When COVID-19 subsides, automakers will reopen factories and dealerships will unlock their showrooms, but that will likely be just the beginning of a crushing, obstacle-filled business path to navigate.
Government-induced retail shutdowns will have shredded Canada’s economic engine, gutted the job market and shuttered thousands of businesses.
And with what money remains, fearful, battered, rattled and cash-strapped consumers are likely to lie low until they regain footing and confidence.
“There’s nothing quite like it. I hope I never see anything like it again,” said Brian Murphy, vice-president of research and analytics at Canadian Black Book.
“There will be some businesses that just don’t make it, and what’s the impact on the economy there? Lots of small businesses — restaurants, hair salons, barber shops, bookstores — they need to make it to the other side because there are jobs attached to them, and that’s what the economy is.” With the auto industry virtually at a standstill, little revenue was flowing through the North American industry in late March and April. Steve Chipman, CEO of Birchwood Automotive Group in Winnipeg, said the health of automakers was one of his major concerns as he deals with the fallout of the crisis at his stores.
“Car companies have to sell us a car. When they can’t sell us a car, how are they generating any cash? If they shut down for a month, what’s the cash burn in a car company?”
The response to COVID19 effectively shut down large swaths of most of the world’s biggest economies, including Canada’s. Nonessential businesses, among them many dealership showrooms, were forced to close in March and April. Governments and health officials urged people to stay home and avoid contact with others to limit the spread of the virus and prevent hospitals from being overrun by a surge of patients needing intensive medical care.
How those businesses fare and how effective government relief targeted at small businesses, individuals and families proves to be will go a long way toward determining just how bad things get for the auto industry even after some of the restrictions are lifted, according to economists and analysts interviewed by Automotive News Canada.
ONE CERTAINTY: IT’S BAD
It was not clear when restrictions would be lifted or how quickly, but officials have warned that it would take weeks or months. Prime Minister Justin Trudeau told the The Globe and Mail in April that it would be “a few months, probably” before governments could consider safely lifting some restrictions. Ontario will allow dealerships to open by appointment only beginning May 4. And Quebec and Alberta are easing some restrictions, too.
But no matter what, things will likely get ugly. Even if the worst public health and economic scenarios are averted, consumers are likely to emerge from the pandemic far more cautious with their spending as they wait for the economy to improve and everyday life to normalize.
Robert Karwel, senior manager of J.D. Power’s automotive practice in Canada, warned of a possible “multiyear sales depression” even if the economy as a whole improves somewhat quickly.
“People got spooked this year, and they may just delay” vehicle purchases for a year or more. Let’s say they get their job back and had wage subsidies from the federal government to tide them over. They kept their homes and kind of kept their lifestyle going. But now that we’re sort of back to normal, do you feel comfortable spending $35,000 on average for another car?
“Maybe not. Maybe the car you have now will be fine, and you’ll just let the dust settle.” The fed-eral government has created a host of measures designed to bring financial relief to individuals and businesses, including expanded benefits for workers affected by the pandemic and a 75 per cent wage subsidy for businesses that have suffered at least a 30-per-cent decline in revenue because of the coronavirus.
While economists applauded Ottawa’s COVID19 response, they cautioned that more government stimulus would likely be needed to prevent dire economic scenarios from playing out.
Robyn Gibbard, senior economist at the Conference Board of Canada, said the government’s efforts could begin to “bridge people and businesses” into a post-shutdown world. Effectively doing so could lead to a V-shaped economic recovery, where a swift and deep decline in economic activity is followed by a relatively fast expansion.
A HOLD ON BIG PURCHASES
But the auto industry might be one of the last major industries to recover from the coronavirus recession, no matter how severe it becomes or how swift the bounce-back is, Gibbard said.
“Durable [goods] spending recovers slower than other categories. People still need to eat, but on the other hand, people are staying home and may have some income instability because of everything that’s going on. Purchasing a car isn’t top of mind for many people now, and it will likely take some time to recover.”
Analyst Dennis DesRosiers said this economic crisis differs from previous ones for the automotive industry because people are staying home and driving less. As a result, less wear and tear on vehicles means consumers will likely delay visits to dealerships.
“In a normal cycle, you have all these number of vehicles bought over a number of years. And then you go through a period where for whatever reason, you have a correction,” DesRosiers said. “But people are still driving during those crises. People still drove their cars during the [2008-09] financial crisis ... That’s not happening right now.”
Hopes for a steady recovery in the long term are also complicated by the search for a coronavirus vaccine. Many scientists have warned that until a vaccine is approved and distributed to much of the population, COVID19 will remain a threat and could cause further outbreaks. That means periods of economic restrictions could erupt until the arrival of a vaccine, which may not be developed for at least a year.
“What we’re worried about is the economy at large,” said J.D. Power’s Karwel. “No one is buying cars right now. OK, fine. Manufacturers can’t make them anyway. That doesn’t really matter right now.
“But what’s going to happen by the third quarter or the fourth quarter?”
Millions of Canadians are expected to apply for employment insurance as they temporarily or permanently lose their jobs.
HOUSEHOLD DEBT WAS ALREADY A FACTOR
Rebekah Young, director of fiscal and provincial economics at Scotiabank warned that as a result, debt levels might rise during the crisis, dampening people’s ability to buy a new vehicle when things begin to normalize. Household debt was likely a major reason that auto sales were expected to decline this year before the crisis hit.
“The consensus was that high household debt levels [put] a ceiling on purchases, so, people were spending more on essentials, whether it was housing costs or rental costs or food-price appreciation.”