Covid-19’s impact on the car market will be profound, explains David Crawford, chief executive officer of the Motor Industry Association, which speaks for new vehicle distributors.

COVID-19 has had, predictably, a significant impact on the new vehicle market in New Zealand, and indeed the rest of the world.

What does the future look like for the sale of new cars in New Zealand? The answer to that question lies in understanding what is happening to the rest of New Zealand’s economy.

Much has already been written about Covid-19, its health impact, and the impact of our response to the pandemic on our economy. Nonetheless, there remains considerable uncertainty on the quantum of the yet to be felt full economic impact

There has also been extensive commentary in recent days on whether we should give equal weighting to health and economic impacts or whether we should, as we are currently doing, continue to prioritise health. Internationally the cost to human life is already too high, and some of the numbers being discussed of the total mortality rate as the pandemic progresses is horrifying to say the least.

Our Prime Minister has been crystal clear in her views, we do not want New Zealand to follow the same infection path of what has happened in other parts of the world. She believes, as I do, that the long term prioritising protection of health is our economic response.

The pathway of how we got to a level 4 lockdown is nothing like anything we have known in our lifetimes. Just as the pathway to how we got to where we are today is unfamiliar territory, so too will be the slow and difficult period of recovery.

Planning for recovery has begun, but there are a lot of uncertainties. Even though there is a target date of 23 April, currently we do not know when New Zealand will move out of alert level 4.

When we do move out of alert level 4 questions remain on if we can avoid returning to that status at some future point. We do not know if the Government’s eradication plan will work and there is the big unknown of how well other countries will fare in their efforts to containing the novel corona virus.

We do not know the details on what long term border restrictions will look like and then there is the question of how soon a vaccine will become available.

We all remember the global financial crisis, but this is different. Fundamentally different.

In the motor vehicle sector, within a matter of days we went from business as usual to shutting down all non-essential services with only an on-call capability for parts and repairs to essential vehicles.

Sales of new vehicles for the month of March are down about 37 percent on March 2019, and sales of new vehicles for April might only amount to 10-15 oercent of April 2019 sales, and then only if we move out of alert level 4 at some point before the end of the month.

Questions remain on what sales will look like from May onwards. This will depend on how quickly we as a country can break the chain of infection and begin our recovery to a new normal. Additionally, even if New Zealand can break the chain of infection, we will need to keep our borders closed until the rest of the world can do the same, or a vaccine is found.

Whichever way you look at it, recovery is going to be slow, fragmented and painful.

To their credit, distributors and franchised dealers quickly responded to the Government’s call to shut down non-essential parts of their businesses. Staff were set up to work from home and contingency plans rapidly implemented.

Vehicle distributors and their franchised dealer network are already busy planning what changes need to be made to survive. Like any business they need to consider a range of fundamental factors. Being a capital intensive type of business, cashflow is critical to keep afloat. Knowing how much cash they have on hand and understanding when they might reasonably expect cash to come in again is occupying their thoughts.

So too are questions around their ability to reduce costs and what other business strategies they might be able to put in place to start the cash flowing again. The way in which they sell vehicles might also change.

For some it has also meant businesses have had to already downsize. The painful decision to let go of staff is not something anyone wants to do, and more importantly have it done to you. We know tougher decisions will need to be made in coming months.

The longer it takes to control this pandemic the more severe the economic impact on our overall economy. The tourism and hospitality sectors are testament to how quickly things can change, they have been decimated and how many will survive is an unknown. Each passing day we hear news of other sectors downsizing or collapsing

Getting a consensus of views from economists is something we sometimes joke about. But a quick read of media still operating reveals a common thread in their thinking.

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Economist Cameron Bagrie noted: “The only thing we can safely say is this economic hit is going to be the biggest I've ever seen in my working life. I've been through the Asian crisis, the GFC and post-1987. This is going to make them look like a walk in the park.”

When presenting to MP’s on Parliaments Covid-19 select committee, economist Shamubeel Eaqub echoed Bagrie’s thoughts and went one step further, arguing we needed to think lockdown, purgatory and new normal.

So, what does this all mean for the new vehicle market?

The single most critical factor that drives the New Zealand new vehicle market is the health of our economy. For our sector to recover we need the rest of New Zealand to recover. For the rest of New Zealand to recover we need to firstly get on top of controlling the novel corona virus, stop further importation of virus vectors entering our country and then get our businesses open again.

When we went through the global financial crisis, the new vehicle market was hit hard. Sales fell from 102,470 vehicles in 2007 to 70,048 vehicles in 2009, a 32 percent drop. It took five years to recover.

Early estimates are that the 2020 sales year might fall to somewhere between 90,000 to 100,000 vehicles compared to just under 155,000 in 2019. If that eventuates, we will see the market drop around 40 percent. Some predicting the market might fall around 50 percent, it depends on how soon the borders can reopen and businesses re-establish themselves. It will also depend and whether people and businesses have money to renew their vehicles.

The outlook for sales in May through to August looks very tight. We are not expecting buyers to flood back into the market, their attention is rightfully elsewhere.

This suggests New Zealand needs an economic recovery plan. While the MIA applauds the current economic stimuli made by our Government, I have not yet seen a well thought out economic recovery plan.

If the Government can ease parts of New Zealand back into circulation, so too can the new car sector begin to generate revenue again. No business can survive for long without revenue. Key to our ongoing survival will be initiatives aimed at easing debt, retention of employees and an early and sustained return to positive cash flow.