Auto Market Update: V-eering Around COVID-19
Early in the year, the outlook for the North American auto industry looked dire. As the COVID-19 pandemic struck, Canadian dealerships were temporarily shuttered and production came to a halt. In the U.S., sales tumbled as the pandemic caused the shortest and steepest postwar recession on record. But the industry mounted a strong recovery in the second half of 2020, and the 2021 outlook for both Canada and the U.S. appears rosy.
Our semiannual report 
on the North American auto industry covers the market and economic factors behind the optimism. To take a deeper dive into what we can expect from the industry in 2021, I recently spoke with a pair of BMO experts:
- Paul Hunsley, Head of BMO Retail Automotive Finance, Canadian Commercial Banking
- Erik Johnson, Economist, BMO Capital Markets
Following is a summary of our discussion, edited for length and clarity.
Bumps on the Road
In the spring, 2020 looked as if it were shaping up to be a grim year for the auto industry. But after staging a dramatic V-shaped recovery in the second half, the industry is poised to continue its upward trend through 2021.
“Despite some of the really severe economic repercussions of the pandemic, what's been both surprising and a bright spot of this year is that the auto sector avoided a lot of the worst-case scenarios that we saw going into back in the spring,” Johnson said. “I think 2021, both from a production and a demand side, is looking good. Bringing the pandemic under control is going to be a big driver of that.”
With that in mind, Johnson said conditions could turn negative in the near term as infection, hospitalization and mortality rates are on the rise on both sides of the border. In response, more regions across both countries are implementing restrictions on businesses similar to what we saw in the early days of the pandemic.
“Those things are going to potentially show up in weaker numbers in the labor market reports to come in December and possibly the first quarter of 2021,” Johnson said. “It could also potentially weigh a little bit on consumer confidence as we finish off this year and head into next year.”
Pent-up Demand
One surprising aspect of the recession was the increase in personal savings. Much of that was buoyed by stimulus relief packages in both the U.S. and Canada. The upshot is that it’s been positive—and will continue to be a boon—for the auto industry because consumers have bulked up their personal balance sheets. They’ve saved more cash and/or they reduced debt levels, which bodes well for consumption to resume through 2021. Also, Johnson noted that much of the recovery in auto sales came from households that experienced less of the pandemic’s economic impact. Assuming the labor market improves in the wake of vaccination efforts, there should be pent-up demand from other segments of the population.
“As some of those workers who are more affected start to come back into the labor market, those people will also be potential new car customers,” Johnson said.
M&A Activity to Heat Up
In another indication that the industry should return to normal, we expect more consolidation in 2021. While buyers are being more selective regarding brands and markets, there's still a fair bit of fragmentation in the industry. About 35% of dealers are independent, and the investment required to stay not only relevant but to stay in the game—whether it's digital retailing, electrification or just capital expenditures to retrofit facilities—is increasing every day.
We also saw that as deal activity picked up in the second half of 2020, sellers were more flexible regarding deal structures, including higher incidences of vendor take-backs (VTBs), and some sellers are retaining their real estate holdings to make transactions more attractive to buyers that just want the operating side of the business. All told, we expect more M&A activity in 2021 in terms of overall velocity and closed transactions.
Retail Innovation Trends
On the retail front, Hunsley noted that financing application volume was better than expected in 2020, and approval rates have remained consistent from pre-pandemic levels.
"That goes to the quality of the consumers that are coming out,” he said. “It looks like there are fewer tire kickers because our booking rate remains very strong—as a matter of fact, stronger than it had been for a while. So that tells me the customers that are coming in to purchase a vehicle, they move on that unit quickly. It also makes me believe that they are more educated on their purchase, so they’re probably spending even more time on online investigation than even pre-COVID. So as an auto retailer today, what does your presence look like online?”
Digital innovation will also be crucial across the industry. Hunsley said dealers, OEMs and financial institutions are working on incorporating technologies like e-contracts and digital bills of sale to simplify transactions.
"The provincial regulators have been working with dealer bodies to get that moving along, and I certainly believe that that's where the future will lie,” Hunsley said. “From a financial institution standpoint, I can tell you just in conversation with my peers, everybody is working toward that solution. I believe a lot of these areas will come to fruition through fiscal ’21. There is certainly a lot of effort being put in that arena to make changes to the ease of doing business for the consumer, the dealer and the lender.”
A Resilient Industry
Ultimately, it was the industry’s ability to innovate and adapt that helped it weather the 2020 storm, and it’s what will likely enable dealers to thrive in 2021 and beyond. From our own experience, we saw dealers across the board leverage the disruption to do more with less, whether through resetting their operating base and/or their expense base. It’s encouraging to see dealers take advantage of the changes imposed by the pandemic.
“I'm always impressed by the perseverance of our dealer clients,” Hunsley said. "Certainly, there have been a lot of signs of perseverance in the last number of months.”
Jamie Gordon, Director of Strategic Initiatives, BMO Automotive Finance, Canadian Commercial Banking and Ryan Ricci, Vice President, Credit Structuring & Leveraged Finance, BMO Automotive Finance, Canadian Commercial Banking contributed to this article.
