One of the biggest issues in the Canadian automotive industry is vehicle affordability
or, more precisely, “lack of affordability.” At a transaction price level it takes
about 29 weeks of after-tax family income to buy a passenger car in Canada versus
only about 23 weeks in the U.S. In Canada, the trend has been towards vehicles
becoming less affordable, whereas in the U.S., vehicles have become more affordable.

However, what many industry
executives, most consumers and almost every politician does not understand is
that at the MSRP level, vehicle prices in Canada are actually significantly
lower in Canada than in the U.S (adjusted for exchange rates). For this Observations,
I did an analysis of base model MSRPs for the most popular vehicles purchased
by consumers in Canada. This analysis took the top three or four selling (in
most cases two import, two domestic) vehicles in each passenger car and light
truck segment. Fifty-two vehicles were chosen accounting for 71 percent of Canadian
sales in 1999 which is a very representative sample.

The average passenger car,
on a sales weighted basis, was priced $5,885 dollars or 22 percent lower in
Canada than in the U.S. But this also reflects the fact that Canadian consumers
purchase smaller vehicles. On a non-sales weighted basis the difference was
$3,595 lower or 13 percent which is still significant. The average light truck
on a sales weighted basis was priced $3,040 dollars lower in Canada than in
the U.S. or 10 percent. On a non-sales weighted basis the difference was $3,072
lower or 10 percent. Translated across the entire Canadian market of 1.5 million
units, this means the OEMs saved Canadian consumers about $5 billion last year
by pricing their vehicles competitively in this country. That’s a lot of money!
Within the passenger car market there was very little difference between import
($3,199 lower) and domestic ($3,339 lower) nameplate vehicles. In addition,
substantial savings were provided across all segments of the market.

Within the light truck market
there was also very little difference between import ($2,965 lower) and domestic
($3,158 lower) nameplate vehicles. There was more of a difference within light
truck segments where the top selling minivans were priced on average 21 percent
lower in Canada or $5,849 while the top selling Luxury Sport Utility vehicles
were only 4 percent lower or $2,071.

Before discussing issues
surrounding these lower MSRPs, it is important to understand the methodology
I used because it yields good, solid but not perfect statistics. The problem
arises from the fact that virtually every vehicle sold in Canada is different
from its sister vehicle in the U.S. Most of these differences relate to different
equipment levels in Canada and/or option packages on base model vehicles in
each market. But some also relate to different regulatory standards in each
country. We have metric, the U.S. has imperial, we have different bumper standards,
seat-belt standards, child safety seat anchorage, rear mounted tail lamps, labelling
standards, etc.

So it is difficult to get
comparable prices in each country. We tried to adjust for many of the optional
equipment differences as possible, but it is impossible to adjust for the regulatory
differences. Nonetheless, we believe this analysis comes very close to the mark
in terms of accuracy and if we are wrong it is only by a few hundred dollars
and this does not significantly change our conclusions. MSRPs are significantly
lower in Canada than in the U.S.

The first question/issue
that needs to be addressed is WHY? How is it possible that the OEMs would actually
set their prices so low? I do not fully understand this, but I believe the primary
reason is that consumers in Canada just can’t afford to pay higher prices. The
Canadian market is also super competitive amongst the OEMs and this leads to
lower prices, but I have a hard time believing the OEMs are more competitive
with each other in Canadathan in the U.S.

The primary reason must
be at the consumer level in Canada and we know the Canadian consumer is very
disadvantaged relative to U.S. consumers. Canadian consumers have a higher personal
tax burden than American consumers. The differences are even more marked with
higher income consumers who are the prime buyers of new vehicles. Most lower
where governments have targeted tax breaks, purchase used vehicles, not new

Canadian consumers are also
more conservative than Americans with their vehicle purchases. The top selling
vehicles each year in Canada are compact cars versus the intermediate sized
cars sold in the U.S. On a market-share basis we purchase almost twice as many
mini-vans and about half as many sport utility vehicles. So vehicle companies
are forced to be more competitive in this market.

