The light-vehicle market contracted by double digits in August, but a trifecta of factors drove buyers into the cushy seats of luxury vehicles.
It all reflected a combination of automakers focusing production on high-margin vehicles amid the global microchip shortage, consumers sitting on stacks of pandemic cash, and a looming federal levy on vehicle purchases of $100,000 or more.
Overall, total Canadian sales in August fell an estimated 11.4 per cent to 146,925 compared with August 2020, according to DesRosiers Automotive Consultants (DAC). Additionally, sales plunged “a disconcerting 19.2 per cent from August 2019.”
But of the handful of automakers that still report monthly sales, luxury brands Acura, Genesis, Lexus and Volvo all posted whopping increases.
Genesis was the biggest gainer, up 416 per cent to 526 units when compared with August 2020, although it added two new utility vehicles since then, which accounted for a bulk of the growth (344 of the 526 sales in August). Lexus reported its sixth consecutive month of record sales as August volume rose 27.8 per cent with 2,508 units sold.
The biggest player in the trifecta, according to Rebekah Young, the director of fiscal and provincial economics with a focus on automotive retail at Scotiabank Economics, is still the “wealth effect.”
“Anyone with a good job and some equity [housing or financial markets] has seen their net worth increase quite substantially over the course of the pandemic. With limited other discretionary spending [on] travel, restaurants, etc. until recently, there is probably more discretionary spending directed to goods like luxury vehicles.”
Steve Chipman, CEO of Winnipeg-based Birchwood Automotive Group, said luxury items, such as boats, are not easy to get right now, and people are still leery of traveling.
“People who have sums of disposable income and have large incomes have nowhere else to buy.”
Chipman said his group’s luxury sales — including Lexus vehicles — advanced 27.3 per cent in August compared with a year ago.
Stored wealth during the pandemic might be a critical factor, but it’s hardly a surprise.
A federal luxury tax slated for Jan. 1, however, appears to be already making waves.
According to the federal Liberals, “The amount of the tax would be the lesser of 10 per cent of the full value of the vehicle...or 20 per cent of the value above $100,000.” The levy will apply to the vehicle’s price after PST, GST or HST are added, a federal Finance Department official said. Ottawa opened public consultations Aug. 10, and stakeholders have until Sept. 30 to make appeals. Some buyers aren’t waiting to find out if the tax goes through, however.
“There could very well be some pull-forward in purchases ahead of [Jan. 1],” said Young.
Birchwood’s Chipman agrees.
“I’ve talked to our vice-president of luxury sales and a couple general managers, and that’s the sense they get.”
The story is similar at Pfaff Automotive Partners, said Chris Pfaff, head of the Toronto-based group. It has 16 dealerships across Canada, including two ultraluxury stores. Pfaff did not provide sales numbers.
The third factor — the microchip shortage — is no stranger, but its impact on luxury sales provides a new twist.
While mass-market brands such as those from the Detroit Three have taken the brunt of the global microchip crisis through lost production, automakers have been redirecting microchips to high-margin vehicles, said Sam Fiorani, vice-president of global vehicle forecasting at U.S.-based AutoForecast Solutions.
FOCUS ON MONEY MAKERS
“These are smart companies and they are trying to focus on the vehicles that make them the most money. But, when the chips dry up, they dry up.”
Luxury brands are not immune to the shortage. “I can tell you even some of that [demand] is being held back because we don’t have enough product,” Pfaff said. “Despite all the challenges, that business is extremely strong.”
His dealerships are “selling everything we can. I don’t know if it’s a panicked consumer hearing that you can’t get a car, so you better get one now. It’s really bizarre.”
At the mass-market level, Subaru was the only brand that still reports monthly to post sales gains in August, up 11 per cent to 5,853 units.
While there doesn’t appear to be an industrywide consensus on how long it will take for the microchip shortage to bottom out, automaker output was cut further in September. Globally, 8.25 million cars and trucks had been taken out of schedules as of Sept. 14 — an increase of about 1.17 million vehicles from two weeks earlier, according to AFS.
Toyota on Sept. 10 announced plans to slash global production by 330,000 units in October. The total hit represents a 40 per cent cutback from its original October production plan. It also said it will take a bigger hit than expected in September, expecting to lose another 70,000 vehicles.
Chipman said his stores will likely notice the cuts starting in November. Meanwhile, he said on Sept. 9 that his group was down to onethird of normal inventory.
“We could get down to 20 per cent of our normal levels.”
Some of his stores are now missing monthly sales targets because there simply isn’t product.