Trade, Tariffs and ICEs: What Dealerships Will be Watching for in 2025
- Keywords:
Between industry dynamics, economic developments and the U.S. election, there’s been a lot of material for auto dealers to process. To get a sense of what it all means for the industry, Adam Doran, Managing Director with our Dealer Finance group, recently sat down with Erik Johnson, Senior Economist at BMO Capital Markets, for a wide-ranging discussion on what Canadian dealerships can expect in the near term.
Their conversation covered the declining interest rate environment, the possibility of new trade and tariff policies in the U.S., Canada’s revised immigration policy, and where the future of the internal combustion engine. Below, you will find time stamps for specific themes throughout the conversation:
-
:38 | The declining rate environment
-
5:14 | The import side
-
8:40 | Tariffs impacting the auto industry
-
14:31 | Consumer decisions in the declining rate environment
-
19:50 | Sustainability in the automotive industry
Read more
00:00:00:20 - 00:00:13:09
Adam Doran
Hello, everyone. Thanks for joining. My name is Adam Doran, Managing Director in Dealer Finance here in Canada. I'm joined by Eric Johnson, our Senior Economist from BMO Capital Markets. Erik, thanks for being here.
00:00:13:12 - 00:00:21:29
Erik Johnson
Oh, it's my pleasure, Adam. Always a pleasure to get together to talk about, where the industry is going and certainly to share some of our insights with our broader client base as well.
00:00:22:02 - 00:01:10:04
Adam Doran
That's great. Well, we've sourced a lot of questions, from clients, from prospects, internally. And so we just want to jump into some hot topics. The election in the U.S. is, you know, a few weeks behind us now. A lot of change, a lot of things grabbing some headlines and just wanted to start off with, maybe a three part question. We'll just jump right into it. We’ve got one from one of our Marina clients. And so there's a few things we want to go through. When you think of the declining rate environment that we're in now, even you seen in the U.S. as well, what do you make of the declining rate environment for areas like Marina and RV? What, if anything, do you think that will do to items like vacancy rates, or inventory? So why don't you try to unpack that three parter. We'll start with a bit of a bang there.
00:01:10:06 - 00:01:43:05
Erik Johnson
Yeah, absolutely. So I guess to start off with, I think one way of thinking about, the leisure craft and the RV space - kind of as a bit of a microcosm for the broader industry - is, it tends to lean a little bit more to the discretionary side than say, someone going out and buying a personal vehicle, which, yes, it's a big ticket item. It'll have some discretionary elements to it. But a lot of people might need that vehicle to get from A to B at the end of the day. Whereas, if I'm going to buy an RV or a boat, it's often more tied to some, recreational hobby I have that I want to do kind of in my off time.
00:01:43:05 - 00:02:28:24
Erik Johnson
And so, you know, it's certainly been a little bit more of the victim of the, higher interest rate, kind of affordability charged environment that we find ourselves in today. And I think, leading into the election, there was a lot of uncertainty related to that because, I think a lot of both businesses and households were a little bit more weary of making kind of either big investments in their business or certainly, you know, big investments on, you know, the more discretionary side of their expenditure book there as well. And so I think, the industry will benefit a little bit from just, the election itself being resolved and, at least there kind of being an outcome there. I think the themes we're seeing in the industry today are likely to continue. So if we're talking about RVs specifically, you know, year to date, the industry on the surface looks pretty good.
00:02:28:24 - 00:03:02:17
Erik Johnson
You know, when we look at overall kind of RV shipments in the U.S. for instance, they're up a little bit over 7% year to date. But that's kind of hiding a lot of details under the surface. So I think it's reflecting this idea that an environment like we found ourselves in, you know, consumers are out there looking for deals. And so where are they, kind of finding those? They're finding those in the towable space, which is driving almost all of that gain in a year to date basis where, no one's out there going to buy those more expensive kind of motorhome products. And in fact, they're down, year over year in sales of almost 25%.