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Robert Sadokierski
Former Senior Vice President & Head, Automotive Finance, BMO
Early in the year, the outlook for the North American auto industry looked dire. As the COVID-19 pandemic struck, Canadian dealerships were temporarily shuttered and production came to a halt. In the U.S., sales tumbled as the pandemic caused the shortest and steepest postwar recession on record. But the industry mounted a strong recovery in the second half of 2020, and the 2021 outlook for both Canada and the U.S. appears rosy.
Our semiannual report on the North American auto industry covers the market and economic factors behind the optimism. To take a deeper dive into what we can expect from the industry in 2021, I recently spoke with a pair of BMO experts:
- Paul Hunsley, Head of BMO Retail Automotive Finance, Canadian Commercial Banking
- Erik Johnson, Economist, BMO Capital Markets
Following is a summary of our discussion, edited for length and clarity.
Bumps on the Road
In the spring, 2020 looked as if it were shaping up to be a grim year for the auto industry. But after staging a dramatic V-shaped recovery in the second half, the industry is poised to continue its upward trend through 2021.
“Despite some of the really severe economic repercussions of the pandemic, what's been both surprising and a bright spot of this year is that the auto sector avoided a lot of the worst-case scenarios that we saw going into back in the spring,” Johnson said. “I think 2021, both from a production and a demand side, is looking good. Bringing the pandemic under control is going to be a big driver of that.”
With that in mind, Johnson said conditions could turn negative in the near term as infection, hospitalization and mortality rates are on the rise on both sides of the border. In response, more regions across both countries are implementing restrictions on businesses similar to what we saw in the early days of the pandemic.
“Those things are going to potentially show up in weaker numbers in the labor market reports to come in December and possibly the first quarter of 2021,” Johnson said. “It could also potentially weigh a little bit on consumer confidence as we finish off this year and head into next year.”
Pent-up Demand
One surprising aspect of the recession was the increase in personal savings. Much of that was buoyed by stimulus relief packages in both the U.S. and Canada. The upshot is that it’s been positive—and will continue to be a boon—for the auto industry because consumers have bulked up their personal balance sheets. They’ve saved more cash and/or they reduced debt levels, which bodes well for consumption to resume through 2021. Also, Johnson noted that much of the recovery in auto sales came from households that experienced less of the pandemic’s economic impact. Assuming the labor market improves in the wake of vaccination efforts, there should be pent-up demand from other segments of the population.
“As some of those workers who are more affected start to come back into the labor market, those people will also be potential new car customers,” Johnson said.
M&A Activity to Heat Up
In another indication that the industry should return to normal, we expect more consolidation in 2021. While buyers are being more selective regarding brands and markets, there's still a fair bit of fragmentation in the industry. About 35% of dealers are independent, and the investment required to stay not only relevant but to stay in the game—whether it's digital retailing, electrification or just capital expenditures to retrofit facilities—is increasing every day.
We also saw that as deal activity picked up in the second half of 2020, sellers were more flexible regarding deal structures, including higher incidences of vendor take-backs (VTBs), and some sellers are retaining their real estate holdings to make transactions more attractive to buyers that just want the operating side of the business. All told, we expect more M&A activity in 2021 in terms of overall velocity and closed transactions.
Retail Innovation Trends
On the retail front, Hunsley noted that financing application volume was better than expected in 2020, and approval rates have remained consistent from pre-pandemic levels.
"That goes to the quality of the consumers that are coming out,” he said. “It looks like there are fewer tire kickers because our booking rate remains very strong—as a matter of fact, stronger than it had been for a while. So that tells me the customers that are coming in to purchase a vehicle, they move on that unit quickly. It also makes me believe that they are more educated on their purchase, so they’re probably spending even more time on online investigation than even pre-COVID. So as an auto retailer today, what does your presence look like online?”
Digital innovation will also be crucial across the industry. Hunsley said dealers, OEMs and financial institutions are working on incorporating technologies like e-contracts and digital bills of sale to simplify transactions.
"The provincial regulators have been working with dealer bodies to get that moving along, and I certainly believe that that's where the future will lie,” Hunsley said. “From a financial institution standpoint, I can tell you just in conversation with my peers, everybody is working toward that solution. I believe a lot of these areas will come to fruition through fiscal ’21. There is certainly a lot of effort being put in that arena to make changes to the ease of doing business for the consumer, the dealer and the lender.”
A Resilient Industry
Ultimately, it was the industry’s ability to innovate and adapt that helped it weather the 2020 storm, and it’s what will likely enable dealers to thrive in 2021 and beyond. From our own experience, we saw dealers across the board leverage the disruption to do more with less, whether through resetting their operating base and/or their expense base. It’s encouraging to see dealers take advantage of the changes imposed by the pandemic.
“I'm always impressed by the perseverance of our dealer clients,” Hunsley said. "Certainly, there have been a lot of signs of perseverance in the last number of months.”
Jamie Gordon, Director of Strategic Initiatives, BMO Automotive Finance, Canadian Commercial Banking and Ryan Ricci, Vice President, Credit Structuring & Leveraged Finance, BMO Automotive Finance, Canadian Commercial Banking contributed to this article.
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