Automotive News Canada - March 2023 - 20

EXPERT INSIGHTS
THE IMPLICATIONS OF RISING INTEREST RATES
For the first time in more than two decades, consumers,
dealerships and OEMs are contending with record-high interest
rates. And this latest drag on the economy comes on
top of other challenges facing the auto industry, such as low
vehicle inventories and supply-chain disruptions. This unusual
combination of events presents uncharted territory for all
involved. So for some guidance in navigating this new landscape,
Automotive News Canada spoke with Andy Wadeson,
Vice President of Sales and Distribution for TD Auto Finance
(TDAF). His overarching message: Yes, challenges do exist -
but so do opportunities.
Q: Traditionally, rising interest rates hurt auto sales. But
given the persistent inventory shortages and continued
strong demand, should we expect that to be the case in
this current period of high rates?
Andy Wadeson: We anticipate another challenging year in the Canadian automotive
industry, but there is a light at the end of the tunnel. New inventory
supply continues to be the biggest factor, as the sector continues to feel the
squeeze from ongoing supply-chain disruptions.
The combination of limited supply, higher interest rates and eroding purchasing
power for consumers due to inflation, likely leads to a best-case scenario
of new sales recouping to trend (1.9 million units) over the coming years. As
supply- chain issues continue to ease, we expect a further rebalancing in market
supply, putting some downward pressure on prices. While this will certainly be
a positive development from an affordability standpoint, we're unlikely to see
much reprieve from lower interest rates.
We anticipate 2023 to mirror 2022 in total vehicle sales, as new-vehicle inventory
returning to dealership lots is tempered by higher
costs for Canadian vehicle buyers.
Q: Are we about to enter a period where incentives
become necessary? If so, what kinds of incentives?
Zero interest loans? Longer loan terms? Cash-back
incentives?
"
Wadeson: As it stands, buyers are contending with
a whole host of factors: Higher gasoline prices, rising
maintenance and insurance costs, and increasing vehicle
prices and financing costs, all of which have led to
a significant erosion of affordability.
There is little reason to believe that consumers won't
tighten their wallets as rising interest rates require
households to dedicate more of their income to servicing
elevated debt and expenses. The decision of each purchase in 2023
will weigh more heavily on customers, and they will be looking for more costeffective
deals on specific makes and models to fit shrinking budgets. In short,
these customers will be looking for the most value for their purchase prior to
committing and will be looking for any additional incentives to help make their
purchasing decision easier.
On the other hand, OEMs are facing higher costs and expenses resulting from
increased production costs. They're also undergoing massive operational transformations,
such as new delivery models and the conversion to electric vehicles.
These factors may limit the ability to provide deep incentives in 2023.
Q: If consumers can't buy a new or used vehicle, then the natural alternative
is to maintain their current one. How can dealers leverage this increasing
potential business for their service and parts department?
Wadeson: TD Auto Finance is Canada's only full-spectrum
lender, providing products and services for customers across
the entire credit spectrum. I would encourage dealers to connect
to their Dealer Relationship Manager to understand what
financing products are available for their customers, prior to
moving on from a sales opportunity.
Andy Wadeson
Q: How will high interest rates affect the types of vehicles
consumers purchase? Will they be attracted to lower sticker
prices and fewer options?
Wadeson: Customers will seek value for their purchases,
given the higher cost of the vehicles themselves. Historically,
customers are not willing to go backward on vehicle trims and
options. They'd rather wait than purchase less. As supplychain
issues continue to ease, we expect to see some rebalancing
in market supply. This, in turn, should help exert a bit
of downward pressure on prices. As the prices decrease and value for purchases
rise, we can expect customers to return to previous buying habits and
not focus as heavily on lower sticker prices.
Despite all of
the headwinds and
challenges, TD Auto
Finance remains
"
cautiously optimistic
that 2023 can be a year
of growth.
Q: The COVID-19 pandemic taught the industry a number of lessons about
operations, such as the advantages of an all-digital vehicle purchase. What
lessons could dealers apply to cope during an era of high interest rates?
Wadeson: I think the biggest implication from the pandemic will be the use of
technology that dealers carry forward in their business functions. They're leveraging
enhanced technology and lessons learned to augment their sales process
and drive down operational expenses. A larger portion of their sales are
in a digital environment that is now more widely accepted after the pandemic.
This creates new ways to reach customers and significantly
broadens their scope of customer possibilities.
Dealership reach has never been so powerful.
However, digital tools should not be viewed as a
disruptor to a dealership's traditional sales process.
They should be a means to enhance the overall experience
and efficiency of a dealership's best practices.
Q: What can dealerships do in other areas of operations
- such as F&I and service - to help maintain
sales departments challenged by higher interest
rates?
Wadeson: Given the rapid change and evolution
of the industry, dealers and OEMs should be constantly
challenging their sales processes, best practices
and tools. They should be open to new products
and tools that help with vehicle sales to ensure they're staying current
and capitalizing on what's available.
For example, TDAF has several key value-adds for dealers. This includes our
TD Wheels app that provides customers with the information they need to
begin the vehicle purchase process and then provides dealers with pre-qualified
leads at no charge. Another example would be our New to Canada program
that offers flexible auto financing solutions to help meet the needs of
newcomers to Canada, providing opportunities to finance vehicles even for
consumers with limited or no Canadian credit history. By staying current on
what's available, dealers and OEMs can leverage special programs to maintain
sales despite higher interest rates. As we know, customers are looking for
value and are conscious of affordability in the face of inflation, so this is an
excellent opportunity to leverage unique products that would benefit them.
Automotive News Canada - March 2023

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