00:03:02:17 - 00:03:48:23
Erik Johnson
And so I think that reflects a little bit of where the leisure craft business is today. It's not that there's, a lack of demand for the product itself, but in an environment where sometimes, you know, finding the arithmetic, affordable for the average household, is a bit more challenging. I don't think that's going to show up in vacancies in, in any way, kind of as we head into this year, you know, I think there's still going to be lots of demand from that front. And if we're just focusing a little bit more on, you know, Marina in particular. I think it's benefiting a little bit more from the idea that, it's a lower volume business, then certainly, you know, overall light vehicles at the top. And then, you know, kind of the RV business below them. And so in segments like that, you can have, some of those higher income households drive a little bit more of the spending totals.
00:03:49:01 - 00:04:24:09
Erik Johnson
And if there's one thing we're certainly seeing, you know, in some of the surveys that we've done for, for some of the leisure craft dealers is that they're noticing and even what they saw, kind of recently at the International Boat Show in the U.S., is that there's still a pretty high demand out there for, you know, high end newer boat models. And I think that's reflective about, igher households haven't faced those same, you know, kind of impacts of the macroeconomic shocks we've seen. And so it's one of the things that we're seeing that's a little bit different in the space. And again you know any product that is high capital cost is certainly going to benefit both on a consumer side as financing rates come down.
00:04:24:09 - 00:04:51:22
Erik Johnson
Although I will say, you know, the longer end of the curve that's a little bit more important for some of those financing costs, will probably take longer than, kind of the fed funds rate or the Bank of Canada overnight rate. So, you know, certainly that's one kind of potential at least minor headwind ahead. But I think the other thing on the dealer side, right, as those overnight rates come down and as the fed funds rate comes down, that's going to have a meaningful effect on, for plan costing and inventory cost.
00:04:51:22 - 00:05:09:13
Erik Johnson
And so I think that is certainly the good news story as we look ahead into 2025... is that's going to have a meaningful impact on dealers who might be carrying a little bit more inventory than they would have otherwise thought with, you know, some of the weaker trends in different segments of demand. And so, I think that will be a benefit to then as we head into next year.
00:05:09:16 - 00:05:34:28
Adam Doran
You think about the import side, obviously, there's a lot of items that are made in the U.S. And so, people have been asking questions, you know, from the loonie’s perspective, you know, where do we see that maybe bottoming out? Is there a bit of a floor that people can maybe rely on? How do you think about, the way people will manage their, exposure to other currencies when the loonies dropped a little bit recently? Maybe you can talk a bit about that.
00:05:34:29 - 00:06:16:27
Erik Johnson
Absolutely. So I think, you know what we've seen kind of in the lead up to the U.S. election, in the few weeks after, is this idea that markets have been out there, going forward with something that we like to refer to as the Trump trade or the idea that, if Trump gets elected and he certainly has and, you know, not only did Trump kind of win the White House race, but Republicans were able to retain the House as well as kind of retake the Senate there. So they do have a lot of discretion to, change the direction of U.S. policy in whatever way that they want to go. And certainly, if it's one where we do see, border tariffs and some of these other policies, that one might be a little bit more inflationary, but also would generally tend to benefit the strength of the U.S. dollar versus other currencies.
00:06:17:04 - 00:06:57:23
Erik Johnson
That's a world where I think you could start to see that Trump trade really take off more than it has, because I think where we find ourselves today is, you know, the loonie has been hovering around, you know, $1.40 U.S. or so or just a bit under or, you know, closing in on $0.70, Canadian there. And I think that isn't really fully reflective of a world where, you know, Canada wouldn't, you know, no longer be behind kind of any U.S. tariff wall. So I think, if we find ourselves next year in a scenario where something like a 10% or even a higher tariff rate is suddenly applying to,all the products that we're shipping into the U.S., I think that would certainly be a world where, the Canadian dollar would weaken, materially from where it is today.
00:06:57:29 - 00:07:52:09
Erik Johnson
Now, our view is that at least over the next three months, until we see the real core of the policy details. And again, you know, I think the thing that's pushing back a little bit on Trump going, all bite, no bark to start with here is that, for Commerce he's picked you know Howard Lutnick and for Treasury at least it seems like he's going to nominate Scott Bessent. So those are two people that ave pretty big financial market credentials as opposed to people who might be a little bit more inclined to fully go all in on, quite an aggressive kind of tariff policy. And so I think those are, I think those are things that maybe might add a little bit of caution to, how potentially large those tariffs could initially be. And so in that kind of world we would view the U.S. dollar kind of stays roughly where it is. And strength, maybe strengthens a little bit as we head into Inauguration Day. But then as the fed kind of resumes, some of its cuts into 2025, we might actually see the U.S. dollar start to kind of roll over.
