The Auto Industry & The Economy
Scot Eisenfelder sees the economy strengthening as the country returns to normalcy post-COVID.
“It’s likely to be a bumpy recovery with delays in vaccines, spikes in cases, and the political process around stimulus, but overall, I see strengthening as the year goes on. The real question is economic resilience,” said Eisenfelder, senior VP of strategy and planning at APCO Holdings.
“People have lost businesses and livelihoods … After losing everything, are small business owners willing to take a risk and invest again to become that engine of growth that’s so important to our economy?” Eisenfelder will need to see evidence of that before declaring economic recovery.
“All signs point towards a robust economy in 2021,” said AUL Corp.’s senior VP of agency and dealer sales, Paul McCarthy. “While there may be some long-term risks due to the overstimulation of economic activity, the near-term is undoubtedly promising. I think that the auto industry will benefit tremendously from this economic resurgence and renewed confidence as retail re-opens.”
McCarthy predicts that people who are confident and in a positive mindset will make large retail purchases and thinks automobiles will be near the top of the list in 2021.
Automotive Development Groups’ Joel Kansanback noted that at the time of writing, 30% of people have had COVID and 10% have been vaccinated, with new cases dropping and plenty of reason for optimism on that front.
“Interest rates remain at historic lows, housing permits are way up, and a stimulus package appears eminent. At the same time unemployment is climbing, we are expecting a record number of bankruptcies, all while a chip shortage is hurting all kinds of businesses, but especially auto,” said Kansanback, the company’s executive vice president.
Kansanback thinks that with continued low rates and COVID cases decreasing, news car sales should be very good, but ongoing problems with new car inventory will remain.
“This won’t be a short-term problem, it could proceed many months,” he added. “Good dealers have been focused on used cars for more than 10 years, so saying dealers will have to focus more on used seems a little glib. It’s reasonable to expect used vehicle prices to rise and F&I grosses to continue to be a priority.”
“We will likely see inflation rise in 2021 but most prognosticators have not agreed on how much or how long it will last,” said Jennifer Holcomb, VP of operations at Norman & Co./Classic Products. “It depends on who you talk to, but we may see some market adjustments this year.”
As far as automotive goes, as long as COVID-19 is still in a pandemic state, Holcomb expects there will continue to be parts shortages, which will likely cause small dips in new car sales until the pandemic is over.
Lindsey Bird, president of Sonsio, predicts the SAAR will stay strong but is concerned that potential inventory challenges (shortage of chips, etc.) will have some impact on new vehicle sales.
“There is some risk with the tightening on financing, particularly with the risk in loans defaulting as a result of layoffs due to the pandemic,” added Bird.
“The auto industry will be flat in 2021 due to the lingering impacts of the pandemic and the overall economy,” said Michael LaMotta, DOWC’s founder and CEO. “As challenging as 2020 was for auto sales, we did see improvements triggered by pent-up demand at the end of the year.”
LaMotta noted that the new challenge for 2021 is the global semiconductor shortage, which has already caused ripples throughout the industry, and vaccine distribution and supply chain amendments will need to be top priority to support continued economic improvements in our sector.
Entire Car Protection’s (ECP) Brian Feldman is bullish on a recovery in 2021, noting that all indications point towards the economy continuing to recover from the impacts of the pandemic.
“Many analysts are calling for a 10% increase in auto sales in 2021 versus 2020,” said ECP’s director. “A lot will depend on the ability for automakers and part suppliers to be able to keep up with the demand as the world recovers from the impacts of COVID-related shutdowns that impacted the supply chain.”
“In general, we are seeing lots of positive signs. Vaccines are being distributed, COVID-19 cases are trending down across much of the country, and Congress has a stimulus package to address,” said Adam Ouart, vice president of agency services at EFG Companies. “All of these actions bode well for the retail automotive industry.”
Ouart listed low interest rates, improved new car inventories plus manufacturer incentives, and a strong used car market as signals of a strong recovery for the industry.
John Lutman, IAS’s SVP of enterprise sales, predicts the economy will be driven by COVID recovery.
“The picture gets a little clearer with every passing month, and it now appears that anyone who wants to be vaccinated will have the ability to do so by mid-summer,” added Lutman. “Vehicle sales performed particularly well last year after the significant drop in March and Q2, and I expect that will continue through 2021.”
Lutman did note a caveat to this: The chip shortage could lead to a further tightening of inventory. But so far, he doesn’t believe this has had much effect on sales, but cautions it is something to watch as we move forward.
