The Time Is Right to Explore Used Car Export Opportunities
The discrepancy in used car values in Canada and the U.S., low inventory levels and a tight new vehicle market all combine to make used car exportation a profitable venture for Canadian dealers. But taking advantage of this opportunity likely requires a change from your normal operating model.
Used vehicle dynamics
Demand for vehicles is creating intense pressure on the auto market. Along with the impact of the pandemic, new vehicle supply will remain constrained well into 2022 due to the ongoing global semiconductor shortage.
Meanwhile, manufacturers like Ford and General Motors continue to halt production in several plants.1
With fewer new vehicles available, the demand—and prices—for used vehicles will further increase. The situation has dealerships on both sides of the border scrambling for inventory.2
Light vehicle sales have been particularly strong in the U.S. In the first half of 2021, sales were slightly above the same period in 2019. In Canada, meanwhile, purchases are down 3.9% in the first half of the year versus 2019. That’s largely due to the fact that Canada imposed more restrictions during the second and third waves of COVID-19, which made it harder to make in-person purchases.
The auto sector has also benefited from the unusual pattern of consumer spending over the last 16 months. With many in-person services unavailable because of the pandemic, consumers channeled some of their spending into other parts of the economy, namely durable goods. Those trends have likely started to reverse, particularly in the U.S., but not enough to supplant the strong consumer demand for new and used vehicles.
Export market dynamics
The shortage in new vehicle inventory plaguing the U.S. market has increased prices for new and used vehicles. Inventories in the U.S. are low, leading many dealers there to begin buying inventory from their Canadian counterparts.3 As a result, used vehicle sales in Canada climbed 38% between January and May compared with the same period in 2020, and were 14% higher from the same period in 2019.4 According to Autotrader, the average price of a used vehicle in June was up 9.4% to a record $28,305.
A considerable portion of cars sold new in Canada will eventually wind up in the U.S. as used vehicles. These are often lower-mileage, better-equipped cars, leaving Canadian buyers with fewer attractive choices:
- Up to 25% of exports are pickup trucks.
- Up to 25% of are small and mid-size cars.
- Up to 10% are large mainstream and premium SUVs.2
Cars sold in the U.S. are completed through a vast network of traditional auction houses, but more Canadian dealerships are selling their used cars directly to their U.S. counterparts. The number of vehicles exported to the U.S. from Canada rose 4.3% to a record 309,505 units in 2020.2 The trend continued through the first five months of 2021, with 151,952 vehicles exported from Canada to the U.S., putting it on pace for another record. The individual vehicles most often exported include the Ford F-150, Chevrolet Silverado, Nissan Rogue and Toyota Camry, according to a J.D. Power study.2
It’s also worth noting that a stronger-than-forecasted Canadian dollar hasn’t slowed the movement of vehicles. In mid-June, the dollar was at 82 U.S. cents, up 3 cents from the start of 2021 and 9 cents from June 2020. Despite the stronger dollar, which makes exporting costlier, the lack of inventory has driven up auto prices, offsetting the dollar’s rise.
Regulatory environment
Under the USMCA, vehicles not manufactured in the U.S. (or that don’t meet U.S. content rules) may be subject to a 25% tariff unless they can prove an exemption. Large volume exporters may run into problems if U.S. Customs and Border Protection decides to enforce the agreement at the border for used vehicles.
We expect to see the USMCA rules to be in effect for all new vehicles produced since the implementation of USMCA. One of the frustrations for Canadian dealers at auction looking to buy vehicles has been that they are often outbid by bidders who want to buy vehicles and ship them to the U.S. But now, some of those vehicles — the ones that are not as attractive to export anymore (such as a Canadian- or Mexican-built pickup trucks) are unlikely to be outbid by someone looking to ship that vehicle.
The positive in this is that these vehicles become available for dealerships in the Canadian market and therefore would deal with less competition. Additionally, we’ve seen that only new vehicles are subject to those tariffs.
Exploring the opportunity
Taking advantage of exporting used vehicles to the U.S. likely requires a change from your normal operating model. It requires back-office support to handle the high volumes of vehicles for exportation, liquidity to support the volume and participate in the auction process, and expertise on both sides of the border.
That expertise would provide a real-time assessment of the type of inventory you have on hand and the ability to appraise the value of those vehicles on both sides of the border. For example, are you heavy on pickup trucks, which are in high demand? It also requires understanding how a sound foreign exchange, or FX, strategy can help drive profitability.
Having the appropriate FX strategy can help offset the volatility of a fluctuating currency and help save significant money depending on the sales volume. Also, once you've purchased a car and you know how much it's worth in the U.S., you’ll want to make sure you're not going to be stuck with an unfavorable currency. That’s where tactics such as forward exchange contracts and currency options come into play.
Having a dedicated staff that’s knowledgeable about both the Canadian and U.S. markets, and who can partner with liquidity and FX experts to execute a strategy, can put your dealership in a position to take advantage of this opportunity.
In many ways, it may be a perfect storm for dealers to take advantage of export markets for used vehicles. But taking advantage of this opportunity requires a long-term commitment, including hiring individuals with unique skills; conducting an assessment of your back office; monitoring FX rates; and keeping enough liquidity on hand to react quickly to capitalize on market conditions as they change.
Benoit Bourbeau, BMO Managing Director, Automotive Finance, and Daniele Maglieri, BMO Senior Portfolio Manager, contributed to this article.