00:07:52:15 - 00:08:05:26
Erik Johnson
And that would be a world where the Canadian dollar would maybe gain some back, gain back some of those losses that we've seen, in the past kind of two months here. So again, certainly dependent on how the policy environment evolves here, as anything right now -
00:08:05:26 - 00:08:06:12
Erik Johnson
Right.
00:08:06:14 - 00:08:08:23
Erik Johnson
after the U.S. election. But I think those would be the two
00:08:08:23 - 00:08:36:05
Erik Johnson
scenarios I'd be considering, on either side. So if I'm getting a lot of U.S. revenue, there's potentially some upside there. And so maybe I might want to hedge some of it now just to guarantee some of that return or alternatively, if I'm doing a lot of my, kind of wholesale acquisition business from U.S. auctions, that again might be something where maybe I want to try to consider controlling my costs. Before, you know, either of those two scenarios kind of completely play out there.
00:08:36:08 - 00:09:03:11
Adam Doran
So you said the word ‘tariff’. Obviously an interesting word to use when we think of the dealer space, kind of two paths to want to go down. One, when you think of tariffs on foreign-made EVs, it's been a topic in the industry for a while. How do you see that playing out in Canada, in the U.S.? And then the other part is more specifically from the auto industry, shipping into the U.S.. How do you see tariffs impacting, the auto industry?
00:09:03:13 - 00:09:42:08
Erik Johnson
Yeah, I guess it's easiest to deal with your first - your second part of the question first, is that, you know, of the two industries that are most exposed to kind of a disruption in global trade policy from a Canadian perspective, it's energy. Because, our number one merchandise trade good to the U.S. is oil. And second behind that are automotive products. And so that includes everything from auto parts to assembled vehicles and kind of everything in between there. And so the challenge of the way we've set up those supply chains right now, is it's not like Canada, , only builds completed vehicles and sells them directly to final customers in the U.S.. What instead we tend to do is maybe a U.S. plant, build some parts.
00:09:42:08 - 00:10:06:05
Erik Johnson
They get shipped over to a U.S. facility, added on to a chassis. That whole chassis might make it back across the border, and that process can often continue several times. And so if all of a sudden we're adding 10% onto either side of that equation over and over and over again, you know, pretty quickly you can see the costs, you know, materially go up in a sector that's already suffering a little bit from, prices being a lot higher than they were in 2019.
00:10:06:05 - 00:10:28:00
Erik Johnson
So you know, new vehicle inflation is pretty you know modest to flat of late. But prices are still roughly about 30% you know above where they were in 2019. And so every time a customer is walking into a dealership, that's something they're coming to terms with. If they haven't gone out shopping in a while. Because when they see a monthly payment for a new vehicle, it's not like it's going to be $50 more than they were used to.
00:10:28:00 - 00:10:48:18
Erik Johnson
It often can be 3, 400 or more dollars, than they're used to paying. And so I think, adding any meaningful amount to that, kind of calculation as exists today, I think would prove pretty challenging for the industry. So, again, I think, you would really hope that brighter heads would prevail kind of in a situation like that, because it's not just Canadian consumers that are going to be losing, you know, losing out in that regard.
00:10:48:23 - 00:11:27:27
Erik Johnson
You know, about 80% of the vehicles that we ultimately assemble in this country are sent south of the border. And so, that's incrementally going to increase the costs of, accessing new vehicle models for your average U.S customers. And a lot of those people are living in, kind of districts that, both voted for Trump in, quite large margins and certainly voted for Republicans in the House and Senate. So, again, I think, you know, to some degree would be a little bit against their interest in the same way that, I's largely Midwest factories or refineries that are importing our oil. And so if they want to tack on a 10%, you know, price increase on that, that would be something that, you know, you would certainly feel as well.
00:11:27:29 - 00:11:34:04
Erik Johnson
And I think on the EV side, I think, you know, the challenge for EVs, much like all vehicles today, is cost.
00:11:34:06 - 00:11:34:18
Erik Johnson
Right.
