Can we learn a bit about the future of the automotive industry from lessons of the past? The recession of 2008 could tell us a lot about what to expect as the automotive industry looks to rebuild. Currently, automotive sales across luxury and non-luxury segments are up (compared to May 2020). Nevertheless, what could the future hold as more states seem to be experiencing a spike in cases, and the second wave of potential business shutdowns loom?
Here are some takeaways from the last economic disruption and the factors that could tell us what to expect.
Rising Oil Prices Vs. Low Gas Costs
The 2008 and 2009 recession was a perfect storm of unfortunate developments for the automotive industry. While the economy overall declined, other factors impacted car sales. A significant problem was the rise in oil prices. Before the oil market collapse, oil prices rose by 50 percent. This development had a residual impact on the increase in gas prices. Today, things are a bit different. AAA is predicting summer gas prices that are the cheapest since 2016. While COVID-19 is definitely impacting the sale of cars, additional factors like this may not be a factor as dealerships and OEMs rebuild.
The Disastrous Auto Loan Situation of 2008 and 2009
Any financial disruption typically brings about a change in how many financial institutions approve loan applications. In 2008, the situation was much dire than today. Research by U.S. Federal Reserve Board members found that there was a freeze in credit markets that prevented automakers from financing loans and leases to customers through dealers. With customers lacking the cash or ability to receive a loan, even those who needed a car couldn’t get one. In 2020, things are different. While loans may not be as easy to come by due to some economic stress, customers can still acquire auto loans. Therefore, the COVID-19 outbreak will likely not be defined by the same internal financial barriers as 2008. This one will be impacted by external causes like unemployment and potential business closures due to the virus.
Projections Indicated Slowdowns in Both Situations
For the past few years, automobile sales have been the highest they have been in decades. Many automotive industry analysts projected that the automotive industry would experience a slowdown in sales in 2020 and 2021 before COVID-19 was a factor. The same thing occurred prior to 2008 and 2009. The automotive sector will experience natural ebbs and flows. Still, there will always be a new generation of buyers and individuals that need to replace their vehicles, which happened in the years after 2009. So, even if slowdowns—in addition to significant declines—occur, the market will rebound. The only question will be: How long is the recovery?
The Branding Problem of 2009
Again, 2008 had a variety of contributing factors that led to a 40 percent decline in vehicle sales. The automotive industry bailouts did not help the brand reputation of General Motors and Chrysler. The brand loyalty of both significantly declined. In a time when unemployment was 7.2 percent in 2008, accompanied by falling wages, many Americans felt that massive corporate bailouts were inappropriate. Today, automakers are not dealing with the brand loyalty issues they experienced a decade ago. Many are using this opportunity to offer financial assistance and more favorable lease terms for customers. If anything, the COVID-19 is helping to strengthen customer and automaker relationships.
What Will It Take for the Auto Industry to Recover From This COVID-19 Outbreak?
There are a variety of factors that are different this time around. Currently, consumers are still purchasing vehicles, where sales took a steep dive in 2008. Additionally, consumers were driving cars for much longer—which led to programs like Cash for Clunkers. Also, they were driving smaller vehicles to manage rising gas prices.
Today, gas prices are not much of an issue, and consumers are not as resistant to purchasing from domestic brands as they were in 2008 and 2009. However, the stakes are still high. The economic outlook of the automotive industry doesn’t just depend on job creation or wage increases. Instead, the presence of COVID-19 is running the show.
This will require dealers to be creative in how they address the situation:
- Automakers and dealers may have to rely on new and innovative automotive trends to engage consumers. So, developments like the further expansion of electric and self-driving cars could play a huge part in the industry’s future.
- Smaller vehicles may again come front and center. In 2008 and 2009, many people went back to their compact sedans as they were less expensive to fuel. Today, consumers are going to be price-sensitive, so lower-priced vehicles—many of which are typically smaller in size, maybe a preference. This price-sensitivity may also require more discounts and incentives to get newer and larger vehicles off the lot.
- Online sales will be critical. As many have predicted, business reopenings will likely start and stop in phases. This situation means that dealerships will have to keep things like online sales, service pick-ups, and vehicle drop-offs a staple of their customer engagement strategies.
Like with any disruption, things will bounce back. People will always need transportation, and whether it’s the recession of 2008 or the coronavirus crisis, sales will rise again.
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This has been a JBF Business Media production.