Where will the savings be spent?
We are not really any the wiser about what shape the economic recovery will be after the worst effects of the pandemic have passed. I was obviously premature just under a year ago talking about the recovery from the pandemic, and the ‘elephant in the room’ being the mood of the public when released from lockdown, but the question remains valid even whilst lockdowns and restrictions continue.
Economic data suggests that consumers are sitting on record savings – a report in the Financial Times yesterday, citing Moody’s, estimated that the additional level of savings since the pandemic began is around US$5.4 trillion which is by any measure a lot of money, but apparently equates to 6% of global Gross Domestic Product. We all understand that the distribution of those savings is very uneven, and some people have been particularly badly affected by the restrictions. However, our focus is on the car industry, and in general people in zero hour contracts and less secure employment are not the people who buy cars – new or used – from dealerships, or take them there for service. I think it is therefore reasonable to assume that the customers the industry focuses on most are generally sitting on unplanned savings, and continuing restrictions on how and where they can spend them.
Some will doubtless decide to keep the savings, perhaps allowing them to pull their retirement forward or help their children who may have been more affected by the pandemic. Economic data from China for the first quarter which was released last week, showed an 18% recovery year-on-year (from the 2020 base when China was suffering most from Covid), but also 6% up on two years ago. However, within that recovery the mix of spending has changed. Spend on eating out has barely changed, domestic travel is still below the 2019 levels, but there is growth in buying goods – houses, cars, furnishings and electronics goods. We do not know how real a measure that is of true demand though, as industrial production – including but not limited to cars – has been limited by supply chain constraints. In cars we are aware of the specific issues around semi-conductor shortages, but along with other supply and capacity constraints this resulted in auto production in the US being up by less than 3% whilst sales were up 15%. Dealer inventories are down, and in a stock-led sales environment, that will start to restrict sales volumes, even if profits should be stronger.
Coming closer to home, concerns and restrictions around international travel will logically lead to more people being forced to holiday in their home countries or using the car rather than a plane to get to a foreign destination. Many people will choose to travel more locally – whether it is part of a return to office working, or to get to entertainment, events and social venues that have been closed off for so long. It therefore seems fair to me to assume that there will be a strong bounce back for new car sales, and this will be mirrored in the used car market, supported by those excess savings. More travel means more maintenance and more collisions, so although the market has been depressed for far longer than any of us anticipated a year ago, and we still do not really know whether we are heading out of it by the end of 2021, it does not look like this will be a global financial crisis multi-year event.
The key challenge to me is that we should as an industry seek to take advantage of that recovery when it comes, not go back to the old ways of over-production, discounting and running the business in the way it’s always been done because that is what we know. The last year and the coming months have presented an opportunity for innovation, and much of that has been successful in meeting customer demands more effectively, for the benefit of all parties. If we do rise to the challenge, consumers will be attracted to spend some of their additional savings within the car sector, and we won’t be ‘busy fools’ selling 20% or 30% more cars for no additional profit.