Incentives lead to vehicles sales jump

TORONTO — Canadians are moving upscale in their car and truck buying as big incentives from the automakers prompt a shift to larger and more expensive vehicles.

TORONTO — Canadians are moving upscale in their car and truck buying as big incentives from the automakers prompt a shift to larger and more expensive vehicles.

Small cars traditionally dominate Canadian vehicle sales, but their share of the market has slumped to less than 29 per cent so far this year — the lowest level in more than a decade, according to the latest Global Auto Report from Scotiabank, released Monday.

That’s down from a peak of 35 per cent in 2008, when gasoline prices were $1.20 a litre, about 20 per cent higher than current levels.

Job creation — the key driver of vehicle demand — has strengthened in Canada recently to an average of 43,000 per month, roughly triple the pace of employment growth in early 2010.

“The key economic driver is what’s happening to employment growth, and what we’re seeing is that the Canadian job picture is a lot brighter than people were expecting even three or four months ago,” said Scotiabank economist Carlos Gomes, author of the report.

Meanwhile, higher incentives from most automakers have reduced new vehicle prices by more than five per cent since February.

However, these discounts have actually encouraged people to spend more money on vehicles, not less, as people buy bigger and more expensive vehicles, the report says.

New vehicle transaction prices are up five per cent so far this year, the largest increase since 1996. And even though data from Statistics Canada shows incentives cut new vehicle prices by one per cent in June, actual transaction prices jumped by nearly two per cent that month.

The report says incentives such as “employee pricing for everyone” boosted light truck sales 25 per cent above a year earlier in June and July to a record annual rate of 930,000 units.

Pickup trucks — with cash incentives of more than $9,000 on some models, or nearly a third of the list price — drove the surge, with sales up nearly 40 per cent so far this year.

Gomes attributed the incentives — which have soared in Canada while staying relatively steady in the United States — to “a fight for market share.”

The Canadian vehicle market has been very competitive as Ford and General Motors vie for the top sales spot. So far this year, Ford has been outselling GM, claiming more than 17 per cent of the Canadian market while GM has captured almost 16 per cent. To compete, GM has launched employee pricing and other incentives.

Generally, when one automaker introduces incentives, others are forced to follow suit to stay competitive.

Gomes said he expects these incentives to taper off as the automakers roll out their 2011 model vehicles in the fall.

“You’ve actually had incentives move steadily lower in the U.S. as companies have really attempted to become much more disciplined, and I think you’re likely to see that same kind of move into the Canadian market when the new model vehicles show up,” he said.

This will likely lead to a shift back to small cars as consumers once again look to save money, he added.

“What’s happening is people are realizing right now that maybe they can move up into something they thought was not affordable to them, and they’re taking the opportunity to do that,” Gomes said.

“Just like back in ’08 when energy prices forced everybody to move toward smaller vehicles, now we’re seeing the opposite, and I think when the market becomes more normal in nature, you’ll likely see roughly a third of all vehicles being these smaller cars, which is normal for the Canadian market.”

Overall, the report said Canadian sales advanced to an annualized 1.65 million units last month, lifting volumes at several automakers to the highest July on record.

It was the second monthly rebound in a row after a weak performance in May.

Scotia Economics said the recent improvement in sales has led it to raise its full-year 2010 Canadian sales forecast to 1.565 million units from 1.525 million, and Gomes said he expects a “small gain” next year as well.

Globally, car sales fell in July compared with a year ago in a significant slowdown from a 16 per cent surge in the first half of 2010.

The report said a “double-digit slump in Western Europe, due to the expiry of scrappage incentives, accounted for the fall-off.”

“However, outside of Europe, purchases have also started to moderate, with volumes advancing year-over-year by only nine per cent last month — the smallest gain since last summer.”