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
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 fo
for 2013:

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
Canadas manufacturing capability will continue to be under
pressure

Changes in the retail environment will accelerate in the next

few years

We will also take a quick look at a couple of the major themes apparent at 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, and a trend that has
been developing over the past few years, is the lengthening of the financing
terms 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

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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.
Well 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

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 theyre 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?

Weve 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 Canadas 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.

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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 dont 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 doesnt 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

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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, isnt 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 years 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 consumers 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

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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

Harris/Decima