At about half-way through the first quarter of 2021, are things any better than the very challenging year of 2020?
Last year was really unlike anything we have experienced as an industry, a country, or a global community. However, we are starting 2021 with a significant number of highly communicable COVID variants out there that threaten the further opening up of our economy — and just as we are starting to address the virus with mass vaccinations.
If we look at the automotive industry from a glass half-full perspective, it would seem that there is only the opportunity for things to get better — after all, things could not get much worse. Vehicle sales in Canada were the worst they have been since the early 1980s — down more than 20 per cent from 2019, and vehicle production in Canada was also lower than it has been in more than 30 years.
That said, vehicle manufacturers and their dealers learned from the first bout of COVID a year ago; they worked with regulatory authorities across the country to ensure that the service and repair activities of dealerships were deemed essential services, while the vehicle sales process was also adapted to a largely online process — thereby advancing industry sales transaction trends that were already moving in that direction.
The new year however, has brought its own challenges. Just as manufacturer vehicle production was starting to recover from COVID, and inventory levels at dealerships were being replenished — albeit in a modified way — the industry took another hit in the form of a microchip shortage, with the end result being that more than a million units of production around the world will be lost, owing to microchips that are essentially sole-sourced from one company in Taiwan.
As the story goes, it seems that when vehicle production took a nose dive in 2020 owing to COVID, chip manufacturers re-allocated their production and sales to consumer electronics like smartphones, game sets and the like. The automotive industry recovered in 2020 faster than both vehicle manufacturers and chip producers anticipated, but by that time microchips had been allocated elsewhere and vehicle manufacturers were left facing what is conservatively estimated to be about a
$60 billion cost of lost production. The end result will likely be a full year of less-than-robust vehicle inventories on dealer lots.
While many analysts have predicted that sales for 2021 will rebound to 1.8 million units, that may be a stretch considering that the microchip shortage was not anticipated when many of those forecasts were made. Moreover, returning to some form of normalcy at the dealership level will be important to driving the market towards that mark. So much of that normalcy hinges on the COVID vaccine roll-out, and not finding ourselves in a third wave of new variant lockdowns in the core of the all-important spring selling season.
Another exogenous factor that will impact the Canadian automotive industry in 2021 actually began in late 2020 with the election of Joe Biden as the 46th President of the United States. While it took a while for all of our friends in the United States to accept the legitimacy of his presidency, that, along with a Democrat-controlled House and Senate will mean that Canada will have an ally for its climate change objectives and hopefully a more continental approach to public policy making — rather than the strict “America First” lens through which President Donald Trump looked at the world.
This means that activity will likely begin very soon on the development of new fuel economy standards in the United States, and Canada has indicated that it will take inspiration from the U.S. to develop its own GHG emission standards for the 2023-2025 model year. The stringency of these regulations will continue to drive the introduction of more hybrids, plug-in hybrids, and pure battery electric vehicles into the market, as this will be the only way that vehicle manufacturers will be able to meet the new standards.
Public policy-making in the U.S. needs to countenance Canada as a critical partner. As many have been quick to point out, Canada has an abundance of the raw materials essential for the development and production of batteries for electric vehicles. It is reasonable, with current battery production localized in Europe and China, that there would be strategic interest in ensuring that there is significant effort expended in trying to establish a battery ecosystem in North America — and ideally in Canada, as well as the U.S.
Otherwise, it may be a significant challenge for the electric vehicles announced for future production in Ontario to meet the regional value preference requirements under the CUSMA/USMCA, which would be important when about 85 per cent of our production goes to the U.S.
So while there are many challenges facing the industry in 2021, the previous year has shown the industry what it is made of and proved that if we have the resiliency, we can also have an innovative spirit to address anything that comes at us.