Autos V-eer Around COVID-19
Early in the year, the outlook for the global auto industry looked dire. Dealerships were temporarily shuttered and production was halted as the global pandemic caused the shortest and steepest post-war recession on record. Still, vehicle sales have managed to chart a V-shaped recovery. Light vehicle sales in Canada and the U.S. should be down 15.7% (Chart 1) this year, much better than the most severe scenarios but vastly different from the pre-pandemic forecast of a 3.7% drop. The resilience of consumer durables, chief among them vehicles, has been a welcome surprise. In the United States, sales volumes are likely to drop 15.2% this year. In Canada, more stringent public health restrictions left a bigger hole to climb out of and, accordingly, vehicle purchases are likely to decline 17.4%.
Zooming out on the year, however, the auto industry has managed to steer clear of more severe economic damage. While the momentum built up over the last several months could take a hit amid surging COVID-19 cases in both countries, we see sales accelerating in 2021. Robust fiscal and monetary support in Canada will likely propel light vehicle purchases to 2 million units in 2021. The biggest drag on sales in Canada, household debt, has also been shelved for now, as interest rates are unlikely to lift off until after 2023, keeping debt-service ratios lower. We see the year ahead for the U.S. with more caution, with sales reaching 15.6 million units. The expiry of the CARES Act income-support programs could slow sales growth to start 2021, and attractive interest rates for vehicle financing will be counterbalanced by slow population growth and waning consumer confidence as coronavirus infections continue to rise more sharply than in Canada. With the potential for a vaccine seeing wider distribution by 2021Q2, we could see U.S. fleet sales recover more quickly, which could add as many as 1 million units. The other upside to a vaccine is that with data from TomTom suggesting urban traffic congestion remains well-below 2019 averages, a decrease in work-from-home trends would tend to increase vehicle use for commuting in 2021, providing further support to the sector.
The Great Accelerator
Rather than upending the industry, the pandemic has instead accelerated many existing trends this year. Particularly, consumer preferences for light trucks, zero emission vehicles (ZEVs), and online purchases all sped up this year.
In the U.S., sales were cushioned in 2020 by the disparities in the labour demand shock. Household income among new vehicle buyers was around $100,000 this year, meaning that these households were more insulated from job losses than lower income workers. In fact, data from Opportunity Insights suggest that higher-wage workers (greater than $60,000 per year) have already seen their employment levels return to pre-pandemic levels. And for workers that were initially affected by the pandemic, significant fiscal support programs in the U.S. (and also Canada) more than made up for losses to personal income. These income trends contributed to the movement toward higher-priced vehicles (light trucks), which are tracking to a new high of 75% of purchases this year (Chart 2). Coming out of the Great Recession, by comparison, light trucks comprised only 48% of unit sales.
Canada is even further ahead of the U.S. when it comes to a shift toward light trucks over conventional passenger cars. This year is gearing up to see light trucks comprise more than 79% of unit sales (Chart 3). Similar to the U.S., a decade ago, the same share stood at 50% in Canada. Higher vehicle prices coming out of this recession are already helping automakers post a faster recovery thanks to fatter margins, which are supportive for future business investment—the likes of which we are already seeing.
Another puzzle in 2020 has been the strength of ZEV sales. With small production runs and pricier components, they tend to be more expensive than similar conventional vehicles. And yet, as vehicle purchases collapsed in the spring, the Tesla Model 3 became the best-selling vehicle in the U.K. Part of the momentum for ZEVs can be attributed to the most popular electric vehicle maker, Tesla, already having a predominantly online retail presence. And the other major factor is that with high pricepoints, they tend to cater to households who were better shielded from the global recession.
In Canada, we're seeing an acceleration of ZEV sales (Chart 4). ZEVs reached 3.5% of new vehicle registrations (21,288 units) in the first half of 2020, after hitting 2.7% in 2019. While they still represent a small minority of vehicle purchases, they continue to gain market share even in Ontario—reaching 1.4% of new registrations so far this year despite the province canceling the green vehicle incentive program back in 2018. With two of the "Big Three" automakers committed to making ZEVs in the country in the years ahead, consumer demand will likely improve for the segment as economies of scale lead to more affordable prices. Research suggests that 80% of global electric vehicles are purchased in the region they are made . And Canada has room to grow as electric vehicles made up only 0.4% of production in 2018 compared to 3.1% in the U.S.
The U.S., by comparison, saw ZEV sales dip through September of this year to 1.7% of total light vehicle sales, but most of the drop can be attributed to the falling demand for plug-in hybrid electric vehicles compared to battery electric. With GM's new battery facility in Ohio running ahead of schedule, we could see ramped-up ZEV production earlier than expected, providing a future surge in sales.
Canadian Production Gets a Boost
At the start of the year, Canada's vehicle production future looked bleak. GM appeared set to wind down much of its assembly in the country. That presented risks of weakening agglomeration economies across Ontario in supporting industries. FCA also announced its intention to shutter its third-shift in Windsor, cutting a further 1,500 jobs. Canadian vehicle production had long been of similar proportion to domestic demand at around 2 million units (Chart 5). However, with both GM and FCA originally set to reduce their presence in Ontario, the auto sector was expected to contract having suffered closures each equivalent to around 7% of production in two years.
Fast-forward to November, and now each of the "Big Three" have announced at least $1.3 billion of investments in their operations in Canada. With these investments, auto sector employment will grow for the first time in years. And compared to past labour deals, each deal represents investment in growing vehicle segments rather than conventional passenger vehicles, which had long been a weakness in FCA's presence in the country. That's a big deal with auto and parts production representing 9% of manufacturing.
Bottom Line: A year that started out with the potential for severe economic repercussions for the auto sector has avoided the worst case scenarios and is headed for a brighter 2021, assuming the pandemic is brought under control.
 Sharpe, B. et al. (2020, April). Power Play: Canada's Role in the Electric Vehicle Transition. https://theicct.org/sites/default/files/publications/Canada-Power-Play-ZEV-04012020.pdf [^]