01.07.2019

Full-time automotive production was expected to start over in 2021, and rental companies were planning on rebuilding inventories as the economy would recover. However, in a field as complex and economically impactful as the automotive industry, an analysis must be performed by regression, not by classification. In simple terms, a regression analysis considers all the variables and their different levels of correlation. This makes it possible to distinguish the singular characteristics of market events and to implement dedicated strategies. In contrast, a classification analysis categorizes a market event, and the resolutions consists in the application of a ready-made solution.

In the automotive industry, the classification of a crisis usually describes a pattern with a sharp decline, a period of stabilization, and a rapid recovery. The COVID-19 crisis is not due to a major economic difficulty but rather voluntary slowdowns of activity, therefore unemployment is temporary and the drop in consumption is under the control of proper health regulations.

Manufacturers Favor Sales to Individuals of Car Rental Companies

The law of supply and demand is in full swing and prices are reflecting needs. Queues are growing at airport rental companies, and a day’s rental at popular locations can cost up to $700. Short-term rental companies have reorganized their fleets to favor high-traffic locations. They have also been knocking on automakers’ doors to replenish their vehicle inventories. But in a time of shortages, manufacturers are favoring sales to individuals since they mean better margins.

The consequences are multiple. First, dealers’ parking lots are being emptied faster than they can be restocked. This is a bad season to change cars because dealers are not very willing to give discounts, as I experienced when I was interested in a particular model that had been on the lot for over a year. No negotiation was possible. Dealerships fill their fleets with new vehicles and offer leased models to extend the duration of their contracts. In many cases, the confinements have greatly reduced mileage and the vehicles are easily 20-30% below their financed mileage quotas, so the customer does not necessarily lose out.

Fleet Sales Decline

Second, fleet sales are not a priority and have dropped 35-37% for GM, Ford and Stellantis. Professionals are going to have to stretch the life of their vans. Some models are no longer available for sale at the moment. This is the case for the Ram ProMaster, whose volumes have all been sold or allocated. For their part, rental companies are used to offering new vehicles, on the one hand for quality of service and on the other hand to ensure lower maintenance costs. They will have to offer vehicles with 50,000 miles or more because the models will remain in service longer before being sold.

Used Car Market Grows

Third, the used car market is still growing. Specialized networks such as CarMax or online sales specialists like Carvana or Vroom are taking advantage of a market where demand is shifting to recent vehicles with low mileage. These resellers have large stocks and offer trade-in values close to the resale values between private individuals. Dealers are in an uncomfortable situation with manufacturers unable to increase production and adversely, competitive and efficient used car dealers.

Once the pandemic wave has passed, the population can resume its consumption habits. In 2020, many employees who were able to do so were put on telecommuting and received their salaries, unlike in 2008, where layoffs were massive and long-lasting. The jobs suffering from the stalled economy were mainly on low wages, which means populations are more likely to invest in used cars than new ones. Therefore, the COVID crisis hurting automotive demand was likely to be very momentary. Very few seem to have anticipated that situation.

Read Part 1 of 3: Electronic Component Shortage Limits Automotive Production

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