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 (kbb.com)
   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.

Dennis
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.