ALG: Auto industry headed for recovery after COVID collapse

As America heads into Thanksgiving week and comes to the end of this roller-coaster year of COVID-19 disruption, ALG—the forecaster of residual values across the auto industry—took a look back at 2020 and what shape the business is in going forward.

ALG's analysis may surprise many.

The industry proved its resilience, and it caught a few breaks. Even though full-year sales will show the steepest drop since the carnage of 2009, the industry is already well on its way back to normalcy, said Morgan Hansen, ALG's vice president of data science. One way things are already normal: "People are out there buying, because they can."

From a bullish outlook to a heart-stopping shutdown to a shockingly fast recovery, 2020 was full of surprises.

Auto market trackers ALG started the year with a more optimistic 2020 sales projection than most—but also with what it warned was a 30 percent risk of recession.

When COVID-19 took off in March—idling assembly plants and shuttering many showrooms—ALG slashed its previous outlook to a level that would be the lowest since 2011, warning of the sharpest one-year sales drop since the start of World War II. Maintaining even that reduced level of demand was going to take significantly bigger incentives, ALG warned.

Luckily, it didn't turn out that bad.

ALG now projects the year will finish at around 14.5 million sales, driven back up largely by activity on the more-lucrative retail side, with higher transaction prices and only relatively modest incentive growth.Also helping to bring the numbers back: the rapid rise of online retailing.

The notion of selling cars online had been discussed since the early days of the internet. But when the pandemic hit, it was still little more than a theoretical construct for many dealers. That suddenly changed this year when retailers weren't allowed to have customers in the showrooms.

"Those types of innovations really shored up the possibility for customers to purchase vehicles without the concern of, you know, coronavirus and exposure," said Eric Lyman, ALG's chief industry analyst.

Peculiarities of the initial recovery also worked in favor of the auto industry. A so-called K-shaped recovery benefits certain segments while others suffer. Auto makers and their suppliers figured out how to operate factories within the bounds of coronavirus protocols, and dealers implemented or upgraded digital retailing and remote service while many worked from home.

Just as important: They had customers. Affluent buyers of new and nearly new vehicles were hurt less, in general, than the rest of the population. So while unemployment jumped to levels that typically crush auto demand, Lyman said, "the customers that purchase those [new and late-model] vehicles were less impacted than some of the lower-income workers."

Heartened by a booming stock market, supplemented by stimulus payments and flush from spending less on vacations and entertainment, new-vehicle shoppers had enough available discretionary income that retail sales topped last year's totals in August and September. And those in the market used incentives to opt for better-equipped models at higher prices. In that environment, luxury brands such as Tesla and Lamborghini thrived during the year.

With new coronavirus infection cases soaring past 100,000 a day, the risks of retail shutdowns and manufacturing short- comings are still very real, especially over the next six to nine months. But after that, ALG projects "a period of exceptional growth in the next few years coming out of the recession," said Kristen Lanzavecchia, senior manager for industry insights.

That should benefit industry residual values as the market moves back toward normal volumes from fleet customers as well as retail shoppers.

The future is still unclear. From a big-picture perspective, there certainly are some commuters whose need for a vehicle has been significantly reduced with the rise of working from home and "the Zoom revolution."

But as workers question the long-term need to work in an inner-city office, more are moving to the suburbs, where personal vehicles are a must. And more families are opting for road trip vacations instead of flying, which puts greater priority on a comfortable vehicle, even if it's rarely used.

The shift away from public transportation also has increased demand for personal vehicles. In all, it's probably a wash, said ALG's data scientist Morgan Hansen. And before long, industry sales will recover and resume growth based on births, long lives and immigration."The impacts from COVID are kind of canceling each other out," Hansen said. "And we expect the market to normalize in the next years, to kind of get back to a normal, steady state."

But one COVID-19 change is here to stay: digital retail. The in-store-only dealer "is probably going to suffer and struggle a little bit, without adding that extra layer on top," Hansen said.

Looking at what gets sold, Hansen projects that the shift away from sedans and coupes has now "rightsized," or fully adjusted. Where more substantial market segment changes will occur is in the rise of electric vehicles. ALG projects EV sales will double—although from a small baseline—over the next three years with the introduction of more and better choices.

"The electric segment is going to grow and evolve," he said, "but it's not necessarily going to be disrupting the kind of traditional (internal combustion engine) segments as of yet."