Turning Massive Challenges Into Meaningful Change

November 29, 2020

Turning Massive Challenges Into Meaningful Change

The COVID-19 pandemic has caused unprecedented economic hardship and concern for consumers around the world. Nearly every industry has been negatively impacted by the global COVID-19 pandemic, including the automotive industry.

Automotive manufacturers faced a number of unique challenges as a result of the pandemic. Production slowdowns, decline in consumer demand, and local lockdown or stay-at-home orders caused significant disruptions in operations for most automotive manufacturers.

The pandemic is still raging, so it’s too soon to measure the full impact that COVID-19 had on the automotive industry. However, Cox Automotive recently released a comprehensive mid-year review report that provides some insight as to how the automotive industry is faring in the face of this year’s unique challenges. Here are some key findings from this report:

Economic Conditions in the U.S.

The report provides a snapshot of the economic conditions in the U.S. that reveals the extent of the devastation caused by COVID-19.

Experts typically assess the state of the economy by measuring the Gross Domestic Product (GDP) growth, which is the value of all goods and services produced in the country during a specific timeframe. The GDP dropped by nearly 40% in the second quarter of 2020, which indicates that the economy suffered substantial losses due to the pandemic.

The unemployment rate also increased to 13.3% during this timeframe. This is primarily due to. lockdowns and stay-at-home orders related to the coronavirus pandemic.

A drastic drop in GDP combined with a rising unemployment rate has left consumers worried about the economic future. Between May 2019 and May 2020, buyer confidence dropped roughly 28 points. The higher this score, the more likely consumers are to spend money and stimulate the economy. So if consumer confidence is dropping, this could hurt the economy even further.

Consumers Delaying Vehicle Purchases

The report revealed that consumers who want or need a new vehicle are in no hurry to make a purchase or sign a lease. In fact, over one-third of these consumers are putting off purchasing or leasing a vehicle.

There are several different reasons why consumers are choosing to delay purchasing or leasing a vehicle. Some cite the general uncertainty in the market right now, whereas others are specifically concerned about unemployment and their own job stability. Consumers also cited the possibility of a second wave of COVID-19 as a reason for delaying vehicle purchases and leases.

Automotive companies shouldn’t expect these consumers to change their minds overnight. In June, 41% of these consumers predicted that they would delay purchasing or leasing a vehicle for up to two months. Another 43% predicted that the delay would last between three to six months.

This means automotive companies should not expect consumers to return to their pre-pandemic purchasing habits right away.

Consumers Delaying Vehicle Maintenance & Repairs

Purchasing a vehicle isn’t the only thing that automotive consumers are putting off during the pandemic. Many consumers are also putting off visiting a dealership or auto repair shop for routine maintenance and repairs.

In early March, only 5% of consumers reported that they were delaying vehicle maintenance and repairs. This number peaked at 40% in early April, but holds steady at 25% in June.

Out of these consumers, 95% are delaying routine vehicle maintenance and 52% are delaying vehicle repairs.

Maintenance and repair delays could affect foot traffic at automotive dealerships, which could in turn affect sales.

Correlation Between COVID-19 Infection Rate & Automotive Sales Drop

There are countless factors that could impact the health of the automotive industry, so some people may wonder whether COVID-19 really is solely to blame for this year’s challenges. The report answers this question by showing a clear correlation between the COVID-19 infection rate and automotive sales.

According to the report, automotive sales suffered the most in states that were hit the hardest by the COVID-19 pandemic. For example, the state of New York was considered the epicenter of the coronavirus outbreak in March and April of this year. During these two months, automotive sales in New York dropped by 63% compared to the same time period last year.

Automotive sales drastically declined in other states with high COVID-19 infection rates, such as Pennsylvania and California.

However, automotive sales did not suffer as much in states that had low COVID-19 infection rates at the time. Automotive sales in Arkansas, for example, only dropped by 12% compared to last year.

Sales Rebound As States Recover From COVID-19

The report shows that state-level automotive sales declined as the state’s infection rate increased. But it also shows the opposite—state-level automotive sales start to rebound as the state begins to recover from COVID-19.

As previously mentioned, automotive sales in New York dropped by 63% during March and April, which is when COVID-19 first began to take its toll on the state. But over the next month and a half, sales increased by 1.3%. This may not seem significant, but it indicates that getting the pandemic under control can help automotive companies recover.

Lower Financing and Ownership Costs

Another bright spot in the Cox Automotive report is the data related to the cost of vehicle financing and ownership.

The effective federal funds rate dropped from 2.39% in May 2019 to 0.05% in May 2020. This means that banks were able to borrow money at a lower interest rate and pass these savings onto consumers.

Furthermore, the average new auto loan rate dropped from 6.30% in May 2019 to 4.56% in May 2020. This may persuade consumers who are on the fence to take action in order to take advantage of the lower interest rate. The lower the rate, the less the consumer will pay in interest on their vehicle loan.

Mobility costs, which are the costs associated with using a vehicle, are also lower this year. The average retail price of unleaded gasoline dropped from $2.82 per gallon in May 2019 to $1.98 per gallon in May 2020. The lower the price of gasoline, the cheaper it is to own and use a vehicle.

Promoting low interest rates and mobility costs could help automotive companies attract more customers and increase their sales.

Low Supply Could Impact the Industry’s Recovery & Limit Consumer Options

The report clearly shows that it is possible for the automotive industry to recover once COVID-19 is under control. But automotive companies may face another obstacle on their road to recovery: low inventory.

