© Harris/Decima

January 25, 2013

What does 2013 hold for the auto industry in

Canada?

With the Detroit auto show this week (yes, despite the strong presence of Los

Angeles, New York, Toronto and Chicago as showcases for new models, Detroit

still seems to be the emotional kick

signals do we see that provide insights into what lies ahead in Canada?

We see four major areas to watch in Canada fo

We will also take a quick look at a couple of the

opening of the Detroit show early this week.

Vehicle sales – moderate growth and a period of transition

We had a strong sales year on 2012. One of the features,

been developing over the past few years, is the lengthening of the financing

terms on new vehicles. This means that many

be out of the market for a longer period of time. Couple this with the high debt

Vehicle sales patterns will shift as the population shifts

More sophisticated technology will bring real benefits for buyers, but will create some turbulence for manufacturers and regulators

Canada’s manufacturing capability will continue to be under pressure

Changes in the retail environment will accelerate in the next few years

2

What does 2013 hold for the auto industry in

With the Detroit auto show this week (yes, despite the strong presence of Los

York, Toronto and Chicago as showcases for new models, Detroit

still seems to be the emotional kick-off of the new automotive year) what

signals do we see that provide insights into what lies ahead in Canada?

We see four major areas to watch in Canada for 2013:

a couple of the major themes apparent at the

opening of the Detroit show early this week.

moderate growth and a period of transition

We had a strong sales year on 2012. One of the features, and a trend that has

been developing over the past few years, is the lengthening of the financing

on new vehicles. This means that many who bought in recent years may

be out of the market for a longer period of time. Couple this with the high debt

Vehicle sales patterns will shift as the population shifts

More sophisticated technology will bring real benefits for buyers, but will create some turbulence for manufacturers and

Canada’s manufacturing capability will continue to be under

Changes in the retail environment will accelerate in the next

© Harris/Decima 3

load of Canadians (with those aged 50+ beginning to realise the threat that this

poses to their longer term financial position) and shifting demographic

patterns, we may not see more than just a moderate increase in sales in 2013.

There are two transitions that will likely take place:

• With the average age of a new car buyer still touching 50 and a large

proportion of buyers being over 55, we see greater reluctance

among these consumers to buy a new vehicle in the next year while

those aged 18 – 34 are much more likely to be in the market. At the

end of 2011, 22% of those aged 18 – 34 indicated positive intent to

purchase or lease a new vehicle in the next 12 months. This

increased to 26% at the end of 2012. Among those aged 55+, the

percentage dropped from 17% to 14% over the same period. This

will introduce decidedly different dynamic in the auto retailing

environment – both in the decision-making process and in the

dealership itself. Auto manufacturers and dealers will need to deal

with a new “cohort” of customers, many of whom have different

attitudes, brand perceptions and buying preferences from their

predecessors. While this shifting of cohorts has always been there

to some extent, economic conditions that have prevailed over the

past five years have likely kept some of those younger consumers

out of the market. The change will be more keenly felt in the next

two or three years.

• We’ll also see an increased questioning of the accepted notion that

ownership of a vehicle is something to aspire to and an automatic

part of our lifestyles. A younger, more urban buyer, different

financial priorities and the continuing shift in how consumers want

to express themselves, could have a moderating influence on sales

growth in the future. Stronger interest in car sharing will be part of

this and, although there will still be a need to have their own

transportation, many younger buyers may see this as a viable

alternative to ownership until they reach that point. Right now,

their challenge is that awareness of this option is lower among

these younger consumers – but therein also lies the opportunity.

© Harris/Decima 4

Technology – battles ahead, but consumers still want more stuff

When it comes to technology in vehicles, there is no denying that things change

on a daily basis. As far as powertrains are concerned gasoline is still king for

consumers, but hybrids have reached that tipping point of broad acceptance as

a mainstream option. In a study we conducted in the summer of 2012, pure

electric vehicles actually achieved slightly better overall acceptance than diesel

(fewer consumers rejected pure electric outright). This does not mean that

consumers are ready to switch to electric, but that diesel still bears some of the

negative baggage of the past. The bottom line is that consumers are ready to

accept alternatives when the price and characteristics of those alternatives

make sense to them from a financial and performance point of view.

Inside the vehicle, we see a real battle between what consumers would like to

have and what makes sense from a safety perspective. Consumers are showing

a real appetite for features that allow them to be connected when they’re in

the vehicle and this will have to be balanced with the realities of safe driving.

But which technologies do consumers really value and how would consumers

like to “bundle” these new technologies, given the price? Harris/Decima will be

releasing a study later this quarter that shows how future car buyers value up

to fifty existing and new technologies and how they would like to combine

them on their next vehicles.