“I see the economy staying strong, with the likelihood of another stimulus package being passed, and I think we will see the majority of Americans vaccinated by summer’s end with continued all-time low interest rates,” said Cliff Childers, business development manager at NAE/NWAN. Childers predicts all these factors will contribute to a strong market throughout the next year.
National Auto Care’s president and CEO, Tony Wanderon, believes economic recovery will depend on stimulus spending and vaccinations. “The auto industry must contend with production challenges (semiconductor shortage) and, so far, severe weather (Texas particularly),” said Wanderon.
“Sales of new vehicles are likely to surpass last year’s numbers, while remaining below 2019 levels,” Wanderon added. The pace of used vehicle sales has slowed, but he expects continued interest in used inventory as many American households grapple with economic challenges as a result of the pandemic.
“The Federal Reserve has recently raised its U.S. GDP growth outlook to 4.2% in 2021, which is up from 2.4% in 2020, indicating that they are bullish on the overall economy. I also believe we will see healthy economic growth in 2021,” said Brent Griggs of Portfolio.
Portfolio’s president and CEO noted that while some of the optimism comes from the economic stimulus — a short-term plan to help the economy — it brings with it the risk of higher inflation as the federal deficit is expected to reach $2.3 trillion, excluding the currently proposed $1.9 trillion of additional stimulus in 2021.
Craig Almon, a founding member of PRO Consulting shared that, as an agent, he has been fortunate to have a business model that is diverse between different markets and many of the Western states.
“Living in the Pacific Northwest we have enjoyed a robust economy during the last decade and 2020 was no exception. The tech-industry is strong, Boeing looks to be back this year, and the car business has been growing right along with the numerous high-paying jobs in our economy,” said Almon. “From our standpoint, the future looks bright.”
A recent Cox Automotive survey revealed that 49% of franchised dealers believe that their dealerships will be “very profitable” in 2021.
“It remains obvious that this year will be an improvement over last year. However, it is uncertain when we will get back to the levels of 2019, both in sales and profitability,” said Reahard and Associate’s Rick McCormick, the company’s national account development manager. “Pre-owned vehicles will see an exceptional increase in sales volume this year and F&I products focusing on those type of vehicles will provide increased opportunities in the finance department.”
Safe-Guard Products International’s Tony Catania cited statements by experts that say the economy will grow and continue to pick up pace the further we get into 2021.
“Effective treatments and COVID-19 vaccines should help us transition to a post-pandemic economy,” said the company’s chief revenue officer. “As we have all seen from history, downturns cause all of us to band together, focus on what matters the most, and create innovative products and solutions. There is no better example of this than the automotive industry.”
2020 saw an unprecedented amount of collaboration across the entire industry, top to bottom, and front to back. Catania expects the innovation that was sparked in 2020 will continue, and as the market opens further, we will see consumers get back on the road, vehicle ownership will return, and the joy in owning and driving a car will be back.
“The economy will continue to improve as industries that have been affected most by COVID-19 start to reopen at greater levels, and the public will continue getting more comfortable with going out and traveling —for business and pleasure — both having a direct effect on commerce,” said James Polley, CEO of Spectrum Automotive Holdings. “The automotive industry will have one of the greatest years in its history.”
The pent-up demand for new vehicles; the lack of inventory driving prices higher; and the need to get new transportation to return to work or exchange a lease, are all factors Polley believes will continue pushing dealer profits to record highs.
Wise F&I’s Cory Schroeder classifies the upcoming stimulus package and vaccine approvals as catalysts for the economy remaining strong in 2021. “Dealership operations will return to full staff and OEMs will continue to push huge incentives and 0% financing. There are good indications that the federal level will not raise rates until well after the economy has recovered,” said the company’s VP of product development. “This will help drive demand for the rest of the year, but the demand will still be tempered by impacts of COVID-19.”
Schroeder added that the industry’s retail side will possibly fall below 2019 demands, but higher than 2020 demands. “Fleet demand will still lag the first half of the year since governments, rental companies, and other entities have been much slower to recover from the pandemic.”
Effects of the Biden Administration
Automotive Compliance Education’s (ACE) Gil Van Over approaches this topic from a compliance perspective. “In the short term, we have already seen the new administration reverse some Trump administration policies through the use of Executive Orders.”
Van Over expects this to continue for the short term and believes this administration will push consumerist policies throughout its different regulatory agencies. “I also expect the agencies with auto industry oversight to transition to aggressive oversight.”
“I think in most ways we’re about to see a repeat of the Obama years: more regulatory oversight in lending practices, more support behind alternative fuel vehicles, higher taxes and very low interest rates,” said Scot Eisenfelder of APCO Holdings.
