How the Coronavirus will impact car buying and the auto industry
The auto industry has been drastically impacted by COVID-19. Car sales are down and most dealership showrooms have shuttered their doors.
Because of quarantines and social distancing, car buyer behavior is quickly changing the dealership model. Many changes are likely to become permanent and we haven’t seen the full impact yet.
Let’s look at my predictions about how the Coronavirus will reshape the car industry in the coming months and what I believe manufacturers and dealers will do to survive in the long run.
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With slumping revenue, we’ve already seen manufacturers are offering Coronavirus car deals and unprecedented financing specials to help revive sales.
Are we through the worst? I doubt it. The longer shelter-in-place orders stay active and car sales continue to suffer, the more desperate manufacturers and dealers will become. And as unemployment numbers grow and people max out their credit cards, the less likely they will be to purchase new cars.
Geoff’s Prediction: Most of the current COVID-19 incentives are flexible financing with deferred or longer payment terms. But manufacturers will add new cash back deals over the summer. We may see some fire sales on Memorial Day and the 4th of July. However, if quarantines are relaxed and people return to work, we may see prices start to go back up in early fall.
Also, as more consumers shift to getting car prices online, dealership margins on new cars will shrink even faster as they must lower their prices to remain competitive.
Dealerships are already cutting production because of both decreased demand and because they’ve temporarily closed plants and asked employees to stay home. But it’s not just auto factories, entire supply chains are affected and shortages of parts created around the globe may slow manufacturing further.
In addition, some manufacturers have repurposed their factories to produce medical equipment like ventilators. While this may prevent some employees furloughs, it may also take some time to revert facilities back to producing cars.
Geoff’s Prediction: For now, the slowdown in manufacturing is offset by the reduction in consumer demand. I expect to see lower production the rest of the year as demand will continue to be low, but I don’t expect this will raise car prices much as manufacturers will remain eager to move inventory.
We’re also seeing gas prices drop and oil in negative territory. This may result in less people wanting to pay a premium for electric and hybrid cars to save on gas, despite the tax incentives. As manufacturers focus production on gas vehicles, expect hybrid and electric car supply to be reduced and those prices to rise.
Test drives at the dealership have all but stopped. Many dealers are starting to offer appointments to accommodate people and allow them to test drive at home. Dealers are even starting to let potential buyers test drive by themselves to limit person to person interaction.
Geoff’s Prediction: I see the at home test drive trend to continue permanently. It’s just more convenient for consumers. More and more buyers want to pick out a car online, test drive it, and buy from home without having to visit a showroom. And since you can have everything else in the world delivered by Amazon, why should you have to leave your home when you are spending $20-50 thousand dollars on a purchase?
On the flip side, many neighborhoods are not conducive to test driving so I expect to see test drives start to occur on neutral ground in stadium parking lots, churches, parks, and more. We may even see 3rd party outdoor test drive centers where different brands convene, almost like a used car lot, but with vehicles widely spread and only a couple per brand.
We’ll also see people narrow their search online and have one or two models already selected. They will test drive far fewer brands, models, and trims simply because it’s cumbersome to arrange separate appointments for each model. This could be a win for dealers as they will spend less time doing multiple test drives of different models and they will face fewer tire kickers testing out multiple brands.
Many peoples’ lease terms will end while dealership showrooms are closed. Some dealerships allow returns through their service departments (which are considered essential services), but that doesn’t provide a good option for a replacement vehicle.
For now, some dealerships are allowing lease extensions, but many lessees like the idea of getting new cars every few years. And consumers need to be wary of whether the mileage limit has been extended as well since they could get stung by additional fees.
Geoff’s Prediction: I expect more people will buyout their leases over the summer than usual. But I also expect a surge in demand for new leases in the fall as lease extensions end and people need to find new vehicles. With that in mind, I believe many manufacturers will be offering a glut of new lease deals in the fall to funnel demand toward their brand.
Getting your trade-in appraised usually requires a dealership mechanic to do a thorough inspection and check the car’s value for auction. Now that showrooms are closed that will be a tough process.
Geoff’s Prediction: I expect trade-ins appraisals to be much easier for consumers. More dealers will honor online trade-in appraisals and buyers won’t need to wait for an hour at a dealership and while being subjected to sales pressure.
That said, dealers may close deals with a caveat and write into contracts that trade-in values may be adjusted downward after the deal when a mechanic inspects the car. This is likely to become the norm and consumers will think they are getting a better deal than they actually are and find out about painful trade-in adjustments later.
Some dealerships are already letting consumers digitally sign their paperwork to avoid a visit to the dealership. However, many states still require physical signatures and salesmen need to visit a car buyer’s home.
Geoff’s Prediction: The closing process is one of the most unpleasant and feared steps among consumers and I see that getting easier. Some salesmen are already doing their presentation of financing, add-ons, and warranties over Zoom. Many will collect digital signatures and do the entire closing virtually. Even if physical signatures are required, I expect most Finance Office presentations to occur remotely in advance and salesmen will only collect signatures in person.
For consumers, I see the closing process going faster, but I actually see dealers profiting more. With a streamlined, web-based process, consumers will quickly check boxes for upsells without as much consideration.