00:11:34:18 - 00:11:57:09
Erik Johnson
So on average, you know, most EVs are selling for, you know, somewhere between 8 and $9000 more than a, similar kind of conventional vehicle. And so anything that is potentially going to add on to that cost margin even more so certainly one case we've seen is with, the idea of potentially limiting access or certainly increasing the price of some foreign made EVs into the market.
00:11:57:16 - 00:12:21:17
Erik Johnson
You know, I think that meaningfully will push up prices. And, I think there are other policy dimensions that we could see from the U.S. that, might, again, slow sales a little bit. So if you know, the new administration in the U.S. were to say roll off the current, tax credits that are part of the Inflation Reduction Act, that would probably at least somewhat, push that margin between conventional vehicles and, zero emission vehicles up a little bit higher.
00:12:21:22 - 00:12:38:14
Erik Johnson
And then, anytime you're raising the price on something in a meaningful way, you're going to sell less of it. And so, if we take an example from Germany where, they did kind of roll off some of their tax credits, you know, you saw sales slow by, not quite 30%, but a little bit less than 30% over a year.
00:12:38:17 - 00:12:53:03
Erik Johnson
And so again, that's something you could see kind of reflected if you have some combination of, higher tariffs and therefore higher prices for, ssembly the EVs in this country and, and in the U.S., but also if there's any kind of further movement on, kind of the rebate side as well.
00:12:53:03 - 00:13:04:03
Adam Doran
Okay. Well, speaking of international trade, where are your thoughts right now around possible redo of the USMCA.
00:13:04:05 - 00:13:26:11
Erik Johnson
Yeah. And so again, I think this is maybe if, you know, the first year of the Trump presidency ends up being a little bit calmer for the Canadian kind of and both the global trade outlook. I think that is certainly where, the lines will be a little bit more drawn, in that extent, because I think there's just more at stake, with the USMCA renegotiations.
00:13:26:11 - 00:13:57:10
Erik Johnson
I think, you know, for Canada, the U.S. probably if Trump is really going to, kind of pick someone he, he really wants to get some possible gains against. It's largely going to be Mexico, at least as it relates to auto. And so maybe in a world like that, Canada and the U.S. will be, a bit of a marginal beneficiary if we see, kind of more strict, provisions put in on things like, the percent of, kind of core parts that have to come from high wage countries and so, maybe that's a world where Canada does a little bit better on the production side.
00:13:57:10 - 00:14:14:09
Erik Johnson
So right now, if you think of North American production writ large, we're roughly back to where we were pre-pandemic. But that's kind of a bit of a granular story where the U.S. and Mexico are certainly doing at least, or if not better. But Canada is still like, well behind where we were even in 2017.
00:14:14:11 - 00:14:29:29
Erik Johnson
And so maybe, to some extent, if those negotiations do pivot more to the high wage countries in, you know, in USMCA, that maybe could be an incremental benefit to Canada. If we, can certainly play it out well from a trade policy negotiation point of view.
00:14:30:01 - 00:14:53:22
Adam Doran
I want to pivot a little bit towards volume. And so with the declining rate environment, obviously there's a lot of people that welcome that. How do you think that's going to impact consumer decisions as it relates to new vehicle purchases or leases? And then the second part to that question, should people be concerned that inflation may creep back up if we cut too fast too soon.
00:14:53:25 - 00:15:12:04
Erik Johnson
Yeah. So again, I think we've talked about some of the risks on the, what could happen on the pricing side, whether it's tariffs and, possible resulting inflation from that, which would again, probably also complicate central bank policy and again keep rates higher, which would, make kind of pricing, even less affordable for longer.
00:15:12:06 - 00:15:31:24
Erik Johnson
But I think, certainly what we've seen happen in the, automotive industry, particularly in 2024, is, a little bit of a shift back to it being a buyer's rather than a pure seller's market and listen, that does sound a little bit bad from a dealer perspective. But you know, we did have more or less the best 2 or 3 years we've ever seen from a seller perspective.
00:15:31:24 - 00:15:50:16
Erik Johnson
And so naturally, you should think that it had to revert to the mean a little bit. I mean, that's certainly showing up when we're looking at things like gross margins, which are certainly, back in line roughly with where they were 2019. And again, lots of dealers did really well in that industry. But I think as we go forward, it's going to be much more of a volume rather than a pure margin industry.
