ones have sold and how many of those were from the model year 2016. But this is a fascinating subject because its growing, and I don’t think many are aware of it,” Karwel said. “It’s a bubble, and its building. The manufacturers have to deal with this.
“This is an undercurrent we see in the industry, one no one is addressing or talking about.”
Automakers don’t publicly report inventory and the number of days to turn in Canada the same way they do in the United States. But J.D Power, working with LMC Forecasting, estimates there were 71 days to turn at the end of the first quarter. That’s up five days over the same quarter in 2016.
It’s a similar story in the United States where there is a 73-day supply, up eight days from a year earlier, according to the Automotive News Data Center in Detroit.
“No one is overly concerned with a growing days-to-turn, until it starts to hit unbearable levels,” Karwel said “It is generally agreed that a days-to-turn in the 60s is still acceptable.”
None of the automakers has slowed production. That’s because the most important thing for a manufacturer to do is to keep a factory running at capacity “because it is absolutely most efficient at that point in terms of costs,” Karwel said.
“If they are overproducing and cars are sitting longer, that is then an issue that can be worked around to a certain extent, by using incentives,” Karwel said.
J.D. Power found the average incentive was worth about $5,900 on each new car and light duty truck sold in Canada during the first quarter of 2017. Karwel said incentives are now entering “uncharted territory.”
“This can’t go on forever, so an adjustment will have to come,” he said.
Cars a harder sell
Inventory is building and older models are lingering on lots longer for a couple of reasons, Karwel said. Overproduction is the first reason and a change in consumer tastes is another.
There’s been a consumer shift from cars to trucks and “the pipeline cannot adjust quickly enough, and cars are sitting on lots longer and longer,” Karwel said.
“In essence, cars are increasingly more difficult to sell,” he said. “Unless production starts to shift, it will continue to be a large cost to the manufacturers. It seems that up to now at least, it was a cost they were willing to bear.”