Technology is at the heart of the changing retail environment as well. More

about this later on.

Manufacturing in Canada – is this a watershed year and do Canadians care?

We’ve already had one surprise on the manufacturing front with the imminent

shift of production of the Chevrolet Camaro from Oshawa to the US. And while

the Ontario and Federal governments still have a significant direct stake in the

industry and have signaled on-going support and funding for innovation in

recent days, the playing field is still tilting southwards. Southern US states and

Mexico are seeing continuing investment in their manufacturing capabilities

and the pressure will be on as manufacturers look for the most efficient way to

produce vehicles for the North American and other markets. The recent surge

in vehicle sales in the US is a positive development for Canada’s manufacturers,

but the drive for efficient production, not legacy, will determine future

investment decisions on production. The Camaro move is an example of a

decision driven by business realities and is just part of the longer term

realignment of production and sales globally.

© Harris/Decima 5

During the labour talks between the CAW and Detroit Three last year, we found

that only 51% of Canadians were even aware of the talks. Granted, the

percentage in Ontario was much higher (66%), but that still left 33% who said

they had no knowledge of the talks. All Canadians are stakeholders (literally) in

the outcome of the realignment that is taking place and there needs to be a

strategy in place to ensure that we don’t get left behind.

Retail – pay attention to changing customer attitudes and embrace social

media with your eyes wide open

The auto retailing model has essentially remained the same for decades. This

may be the year when population shifts and changes in consumer attitudes

really begin to be felt in the dealership and it may be time for many dealerships

to look again at their standard practices. There are three areas in particular to

watch.

The first is in the way consumers will go through the purchase process. No one

doubts that most consumers go on line before they make a vehicle purchase.

The common belief was that this would reduce the number of dealerships

visited and shorten the overall purchase cycle. This doesn’t seem to be the

case. Just before the end of the year, we surveyed Canadians to find out what

they might do differently in 2013. What we found was that many Canadians

vehicle buyers will:

• Spend more time on-line researching their next vehicle;

• Take more time to make their final decision

• Be more assertive with the dealership when buying

• Visit more dealerships, not fewer

This has clear implications for dealerships. The old tactic of pressure to buy

that day is more likely to push the customer away and salespeople need to

hone their skills in following up with the customer so that they do come back

for that second or third visit. As well, the test drive may assume even more

importance than before. The sales training curriculum will need to be updated.

These changes are clearly an outcome of the amount of information available

to car buyers and their growing confidence in using that information.

Interestingly, a relatively small percentage said they would be paying much

more attention to social media in the car buying process. The growth is

certainly there, but so are the fundamentals of a solid sales process. The key

© Harris/Decima 6

will be to leverage social media to complement and enhance sales processes,

rather than replace the fundamentals.

The second area to watch is the facility. In upgrade and image programs, there

is a strong focus on the “bricks and mortar” within the facility, often to the

exclusion of improving the overall customer experience at the dealership.

Given the changes taking place in the cyber-retailing world (and in other retail

environments) and in the shopping process, isn’t this a bit like rearranging the

deck chairs on the Titanic? Customers have new expectations. These are set

by their other retail experiences and by their experiences on-line.

Is there a seamless connection and are the processes appropriate to the new

environment? Facilities programs and improvements should focus as much on

the seamless transition from the on-line environment and on the ease and

efficiency of customer activity in the dealership as on the bricks and mortar

elements of the facility.

Observations from the 2013 Detroit Show

Two broad themes were evident at this year’s show.

1. Advanced technology is replacing the traditional signals of luxury

for consumers who “want it all”

• Technology is no longer limited to just high-end vehicles and

can be found inside the car for consumers to touch and

experience and in the mechanics to transform the driving

experience. As this plays out, it will be interesting to watch and

see who “owns” the technology (particularly inside the car) in

the consumer’s mind – the manufacturer, or will some of the

strong technology brands begin to establish their territory.

Which will be more appealing in the minds of the new, younger

cohorts of consumers coming into the market?

2. Fuel economy and smaller engine sizes no longer signal less

prestige or lower quality and performance

© Harris/Decima 7

• The four cylinder gasoline engine is no longer just an entry-level

offering. Advances in technology, along with the characteristics

of alternative powertrains (Diesel, Hybrid and Electric) and the

tangible benefits at the gas pump will keep this trend moving

quickly.

2013 promises to be an interesting year from many perspectives. The

development and consumers’ acceptance and comfort with new technology

are both increasing exponentially. Merely keeping up with these changes will

be a challenge!

Richard Cooper

Senior Vice President

Harris/Decima Inc.

416-355-6821

rcooper@harrisdecima.com