00:15:50:16 - 00:16:10:05
Erik Johnson
And so again, we're certainly expecting, volumes in Canada hit around, you know, one point just under 1.9 million this year, just under 16 million in the U.S. this year. And then, pop up a little bit higher than that. So maybe closer to 2 million in Canada next year and a little bit over 16 million in the U.S., in 2025.
00:16:10:08 - 00:16:24:29
Erik Johnson
But again, that's going to be a market where there's going to be a lot more focus, I think, on some of those, slightly more compact, lower price point vehicles where, when I go into a dealership and I see that monthly, payment number, it's a little bit easier to breathe when I look at that number.
00:16:24:29 - 00:16:45:18
Erik Johnson
And so that's certainly a trend we've seen developed through the first three quarters of 2024. And I expect that's really going to continue until you see kind of that tension between, where income growth has gone. And, obviously how much higher price growth has been in the space when you add on interest rates. And so, that's probably a 4 to 5 year process for that fully to shake out.
00:16:45:21 - 00:17:00:16
Erik Johnson
And so again, I think that's really where I see kind of the next few years of the industry shaking up. But again, from a buyer perspective, you know, it's going to be an easier, process to go to a dealership and say, oh, this arithmetic looks a lot better than it did kind of, a year ago or two years ago.
00:17:00:16 - 00:17:22:05
Erik Johnson
And so I think the only potential challenges there, obviously, on the used car side, we didn't sell a lot of leases and these things 2 or 3 years ago. And so that's starting to show up in, you know, some of the lack of trade ins kind of coming in now. But again, I think it is going to be a better, kind of industry from a buyer perspective. And naturally that's going to push up volumes as we head into the next couple of years here.
00:17:22:08 - 00:17:46:06
Adam Doran
And just to talk a bit more about volume. So in Canada, we've had, obviously a surge in immigration in the last few years. The tone from the federal government has changed a little bit recently on that. When you think about impact to, you know from immigration onto the auto industry, from a sales or service perspective. How do you see a shift in policy kind of impacting the way dealers may expect people to be walking in and out of the dealership?
00:17:46:08 - 00:18:12:04
Erik Johnson
Yeah. So I would touch on two things there. So the first being, if we think about the incremental gain that things like the gig economy have added to, the dealer industry and the, the auto industry in the past several years, that's certainly been, at least some amount of the incremental sales. So I would expect those to be a little bit weaker as we head into the next couple of years with the idea that at least over the next couple of years, we'll see the Canadian population on average be, flat to marginally negative.
00:18:12:04 - 00:18:28:23
Erik Johnson
And a lot of that is going to come from a portion of people who are more likely to kind of step into those roles. But I think you do have to remember there's two things that are kind of going to be going on here. Yes, maybe the population isn't going to grow as fast in Canada, but then you also have to think that, from a per capita basis, we've had really weak per capita spending numbers.
00:18:28:29 - 00:18:51:18
Erik Johnson
And so if on average, our population growth is slowing, but, the people that are, kind of staying in the country or, are likely to see lower interest rates going forward. They tend to be, a little bit higher income households on average, than some of those, recent newcomers. And so, you could end up in a world where, like, on average, your typical buyer has a little bit more favorable, kind of cash flow, affordability perspective.
00:18:51:20 - 00:19:09:26
Erik Johnson
And so again, I think that's the one benefit. The one thing I will caution is, on the service side, filling those technician roles has always been a challenge in this environment. And so I think where it's going to - you're going to be a little bit more challenged there, is in markets where you're having trouble sourcing immigrants or sourcing workers for those technician roles.
00:19:10:02 - 00:19:28:27
Erik Johnson
You know, that's going to become a little bit more incrementally challenging here. And so I think you do really, would want to have a strategy in place where you can still try to, get workers in through either a high wage stream or another program that's going to allow you to access kind of the, you know, certainly the technology and the skill set mix to fill those roles.
00:19:28:27 - 00:19:46:22
Erik Johnson
And again, I think it does speak to sometimes. Yes, you know, the number of people is important, but also who you target from an immigration policy level really does matter. And that's, you know, a situation where, you know, we could do a lot better of targeting immigration towards those roles that are really in shortage like trades and, you know, certainly automotive technicians as well.