Many production plants were closed due to lockdown or stay-at-home orders, which means automotive manufacturers were unable to produce new inventory. Then, sales started to slowly rebound at the same time the production plants were reopening. This led to a rapid drop in the available supply of vehicles.

In March, there were about 3.5 million vehicles available for sale in the United States. But just three months later, this number dropped to roughly 2.6 million. The days’ supply also fell below 80, which indicates that the automotive inventory could have been depleted in less than three months.

Inventory issues affected some manufacturers more than others. Toyota, Subaru, and GMC were three of the manufacturers that were low on inventory, whereas Nissan and Ford had the highest numbers of vehicles available.

Luxury Automotive Manufacturers May Suffer the Most

Many consumers are experiencing financial hardship right now, so it’s not hard to understand why the pandemic may have the biggest impact on luxury automotive manufacturers.

During times of economic uncertainty, consumers tend to gravitate towards lower-priced vehicles. This is why manufacturers such as Toyota, Hyundai, Honda, and Kia may not be as greatly affected by the pandemic as more high-end automotive manufacturers such as Porsche, Mercedes-Benz, and Jaguar.

Lending requirements often change during economic uncertainty, which is another factor that could make it harder on luxury automotive manufacturers. Lenders are more hesitant to take on risk during periods of economic uncertainty. To avoid risk, they may only lend to borrowers with higher FICO scores. This means it could be harder for some buyers to get approved for a loan that they need to afford the purchase of a luxury vehicle.

Opportunity For Used Vehicle Sales Growth

One of the silver linings included in the Cox Automotive report is the opportunity for used vehicle sales growth.

The market for both new and used vehicle sales bottomed in mid-April, which is when most lockdowns and stay-at-home orders began to take effect. Both new and used sales started to slowly improve in the weeks that followed. But as of June 15th, new vehicle sales were still well below last year’s figures, whereas there was a positive gain in used vehicle sales compared to the same timeframe last year.

This data indicates that automotive companies may need to focus more on selling used vehicles in order to boost sales and make a full recovery.

Sales of Certified Pre-Owned Vehicles Are Stabilizing

The sale of certified pre-owned vehicles could be another area of opportunity for automotive manufacturers.

A certified pre-owned vehicle is a used vehicle that has passed certain inspections and met specific standards established by the manufacturer. Many manufacturers offer additional perks such as extended warranty coverage to consumers who purchase certified pre-owned vehicles.

Just like standard used vehicles, certified pre-owned vehicles are more affordable than new vehicles. But certified pre-owned vehicles are typically viewed as more reliable than standard used vehicles since they have been thoroughly inspected.

Sales of certified pre-owned vehicles declined in March and April at the start of coronavirus-related lockdowns. But in May, sales began to stabilize. In fact, sales of certified pre-owned vehicles in May were almost identical to pre-pandemic monthly sales of these vehicles.

Automotive companies that are suffering due to the economic impact of the pandemic may want to allocate resources to the promotion of certified pre-owned vehicles.

Manheim Index Indicates Increase in Used Vehicle Wholesale Prices

The data in the report indicated that automotive manufacturers may be able to recover by shifting their focus to the sale of used or certified-pre owned vehicles. But the report also revealed that making this shift may be a challenge for some businesses.

The Manheim Index is recognized as the most important indicator of wholesale used vehicle prices. In other words, the Manheim Index can be used to determine how much dealerships will have to pay for used vehicles that they can resell to consumers. The higher this number, the higher the average wholesale price of a used vehicle.

The report reveals that the Manheim Index rose to 146.1 in mid-June, which is the highest it has been in over 25 years. Because used vehicle wholesale prices are so high, it may be harder for small dealerships to purchase used vehicles from wholesalers in order to resell them to consumers.

Even if a dealership can afford these prices, they will have to raise the retail price so they can still make a profit on each vehicle. If the average price of a used vehicle significantly increases, consumer demand may start to decline.

Based on this data, the opportunity for automotive companies to increase sales by focusing on used vehicles may not be as promising as it looks.

Independent Dealerships Aren’t Prepared For Shift to Digital

Most consumers are hesitant to visit dealerships in-person due to the threat of coronavirus. Based on this report, it seems that automotive companies are well aware of this fact. The report states that 81% of franchise dealerships and 78% of independent dealerships are going beyond conducting business just in their physical location.

It would make sense for automotive companies to begin conducting business online, especially since research has shown that the process of buying a new vehicle typically starts online. But unfortunately, not all dealerships are prepared to offer consumers an online retail experience.

The shift to the online vehicle shopping experience may benefit large dealerships. This is because over three-fourths of franchise dealerships—compared to 45% of independent dealerships—already have digital retailing solutions in place. This data shows that independent dealerships may need to invest heavily in digital retailing solutions to stay competitive.

The Cox Automotive report confirms that companies in the automotive industry faced significant challenges as a result of the COVID-19 pandemic. There’s no doubt that there is a long road ahead for automotive manufacturers hoping to rebound from a difficult year.

But fortunately, the Cox Automotive report also revealed that there is some light at the end of the tunnel. Automotive companies can bounce back by focusing on the sale of certified pre-owned and used vehicles. Dealerships can also increase their sales by investing in digital retailing solutions that allow consumers to research and purchase vehicles without ever stepping foot in a showroom.

Maximizing these opportunities can help the automotive industry make a full—and fast—recovery after a devastating and unpredictable year.