Eisenfelder urges dealers to focus more on compliance but expects limited impact on the trajectory of the industry; perhaps slower growth than we saw pre-pandemic but a faster path towards a new normal in the balance between ICEs and EVs.
Paul McCarthy of AUL predicts that, in the short term, we will see federal incentives for EVs that will further stimulate the growth of the segment. “It is also likely there will be some renewed focus from the CFPB on auto lending and in particular, repossessions.”
“Short term will depend on whether additional interstate travel restrictions are placed by the Biden Administration. Long term could be higher gas prices as more employees work from home due to the shift of remote workers due to the pandemic, as well as the race for more manufacturers to have electric cars on the market,” said Classic Product’s Jennifer Holcomb. “We will have to see what happens with the push for federal minimum wage to increase to $15 per hour.”
In Holcomb’s home state of Florida, that measure passed in November, but it will take five full years to go into effect, with many small businesses saying it’s an undue burden coupled with any COVID-19 recovery. She believes it could lead to less hiring, less expansion, and whether employers choose to invest in people or automation.
DOWC’s Michael LaMotta predicts that in the short term, the impact will be directly in line with the administration’s ability to end the pandemic and get the nation close to some sort of herd immunity. While long term, the auto industry will likely see mixed results from the Biden administration.
“On one hand, a renewed focus on sustainable energy will align perfectly with the industry’s rapid shift into electric vehicle production. Hopefully, we will see the federal government continue to incentivize the purchase of EVs,” said LaMotta. “On the other hand, increased taxes and regulation will most likely stunt the industry on some level. I don’t think we will see much of that direct impact in 2021, however.”
“The new administration is targeting a move towards green energy and the lowering of emissions by supporting renewable energy sources. As such, many automakers have already announced plans for more electric vehicles and/or to go fully electrified by a certain date,” said Brian Feldman of ECP.
The administration’s outline for the transportation sector includes spending to rebuild and improve the country’s infrastructure, which includes money for the electric vehicle infrastructure, along with support for other types of mass transit. With both the government and private sector pursuing and pushing greener vehicles on the public, Feldman expects we may see an increase towards these types of vehicles so long as the infrastructure can support the increased demand and consumers are willing to purchase these vehicles.
“Government intervention can be very powerful and could cause significant change to what we perceive to be the ideal automobile,” added Feldman.
Adam Ouart of EFG Companies is hoping to see several positive effects, including an increased focus on new technology, addressing labor concerns, and strengthening export markets while reducing tariffs on parts and supplies.
“Many components of the American Recovery Act could provide much needed financial assistance, restore the economy, and spur a measurable increase in automotive sales in the second half of this year. The administration’s focus on climate could energize the electric vehicle market,” said Ouart. “It will be important for F&I agents to be well-versed on this topic and prepared to support their dealer customers.”
IAS’s John Lutman lists two factors as having the most significant impact: “First and foremost, electric vehicles will have an impact in the long-term. With the Biden administration in place, OEMs will know that they can invest heavily in EV technology without having the federal government interfere; and it’s very likely the federal government will try to accelerate the adoption of EVs with federal tax credits and other measures.”
The second impact Lutman cited is the likelihood of increased regulation due to the increased power of the CFPB. “They have previously focused their efforts on lenders and dealers within our industry, but agents and dealerships need to make sure their providers and administrators are prepared for increased oversight as well.”
“The Biden administration is going to push for electrification and heavily incentivize manufacturers to adopt fully electric vehicle offerings,” said Cliff Childers of NAE/NWAN. Based on recent events, he believes we will need infrastructure enhancements to not only support current demand but make full electrification a reality.
“Vehicle manufacturers and Silicon Valley are teaming up to make energy consumption and efficiency more of a focus than raw horsepower,” Childers added.
National Auto Care’s Tony Wanderon expects that in the short term, stimulus spending and pandemic relief will likely provide a boost in consumer confidence and spending plans. Long term, he thinks we can expect a focus on green energy and EVs, along with higher standards for fuel efficiency and emissions.
“The return of EV tax credits and infrastructure for EVs could speed consumer adoption and demand for these vehicles, said Wanderon. “Trade policy could also have an impact, though little has developed on this front.”
“This is my 32nd year in the car business, and during that time there have been six different Presidents: three Democrats and three Republicans,” said Craig Almon with PRO Consulting. “Short-term, Mr. Biden has instructed the CFPB to be more aggressive in regulatory actions related to consumer transactions in the retail auto business, but it is a hard stretch to think the CFPB could be more aggressive than it was during the Obama regime when it was first founded, at least in a way that would meaningfully cool sales or retail financing for consumers.”