00:19:46:25 - 00:20:06:03
Adam Doran
So my last question for you, Erik. You've touched a little bit about, on the affordability piece. Going forward, maybe the next 6 to 12 months, how would you characterize the topic of sustainability in the automotive industry? And then where do you see, the mix between EVs and, traditional ICE vehicles?
00:20:06:09 - 00:20:22:20
Erik Johnson
Yeah. So I think going forward, you know, there's going to be a little bit more weight, especially in the U.S., on the lighter the gas hybrid market. I think we've seen that already in 2024. And that's likely to continue. And even, you know, maybe pick up a little bit more if we see some of those incentives, you know, weaken or roll off in any meaningful way.
00:20:22:25 - 00:20:43:06
Erik Johnson
And I think in Canada, you know, you're going to still continue to see a very bifurcated market with, you know, places like Quebec and B.C. where, you know, the economics and the infrastructure is just much further along. You know, those markets will still do exceedingly well. You know, the early estimates in Quebec for Q3 of this year, are that one in every three new vehicles is a zero emission vehicle.
00:20:43:06 - 00:21:12:24
Erik Johnson
And so just a very different place than the rest of Canada. I think on the sustainability side, what you're going to continue to see is, you know, as you know, probably electricity, at least in the interim in some big markets, continues to get a little bit more expensive. You know, dealerships are really big commercial buildings. And so I think you will see a lot of interest, and you're already seeing interest on the dealer side of figuring out ways, either lowering energy bills or, you know, putting in things where you're able to take advantage of some of the, you know, credits for emission reductions out there.
00:21:12:24 - 00:21:29:17
Erik Johnson
I think that's a trend that's only going to continue in an environment where there's gonna be a lot of emphasis on, you know, I think reducing the footprint of buildings in particular. And if there's one thing that you have to remember about, you know, the dealership space in particular is, yes, you know, selling vehicles is one big part of the business.
00:21:29:17 - 00:21:32:09
Erik Johnson
But the other thing is, you know, having a lot of commercial real estate.
00:21:32:13 - 00:21:32:17
Adam Doran
Yeah.
00:21:32:21 - 00:21:41:10
Erik Johnson
So I think that's, you know, there's gonna be a lot of opportunities, I think, to, you know, find some cost savings long term in the business from pursuing some of those avenues as well.
00:21:41:12 - 00:22:01:13
Adam Doran
Erik, I can't thank you enough. Really appreciate you joining us and providing some insights. To anyone online or listening on the podcast, if you want to learn more, you can reach out to myself, adam.doran@bmo. com or erik.johnson@bmo.com. Feel free to reach out. Alternatively, you can follow up with your relationship managers.
00:22:01:13 - 00:22:07:17
Adam Doran
And, Erik, once again, thank you so much for joining and I hope everyone found this beneficial. Bye for now.
00:22:07:19 - 00:22:08:03
Erik Johnson
Thanks so much.
Andre Salvi
Head, Commercial Dealer Finance, Canada
Andre Salvi is Head, Commercial Dealer Finance, Canada. Having joined BMO in 1999, Andre has held senior roles in BMO’s investment banking; private equit…(..)
View Full Profile >Between industry dynamics, economic developments and the U.S. election, there’s been a lot of material for auto dealers to process. To get a sense of what it all means for the industry, Adam Doran, Managing Director with our Dealer Finance group, recently sat down with Erik Johnson, Senior Economist at BMO Capital Markets, for a wide-ranging discussion on what Canadian dealerships can expect in the near term.
Their conversation covered the declining interest rate environment, the possibility of new trade and tariff policies in the U.S., Canada’s revised immigration policy, and where the future of the internal combustion engine. Below, you will find time stamps for specific themes throughout the conversation:
-
:38 | The declining rate environment
-
5:14 | The import side
-
8:40 | Tariffs impacting the auto industry
-
14:31 | Consumer decisions in the declining rate environment
-
19:50 | Sustainability in the automotive industry
What to Read Next.
2025 Canada Economic Outlook: On the Mend
Douglas Porter | December 03, 2024 Economic Insights
Canada’s economic environment remains as complex as it has been for the past couple of years. However, we're now dealing with a different i…
Continue Reading>
Tell us three simple things to
customize your experience
