NEW-CAR BUBBLE IS GOING TO BURST
But that may come with bad news, such as recession in Canada, writes David Booth.
It is not a mystery — or at least it shouldn't be — why the pandemic's mobility restrictions and supply-chain woes have actually been a boon for the automobile industry.
COVID-19 meant that dealer-consumer interactions were severely restricted, and the traditional shopping of multiple brands, dawdling in dealerships, and then haggling on price have gone the way of the dodo bird. Supply-chain issues have resulted in a dearth of new product so critical that the battle for new — and used! — cars has become as acute as the bidding wars that once ruled the Toronto real estate market. Six-month waits for the delivery of a new car have become commonplace, and waiting two years (take a bow, Toyota RAV4 Prime) is not unheard of. Transaction prices mirror MSRPS to the dollar. Because new-vehicle inventories are constrained, dealers now order only fully optioned — that should read “high-margin” — cars, loaded with trim packages with all the (grossly marked up) bells and whistles. You think mortgage rates are skyrocketing? Try leasing a 2023 Chevrolet Bolt, which, according to Chevrolet. ca, sits at a circa-2000s 8.9 per cent for all loans between 24 and 48 months. New-car sales may indeed be (marginally) down compared to pre-pandemic numbers, but profitability for both dealer and manufacturer has never been higher. And it's almost certainly coming to an end.
As bad as things sound now — rising interest rates, dwindling housing sales, etc. — they are going to get much worse. For one thing, interest rates have not peaked; even the most optimistic of forecasts are now calling for the Bank of Canada to raise its overnight “policy” rate to at least four per cent. And one prognosticator — Mark Mobius, of Franklin Templeton fame — predicts the American Fed will have to jack things up to nine per cent before U.S. inflation is tamed.
More important is that recessions don't actually start until six to 12 months after central bankers stop raising their interest rates. In other words, right now, we're all thinking about curbing our spending; in six to 12 months, we'll actually be forced to stop spending. The big problem for the automotive industry is that this time frame roughly coincides with the time many industry experts predict will herald the easing of supply-chain restraints. Yes, just as Canadians enter a recession, auto dealers will have their lots full of vehicles to sell.
A huge downturn in the marketplace would seem inevitable. Inevitably, automakers will once again flood showroom floors, dealers will again become desperate to “move metal,” and hefty markdowns will be required for cars nobody wants.
Other than the fact a recession will almost assuredly occur in the next 12 to 24 months, and that the relaxing of supply constraints will result in a glut of new vehicles, practically nothing is knowable about how all this will play out. However, I can tell you the indicators I am following with the greatest interest, the foremost of which is the difference in pricing between the “ascendant” electric vehicles and the ICE (internal combustion engine) cars they are supposedly supplanting.
According to Kelley Blue Book, the average transaction price in the U.S. for an EV is about US$66,000, while its average Ice-powered counterpart averages just under US$44,000. That gap is simply too large for government subsidies to bridge, or for the reduced long-term-costs-of-ownership argument to justify.
The question would then become whether zero-emissions vehicles will continue their upward growth path or the Us$22,000-plus difference will result in a re-appreciation for traditional fossil fuel. Two factors point to the latter being more likely. The first is that recent reductions in the growth of inflation have been the result of lower gas prices. The second, a longer-term consideration, is that while the manufacturing supply constraints plaguing the ICE portion of the auto industry may soon abate, the raw-mineral shortages impeding growth of the EV segment will not. On the other hand, as recent volatility has shown, the market can turn on a dime. Russia could drop a (tactical) nuclear bomb, Europe could well and truly freeze this winter, or Trump could win the U.S. election in 2024 and ban electric cars in a fit of populist piqué.
Indeed, as Greek philosopher Heraclitus said, “the only thing that is constant is change.” With the world awash in volatility, why would the auto industry be spared?