“Long-term,” continued Almon, “for the most part what seems to affect the car industry, at least as it relates to sales, is the easy and cheap access to money for flooring and retailing automobiles and for consumer financing. President Biden has taken early steps in his administration to approve legislation which will buoy the economy with stimulus monies and the Fed has made it clear that they see no reason to change policy on lending and cost of funds.”
Almon believes that both short and long term, the early moves by the administration would seem to bode well for the continued upward trends that we have seen in the auto Industry in both sales and profits, at least until the next congressional elections and possible changes in control of Congress.
The good news is that consumers love their vehicles, and they will continue to buy them at increasing levels year over year — something Reahard & Associate’s Rick McCormick strongly believes in. “However, higher taxes combined with higher levels of uncertainty about the economy, will cause them to buy less expensive pre-owned vehicles or new vehicles that have higher manufacturer incentives in place.”
McCormick expects to see multiple 0% campaigns for extended terms of 72- and 84-months on new vehicles, along with increased dealership competition with pre-owned vehicles and a spike in prices in the pre-owned segment.
“We can always speculate,” said Safe-Guard Products International’s Tony Catania. “As with any change, we need to watch and make sure we work together as an industry to address any needs.”
James Polley of Spectrum Automotive Holdings bases his predictions off the assumption that a further stimulus deal will likely take place in the short term, resulting in a great surge across all aspects of the automotive industry.
“Direct results of the public having more confidence in their safety going forward will prompt the purchase of new and used vehicles as well as repairs and maintenance of existing vehicles for consumer and commercial use,” added Polley.
The Biden administration has already put a push on buying electric vehicles (EVs) for the federal government to replace its fleet. Wise F&I’s Corey Schroeder predicts this will have an effect on the OEMs, to market to the non-electric consumers to rethink and consider driving EVs.
“OEMs are pouring a lot of money in EVs and microchip advances for auto software. There has also been a hefty advance toward autonomous vehicles,” said Schroeder. “Due to COVID-19, many of these plans have been curtailed and might not resume right away.”
Schroeder foresees 2022 being the year that EVs will have a greater impact in the sales chain, but that overall, the automotive industry will remain strong due to the current low interest rates and the policies of the White House. “Therefore, the Federal Reserve will not raise costs,” he added.
The Evolution of Rules and Regulations
ACE’s Van Over will be watching for a re-issuance of the Fair Lending directive that was originally issued by the Obama administration and also suspects that the Military Lending Act guidance will be revisited.
“I’ve heard the rumors that scrutiny of voluntary protection products may intensify,” he said. “I also believe the vast majority of franchised dealers are honest and want to provide outstanding service and values for their customers.”
With the exception of possibly not offering GAP to covered borrowers under the MLA, Van Over believes that other possible enforcement actions will not have a huge effect on dealership operations as most are already self-regulating.
APCO Holding’s Eisenfelder expects greater focus on regulations for lending practices, “both in terms of regulations and enforcement.”
“Rules and regulations in 2021 for the automotive industry will continue to generate more focus on enforcement of the numerous laws already in place,” predicts ARMD Resource Group’s Michael Tuno. “The recent push by the CFPB on finance companies resolving consumer complaints in a timely fashion is getting a lot of focus. The feeling by the CFPB is that during the pandemic, many finance companies dropped the ball on adequately responding to issues that consumers filed about their specific issues with finance companies.”
The company’s president added that the automotive industry has had to adapt its processes to address the impact of the pandemic and because of the increased use of remote selling, the clear and conspicuous disclosure that is central to finance issues appears to be lagging in the metric that the CFPB would like to have in place. “Typically, the resolution of a consumer complaint should occur within 10 days of the filing of the complaint. Dealers need to be more responsive and timelier on these issues to stay ahead of the regulator’s expectation and subsequent scrutiny.”
AUL’s McCarthy believes the CFPB will play more of an activist’s role in 2021, with a particular focus on fair lending and debt collection practices.
“I wouldn’t necessarily expect new rules or regulations, but rather, a renewed presence of the CFPB. With the changing of administrations, the threat of increased scrutiny will reemerge,” said Automotive Development Group’s Kansanback.
For lenders and dealers alike, Kansanback expects a big spotlight on rate markups and fairness around lending. He encourages dealers and agents alike to go back and take a look at if they have solid pricing disciplines on their products that are documented and defendable.
