Canadian Car Dealers Recalcitrance Revealed
So why would Canadian car brands refuse to lower their prices in the face of a huge wave of bargain-seeking cross-border shoppers, and the pricing policy's stultifying effects on the new car market? Because they can? Yes and no. The Globe and Mail tapped Bank of Nova Scotia economist Carlos Gomes for an explanation, and an explanation they got: auto makers are reluctant to cut MSRPs in Canada because a record 550k vehicles are coming to the end of their leases next year, up from last year's five-year low of 470k units. Cutting prices would reduce the vehicle's residual values leading to huge losses for the dealers and auto financing companies obliged to buy them back from the lessees. Oops. Instead of biting the billion dollar bullet, Canadian car companies have launched a less expensive PR war. The Globe says "several auto makers" sponsored an eight-page (!) advertising supplement. Within this magnum opus (methinks they doth protest too much), execs from Audi Canada, Toyota Canada and Volvo Canada justified their Canadian price premium and explained what they're doing about it. If any of our Canadian readers have a copy of yesterday's Mail, we'd love to read the quotes.
The Globe and Mail has been at the forefront of the pricing situation in Canada for numerous months, its nothing new for them. Michael Vaughan of the Globe and Mail had an informative One on One a few weeks ago where the issue of residual was dicussed. Carlos Gomes who a respected analyst from the Bank of Nova Scotia merely reinforced that residual values are the biggest reason MSRP's are not lowered, and the 2008 tsunami of lease returns is on the horison. All Canadian web sites of the various manufacturers have a section with all the reason as to why a customers should buy a vehicle in Canada. The link for the Global Auto Report from Carlos Gomes http://www.scotiacapital.com/English/bns_econ/bns_auto.pdf The Toyota version of buying in Canada http://www.toyota.ca/cgi-bin/WebObjects/WWW.woa/37/wo/Home.WhatsNew-hxIgElr2aOtkhUNDywzx80/0.9?fmg%2fnew%2fticker%5fn306313e%2ehtml
The amount of automotive advertising FUD in the papers in Canada is astouding. It seems to be fooling some of the people some of the time at this point. It's a good thing that it's somewhat offset by the many ads placed by US dealers offering new and used vehicles and all accompanying paperwork at prices that make us rub our eyes to ensure we're seeing what we think we see. On the it's NAFTA but not free trade front, some manufacturers are using the new immobilizer regulations in Canada as an excuse to not certify the cars (many built in Canada) for import into Canada.
I have noticed a few smart indepentent dealers are buying used American cars in bulk and shipping them north, doing the retrofitting required to bring them to Canadian standards, then flogging them at a steep discount compared to 'real' dealers. uh oh.
Here's a quote from Volvo Canada CEO: "..for many companies like Volvo Canada, we cannot price our products against the currency valuations of countries that don't produce what we sell. Doing so would create an inhospitable business environment, wreaking havoc on both sellers and buyers with costs fluctuating daily - even hourly". (This apparently explains why an XC 90 starts at $36,000 in the U.S. and $51,000 in Canada.) From another article: "A big price cut would make a mess of the used car market. Dramatic price decreases would deal a devastating blow to used vehicle values." "Any sudden and large drop in new vehicle pricing would have a devastating effect on used car prices and residual values........Leasing companies, faced with losses as a result of an unplanned and unprecedented drop in residual values, would likely be forced to raise interest rates on new leases. Meanwhile, owners of relatively new cars would be faced with a massive drop in value of their trade-ins." Toyota Managing Director, S. Beatty: "We have also carefully price repositioned three Toyota and Lexus models.........Canadian customers receive over $4,000 in value on the 2008 Toyota Prius at no additional cost." (The Prius still sells for over $7,000 MORE in Canada.)