Remember, this analysis
is at the MSRP level. Actual transaction prices in Canada (ie: the price in
the driveway) are closer to U.S. transaction prices because Canadian vehicles
are highly taxed. Basic GST and PST average 15 percent or higher in most provinces
in Canada compared to under 10 percent across most states in the U.S. Canada
also has a plethora of additional, and I believe ineffectual taxes in many provinces,
such as the air conditioning tax, a tire tax, a battery tax, a fuel economy
tax, a luxury vehicle tax, etc. The total tax load on a vehicle in Canada could
be as much as 10 to 12 percent higher than in the U.S., so most of the MSRP
advantage provided by the OEMs is stolen by government. Combine these higher
vehicle taxes together with lower take home pay, due to higher income taxes,
and this translates into the difference in affordability between the two markets.

These price differences
lead to a discussion of a number of very serious issues.

  1. The WTO Decision
    on the Autopact – The Autopact is currently being challenged by the
    WTO. The argument of the importers is that higher tariffs have resulted
    in higher vehicle prices in Canada. This has lead to calls to eliminate
    the tariff on new vehicles for the benefit of consumers. The theory
    is that since there is a 6.1 percent tariff on some imported vehicles,
    this allows the Autopact members to “price to the tariff”. This MSRP
    analysis calls into question this theory. If vehicle prices are already
    4 to as much as 21 percent lower in Canada depending on the vehicle
    segment, it is hard to believe that eliminating the tariff would lead
    to even lower prices for consumers. The vehicle companies almost certainly
    must be selling many vehicles at or near their production costs. A more
    logical response to a lower tariff would be a restoration of their profit
    margins rather than significantly lower prices for consumers. To be
    sure, lower tariffs would have some positive impact for the consumer,
    but probably not to the degree anticipated by some groups. In order
    to be more definitive on this it would be necessary to do a detailed
    technical analysis of price elasticity in the vehicle markets. Giving
    up vehicle tariffs would be a major concession by the Federal Government
    and I would hope that they would extract major investment and or sourcing
    commitments or tariff concessions in our export markets as a part of
    the process. In order to eliminate the tariff on original equipment
    parts Honda and Toyota committed to major investments. What is a reduction
    in vehicle tariffs worth? If they were able to get a better profit margin
    on their vehicles then you would think a tariff concession would be
    worth quite a bit.
  2. Dealer Profit Margins
    – Dealers are constantly complaining that their new vehicle margins
    are being squeezed by their OEMs. But with these price levels the OEMs’
    profit margins must also be equally squeezed if not more so. Quite frankly,
    the OEMs just do not have the ability to provide better dealer margins.
    This is consumer driven, not some sort of corporate conspiracy against
    their dealer body. You can’t share what’s not there.
  3. Vehicle Allocations
    – One of the hidden jobs of each vehicle company President is to fight
    with their head offices for vehicle allocation for Canada. Hot vehicles
    are very difficult to get at any time, but I believe this is more so
    in Canada than in the U.S. This problem however, extends across the
    whole range of products. Given these MSRPs, most vehicles in Canada
    would yield $2,000 to $4,000 less in marginal profit than in the U.S.
    Then why sell them here? As ludicrous as this proposition sounds, if
    all the vehicles sold in Canada were sold in the U.S. market instead,
    then the OEMs would have yielded $5 billion more profit. The OEMs have
    to support their brand identity, their dealer body and their market
    positions in Canada, so they have to continue to participate in this
    market but they do this at a very high cost. This is not well understood
    by most dealers and consumers.
  4. Grey Marketing
    of New Vehicles – We constantly hear stories of dealers who are accused
    of selling new vehicles to the U.S. in violation of their franchise
    agreements. Indeed, every OEM has strict rules against this practice
    since it causes severe problems with warranty and vehicle recalls, as
    well as government regulations protecting consumers. Why do some dealers
    still try to do this? Well, as can be seen in our pricing analysis,
    the economic incentive is very significant. There are vehicles in Canada
    that would yield $7,000 to $8,000 additional profits if sold to a U.S.
    consumer through a U.S. dealer instead of a Canadian consumer. That’s