Holcomb of Classic Products believes the CFPB was created by Democrats who want the government to increase intervention in public and private businesses. “They have concerns about disparate impact, and from what we have seen of the CFPB, they will find it in any investigation they complete as they will have full access to any corporation’s records. Though the CFPB can’t directly go after the automotive industry at this point, many state agencies can and are being encouraged to do so by the CFPB.”
With a new administration in office, Holcomb thinks they will find a friendly ally who believes that the auto industry is too capitalistic and that anything besides a mediocre profit is egregious.
“There will be more regulatory impact, as we have seen with lenders, which has added more complexity for both providers and dealers to sell products,” predicted Sonsio’s Bird.
Edvie M. Castro Esq., General Counsel and COO at DOWC expects major regulatory developments in the industry will focus on reducing emissions and fuel economy in general. “Many manufacturers are making commitments in this regard and we are consistently developing and improving upon products to meet the EV market needs. In addition, there is a greater focus on public safety given the introduction of self-driving vehicles and, of course, consumer protection is the continued mission of the CFPB.”
Assuming the appointment of Chopra as director, Castro thinks the Bureau will likely focus its attention on dealer compensation for F&I product sales, legitimacy and documentation of charges for taxes and other items, and deceptive advertising practices. Protection of military families and minorities also remains a top priority, in her book.
“Administrators will, in turn, keep a closer eye on products and pricing, and dealerships will sharpen their attention on how they handle their customers from a financial standpoint. It is likely that rules and regulations will include not only protection, but consumer education or notice requirements,” added Castro. “Transparency in industry transactions is what we are all working toward.”
ECP’s Feldman expects an increase in federal scrutiny with the new administration. “Both the CFPB and the FTC are led by opponents of our industry. We expect a number of regulatory challenges similar to what we saw during the Obama administration.”
The new administration has signaled an increased focus on compliance, nominating former FTC member Rohit Chopra to head the CFPB. In the past, Chopra has acted to protect members of the military, as well as minority populations from abusive buying practices.
Ouart at EFG Companies predicts State and local regulators may also look more closely at discriminatory practices. “As a result, we are encouraging our agents to reinforce the many training options that are available to dealers and their staff, including certification with the Association of Finance and Insurance Professionals.”
NAE/NWAN’s Childers believes the Biden administration will strengthen the CFPB making compliance a continued area of focus for the coming years.
“The CFPB is likely to take a more enforcement-focused approach under the new administration at the federal level, coming on the heels of four years of increasingly state-based regulations and enforcement amid a relaxed federal approach,” stated NAC’s Wanderon.
While never a big fan of regulation, he urges something must be done about VSA telemarking companies that overall have a negative impact on our industry.
“This form of aggressive marketing and over-inflated pricing is something everyone in the industry should be concerned over,” Wandernon added. “This should not be looked at the same way a dealer or OEMs offer an opportunity to buy after the purchase of a vehicle; it is more around the robo-call centers.”
“Unfortunately, Biden intends to strengthen the CFPB, which will lead to additional regulation and reverse some of the streamlining that took place during the last administration,” said Griggs with Portfolio. He views this as a negative both for consumers and the auto industry.
As he mentioned earlier, PRO Consulting’s Almon thinks the Biden Administration has reinvigorated the CFPB with new leadership and a mandate to vigorously enforce consumer protection policy (… good!).
“While it could be said that past administrations have allowed heavy handed enforcement by the CFPB, it is always a good thing for the industry to have a check-up and I suspect that there are fewer “bad actors” than in July of 2011 when the CFPB was formed,” added Almon.
McCormick with Reahard & Associated expects the solid and sustained promises of higher regulations in the automotive industry made over the recent election cycle are likely to be kept.
“The pendulum will be swinging in the direction of increased regulations over the next two years. It's important to remember that regulations do indeed come and go like a pendulum and navigating this landscape will cause some temporary bumps in the road through 2022,” McCormick said.
Polley with Spectrum Automotive doesn’t see much anticipation of any meaningful changes across the rules and regulations landscape in 2021, and that will likely remain true until COVID-19 is under control.
“The pandemic will continue to be the main thrust of 2021 to get some semblance of order and normalcy back into the daily lives of consumers,” predicts Polley. “The regulations and changes that may be considered will be on a go-forward basis in 2022 and beyond, rather than retroactive.”
Wise F&I’s Schroeder sees a lot of scrutiny from the CFPB, FTC and others on compliance and lending practices. Adding that the NADA regulatory office believes that dealer participation programs will be coming under the microscope as well.
“With any administration change, we see rules and regulations affect the automotive industry and F&I,” prefaces Safe-Guard’s Catania. “We need to watch and work through that change together as that comes.”