Canadian dealers and automakers could face some tough choices if the Canadian dollar continues to fall against its U.S. counterpart, industry experts say.
With 70-80 per cent of vehicles sold in Canada coming from outside the country — mainly from the United States but also from Europe and Asia — an unfavourable exchange rate becomes a critical factor in their cost.
“There’s no doubt the value of the dollar does affect pricing in Canada,” said Dennis DesRosiers, president of DesRosiers Automotive Consultants in Richmond Hill, Ont.
The only remaining question is who pays: the automaker, the dealer or the consumer?
If the automaker passes the price increase along to the consumer, it risks losing market share. If it swallows the higher cost, that hurts its profit margin, DesRosiers said.
The loonie slumped to a near four-month low of US74.04 in April after the Bank of Canada said economic growth this year would be slower than expected and held its trendsetting interest rate at 1.75 per cent. Thursday, the loonie closed at US74.19.
ONE CENT EQUALS $250
DesRosiers estimates that for every US one-cent decline in the value of the Canadian dollar, the imported cost of a vehicle rises by $250 to $300. His figures assume an average retail price of $35,000, including cars and light trucks, with an average import cost of $21,000.
Most automakers don’t like to raise the manufacturer’s suggested retail price, especially when the market is soft, said Brian Murphy, vice-president of research at Canadian Black Book, a dealers’ guide to new- and used-car prices. Instead, they will use other strategies to cut costs, such as reducing incentives or making more standard features optional, Murphy said.
The industry typically tries to manage short-term swings in currency valuations, but “ultimately it’s the consumer that pays,” said Don Romano, CEO of Hyundai Canada.
Since 2014, when the value of the Canadian dollar reached US 90 cents, Canadians’ buying power has fallen, Romano said. “We’re paying more for everything,” he said, “not just cars.”
Prices don’t immediately increase, but since 2016, the average transaction price of a car sold in Canada has risen to $35,200 from $33,000, Romano said, citing figures supplied by the Californiabased market researcher J.D. Power.
WHAT’S FOR SALE AFFECTED
The biggest impact of the low dollar on Canadian auto dealers is the availability of product from the manufacturers, said Shahin Alizadeh, president and CEO of Downtown Autogroup in Toronto, which sells 12 brands across 11 dealerships.
“If the car is hot in the U.S., imagine having a 35 per cent advantage in making a decision where does the product land, especially in the luxury brands,” Alizadeh told Automotive News Canada. “Why would they want to collect Canadian dollars?”
On the flip side, a higher U.S. dollar benefits Canadian dealers by boosting demand for Canadian-owned used vehicles from American buyers, Alizadeh said.
Automakers with assembly plants in Canada can benefit from a lower Canadian dollar, depending on how many parts they import, because they sell 85 per cent of what they make outside the country, most of it to the United States, said David Adams, CEO of Global Automakers of Canada (GAC). Toyota, Honda, Ford, General Motors and Fiat Chrysler Automobiles all have assembly plants in Canada.
Most automakers use foreign-exchange hedging to minimize the impact of currency fluctuations on their business, Adams said.
It’s too soon to say what impact the lower loonie is having on Canadian new-car dealers, said Oumar Dicko, an economist with the Canadian Automobile Dealers Association (CADA). “We have not heard this concern from our dealers. That’s not to say it’s not there.”
The Canadian dollar is expected to end the year at about US 75.5 cents, said Jennifer Lee, senior economist with BMO Capital Markets. That could change depending on how the Canadian economy performs and whether the U.S. dollar strengthens.
Sales of new vehicles in Canada are expected to fall to 1.93 million units in 2019 from 1.98 million in 2018 and 2017’s all-time high of 2.04 million, said Scotiabank economist Juan Manuel Herrera.