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Contributing Author: John Stephens Executive Vice President EFG Companies

Contributing Author:
John Stephens
Executive Vice President
EFG Companies

We are halfway through a very interesting year in retail automotive. If you had planned for flat sales, lower OEM incentives, and interest rates bumping along the lower range, congratulations! You’ve planned for this situation and hopefully are managing well. Going forward, you’ll need to stay the course. The forecast for the second half of this year and all of 2020 appears to be equally bumpy.

The Economy

On June 19th, the Federal Reserve chose to keep interest rates steady in the near term, but retained an option to cut rates as economic risks mount and inflation remains stuck below their target. But amid continuing trade tensions and slowing global economic growth, the Fed is preparing for the economy to take a hit and is keeping an interest rate ace up their sleeve.

There are other indicators of a stalling economy. A subdued global economy, increased corporate stock buybacks, and some spikes in lay-offs will keep business bumpy throughout 2019 and into 2020. Significant peaks and valleys in the stock market have caused unrest. The good news is that investors are predicting another recession in two to three years, meaning a recession may still be a few years off.

A major player in the state of the economy are the recent Trump Administration tariffs. According to a report from the Tax Foundation on the impact of the tariffs, the actions imposed to date are expected to:

  • Reduce long-run GDP by 0.21% ($52.2 billion)
  • Reduce wages by 0.13%
  • Eliminate 161,751 full-time equivalent jobs

Of course, we’re all watching to see how the 25% proposed tariffs on automobile imports will affect the industry. The Tax Foundation provides some predictions based on import levels. In 2017, the United States imported nearly $292.5 billion worth of vehicles for consumption, while paying about $3.4 billion in duties on those imports. If import levels remain the same, and the proposed tariff would apply to all goods in the Harmonized Tariff Schedule, the new tariff would amount to a roughly $73.13 billion tax increase.

More recently, the Trump administration has mentioned the possibility of singling out auto imports from Canada for tariffs. In 2017, the U.S. imported $55.6 billion of Chapter 87 goods from Canada. Placing a 25% tariff on Chapter 87 auto imports from Canada would amount to a $13.9 billion tax.

Clearly, the whipsaw status of tariffs can have a major impact on the entire country, not just the automotive industry. While you can’t control the cost to import automotive parts into the US, you can plan for the effect higher prices will have on the market.

We all know that as new vehicle prices rise, consumers turn to used vehicles. Is your used vehicle inventory up to snuff? If you’ve been preparing to ride out a flat sales year, then you should already be focusing on increasing customer retention through your service drive. If not, now’s the time to do so. Take a look at your F&I products, customer service levels in your service drive, incentives, and pay plans. Is everything aligned toward your goal of not only increasing the number of people who bring their vehicles to you, but gain repeat business?

The Good News

After approximately eight years of unit sales growth, the automotive industry’s new average yearly sales volume is 11% higher than historical norms, and it looks like it’s here to stay! The S&P Global Ratings expects light vehicle sales to decline by about 1% year-over-year in 2019 before stabilizing in the 16.5 million range, and remain in the 16.5 million unit range for 2020 and beyond. This top-end threshold may be the new normal for the foreseeable future.

What does this mean? The automotive market is still strong and is expected to remain stable despite economic forecasts. However, we never know when this “goldilocks” economy will take a shift. That’s why it’s important to stay focused on those goals that will weather you through the storm – quality customer service, providing valuable products (both vehicles and consumer protection products), and creating lasting relationships with your customers.

The global market may feel unpredictable, but continued focus on the things you can control will lessen the impact on your business.

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