3 Car Buzz
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Robert Sadokierski
Former Senior Vice President & Head, Automotive Finance, BMO
The discrepancy in used car values in Canada and the U.S., low inventory levels and a tight new vehicle market all combine to make used car exportation a profitable venture for Canadian dealers. But taking advantage of this opportunity likely requires a change from your normal operating model.
Used vehicle dynamics
Demand for vehicles is creating intense pressure on the auto market. Along with the impact of the pandemic, new vehicle supply will remain constrained well into 2022 due to the ongoing global semiconductor shortage. Meanwhile, manufacturers like Ford and General Motors continue to halt production in several plants.1
With fewer new vehicles available, the demand—and prices—for used vehicles will further increase. The situation has dealerships on both sides of the border scrambling for inventory.2
Light vehicle sales have been particularly strong in the U.S. In the first half of 2021, sales were slightly above the same period in 2019. In Canada, meanwhile, purchases are down 3.9% in the first half of the year versus 2019. That’s largely due to the fact that Canada imposed more restrictions during the second and third waves of COVID-19, which made it harder to make in-person purchases.
The auto sector has also benefited from the unusual pattern of consumer spending over the last 16 months. With many in-person services unavailable because of the pandemic, consumers channeled some of their spending into other parts of the economy, namely durable goods. Those trends have likely started to reverse, particularly in the U.S., but not enough to supplant the strong consumer demand for new and used vehicles.
Export market dynamics
The shortage in new vehicle inventory plaguing the U.S. market has increased prices for new and used vehicles. Inventories in the U.S. are low, leading many dealers there to begin buying inventory from their Canadian counterparts.3 As a result, used vehicle sales in Canada climbed 38% between January and May compared with the same period in 2020, and were 14% higher from the same period in 2019.4 According to Autotrader, the average price of a used vehicle in June was up 9.4% to a record $28,305.
A considerable portion of cars sold new in Canada will eventually wind up in the U.S. as used vehicles. These are often lower-mileage, better-equipped cars, leaving Canadian buyers with fewer attractive choices:
- Up to 25% of exports are pickup trucks.
- Up to 25% of are small and mid-size cars.
- Up to 10% are large mainstream and premium SUVs.2
Cars sold in the U.S. are completed through a vast network of traditional auction houses, but more Canadian dealerships are selling their used cars directly to their U.S. counterparts. The number of vehicles exported to the U.S. from Canada rose 4.3% to a record 309,505 units in 2020.2 The trend continued through the first five months of 2021, with 151,952 vehicles exported from Canada to the U.S., putting it on pace for another record. The individual vehicles most often exported include the Ford F-150, Chevrolet Silverado, Nissan Rogue and Toyota Camry, according to a J.D. Power study.2
It’s also worth noting that a stronger-than-forecasted Canadian dollar hasn’t slowed the movement of vehicles. In mid-June, the dollar was at 82 U.S. cents, up 3 cents from the start of 2021 and 9 cents from June 2020. Despite the stronger dollar, which makes exporting costlier, the lack of inventory has driven up auto prices, offsetting the dollar’s rise.
Regulatory environment
Under the USMCA, vehicles not manufactured in the U.S. (or that don’t meet U.S. content rules) may be subject to a 25% tariff unless they can prove an exemption. Large volume exporters may run into problems if U.S. Customs and Border Protection decides to enforce the agreement at the border for used vehicles.
We expect to see the USMCA rules to be in effect for all new vehicles produced since the implementation of USMCA. One of the frustrations for Canadian dealers at auction looking to buy vehicles has been that they are often outbid by bidders who want to buy vehicles and ship them to the U.S. But now, some of those vehicles — the ones that are not as attractive to export anymore (such as a Canadian- or Mexican-built pickup trucks) are unlikely to be outbid by someone looking to ship that vehicle.
The positive in this is that these vehicles become available for dealerships in the Canadian market and therefore would deal with less competition. Additionally, we’ve seen that only new vehicles are subject to those tariffs.
Exploring the opportunity
Taking advantage of exporting used vehicles to the U.S. likely requires a change from your normal operating model. It requires back-office support to handle the high volumes of vehicles for exportation, liquidity to support the volume and participate in the auction process, and expertise on both sides of the border.
That expertise would provide a real-time assessment of the type of inventory you have on hand and the ability to appraise the value of those vehicles on both sides of the border. For example, are you heavy on pickup trucks, which are in high demand? It also requires understanding how a sound foreign exchange, or FX, strategy can help drive profitability.
Having the appropriate FX strategy can help offset the volatility of a fluctuating currency and help save significant money depending on the sales volume. Also, once you've purchased a car and you know how much it's worth in the U.S., you’ll want to make sure you're not going to be stuck with an unfavorable currency. That’s where tactics such as forward exchange contracts and currency options come into play.
Having a dedicated staff that’s knowledgeable about both the Canadian and U.S. markets, and who can partner with liquidity and FX experts to execute a strategy, can put your dealership in a position to take advantage of this opportunity.
In many ways, it may be a perfect storm for dealers to take advantage of export markets for used vehicles. But taking advantage of this opportunity requires a long-term commitment, including hiring individuals with unique skills; conducting an assessment of your back office; monitoring FX rates; and keeping enough liquidity on hand to react quickly to capitalize on market conditions as they change.
Benoit Bourbeau, BMO Managing Director, Automotive Finance, and Daniele Maglieri, BMO Senior Portfolio Manager, contributed to this article.
3 Car Buzz
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