    an incentive that many can’t resist.
  5. Used Vehicle Prices
    / Exports – Canadian dealers complain about Americans coming to Canadian
    auctions and outbidding local dealers for prime used vehicles. Well,
    if new vehicle prices are so much lower then it follows that used vehicle
    prices also must be much lower since they are substitute goods in the
    eyes of many consumers. Again, there is a significant economic advantage
    to exporting our used vehicles into the U.S. market. This practice is
    also less of a problem for the OEMs than the similar practice with new
    vehicles. I personally think the vehicle companies and their dealers
    should be more pro-active exporting used vehicles. It can be very profitable
    and helps address some of the problems related to the volume of off-lease
    vehicles entering the Canadian market. There are, however, warranty,
    recall and regulatory issues that would need to be addressed. I suspect
    the OEMs are not aggressively doing this since it makes the off-lease
    volume issue worse for their parent company in the U.S.
  6. High Vehicle Taxes
    in Canada – As mentioned earlier, almost all of the MSRP advantage in
    Canada is gobbled up by higher taxes. One in seven jobs in Canada are
    related directly and indirectly to the automotive sector. The jobs are
    totally dependant on consumers buying and owning vehicles. Does the
    government not understand that higher vehicle taxes result in less vehicle
    purchases and less ownership and are therefore a serious detriment to
    the economy? Canada was the only market in the entire world (over 60
    countries analyzed) where consumers purchased fewer vehicles in the
    decade of the 1990s than the decade of the 1980s. The primary reason
    was higher taxes. Canadian politicians can thank the American consumers
    for buying Canadian built vehicles and keeping thousands of Canadians
    at work. It sure wasn’t the Canadian consumer who has kept these auto
    workers employed. But we can’t count on the U.S. market forever. We
    need a lower tax on vehicles in this country.
  7. Consumer Perceptions
    of Dealer Profits – Most Canadian consumers are highly influenced by
    American media and trends south of the border. For instance, they read
    about thousands of dollars which can be saved by buying a vehicle via
    the Internet. But most of these stories are U.S. examples and in the
    U.S., prices are much higher than in Canada which allows for more discounting.
    Consumers believe similar savings are available in Canada but this analysis
    indicates this may not be possible. We know that one of the most popular
    websites visited by Canadian consumers is Kelley Blue Book (
    which provides both MSRP and dealer invoice pricing. But this is a U.S.
    website with all prices in U.S., not Canadian dollars. This analysis
    lends weight to those arguing that Canadian dealer invoices should be
    available “on-line” since the price differentials between countries
    are so significant and making more pricing data available “on-line”
    would eliminate some of this confusion.
  8. Affordability of
    Canadian Specific Vehicles – In the past there were a number of vehicles
    made only for the Canadian market. Examples would be the Mazda MX3 and
    Precidia, the Nissan Micra, Toyota Tercel, etc. With these lower MSRP’s
    there is just no profit in these cars unless the OEM’s can also sell
    them in the U.S. as well. Lower MSRPs ultimately means the demise of
    ‘Made for Canada’ vehicles.

I started out by discussing affordability issues facing consumers. This analysis
leads me to believe that we should start to look at affordability through a different
light. Clearly, consumers and other critics of the auto sector who believe the
affordability problem rests with the vehicle companies are wrong. The current
problem rests with the government not the OEMs.

In addition, there is a
need for more availabilty of data and information which would facilitate better
analysis and a better understanding of issues. This is particularily true at
the dealer level where there is a trend toward more dealer-factory confrontations
and much of this confrontation is based on perception of issues rather than
solid analysis of issues.

DesRosiers is president of DesRosiers Automotive Consultants (DAC), Canada’s
leading automotive sector consulting firm, and the only strategic consulting
group in the country focusing exclusively on automotive issues. Services
provided by DAC include strategic consulting, consumer market research,
and automotive information services.

For further
information please contact:
DesRosiers Automotive Consultants Inc.
100 Mural Street, Suite 102
Richmond Hill, Ontario
Canada, L4B 1J3
p: 905.881.0400
f: 905.881.7456