Despite Virus Car Sales Won’t Be As Bad As You Think; Here’s Why

When the U.S. new-car sales figures for March are released in a couple of days, you can expect them to be very, very ugly. Reflecting all the uncertainties revolving around the health crisis, global market research firm J.D. Power expects March retail sales to range somewhere between 669,000 and 948,000 units. That represents a 16% to 47% decline from the retail sales in March 2019. A slight shortfall versus 2019 was expected before the onset of the virus, but 14 to 39 percentage points of the predicted decline are directly attributable to the virus and its various effects.

A near-50% drop in sales would represent an automotive Armageddon and even a 16% drop would be difficult to swallow, but as we come to a close of what has been one of the most chaotic sales months in the history of the automobile industry, there remain some reasons for optimism. Yes, March 2020 will certainly go down in history for its disastrous mid-month sales slide. Yet the American auto industry could be much more resilient than these depressing forecasts would suggest.

The retail car business has not one but two aces up its sleeve. First, there is the historical fact cited by J.D. Power that the car industry has demonstrated a repeated ability to recoup sales lost due to short-term disruptions. Second, the used-car business could provide some welcome relief for franchised new-car dealers, providing cash flow and profits as global automakers get their production plants back into operation after shuttering them for health concerns. Strange as it might seem in these locked-down days, the vehicles that are not being built during the pandemic-caused factory shutdowns could well limit what might otherwise be booming car sales by year’s end.

“The auto industry has the potential to recover from the virus-related sales disruption,” Tyson Jominy, Vice President of Data and Analytics at J.D. Power wrote in a report the company shared with forbes.com. He also cautioned, “As with other industries, the extent of the recovery will be influenced by the general economic environment post-virus, which remains highly uncertain.”

To deal with some of the uncertainty, J.D. Power modeled near-term U.S. new-vehicle sales using the market conditions of China and that country’s recovery from the coronavirus epidemic as a baseline. After creating various scenarios that represented low-, medium-, and high-severity impacts, J.D. Power decided its medium-severity scenario is currently most likely to occur. It forecasts a 1.7-million unit retail sales loss between March and July. At the same time, the outlook is almost certain to change as the virus takes its course and government, vehicle manufacturer and car dealer responses are implemented.

Beyond the half-year mark, a rapid recovery seems in the cards with many first-half sales not being lost but simply postponed. Here’s one ray of hope: 1.8 million vehicle leases are due to expire between March and July of this year, and that gives some urgency to the market. Unlike car owners who can easily put off a new-car purchase for weeks or even months, lessees have to do something — either lease or buy a new vehicle or purchase the vehicle they are currently leasing. With almost one-third of new-vehicles being acquired via a lease, there is a large pool of consumers who are compelled to enter the car market in the short term.

In addition, the vehicle-replacement portion of the market was expected to be strong before the virus outbreak. While an economic downturn would almost certainly persuade some new-car intenders to put off their acquisition through the balance of the year, many more are expected to return to the market quickly after conditions stabilize.

In early February on the eve of the National Automobile Dealers Association annual convention in Las Vegas, Jonathan Banks, vice president and general manager for vehicle valuations at J.D. Power, said the industry was entering the “Golden Age of the Used Car.” Coronavirus threw a monkey wrench into that scenario, but as vehicle production ramps back up in the second half of the year revived used-car sales could buoy the fortunes of new-car dealers who otherwise might be supply-restrained.

At the same time, while there are real reasons for optimism, it would be foolish to minimize the fact that many Americans will have much lower 2020 incomes than they envisioned. The degree to which the just-enacted federal economic recovery efforts stave off rampant unemployment and supplement consumers’ incomes will largely determine whether the optimism regarding the immediate post-virus era is justified.

Taking all of this into consideration, Jominy wrote, “It is clear that our pre-virus outlook of 16.8 million [for calendar year 2020] is no longer attainable, with sales likely to fall in the range of 14 to 16 million units dependent upon the factors noted above.”

While sales of 14 million new cars and trucks won’t have any carmakers celebrating, that figure is a long way above the disastrous levels we saw in the Great Recession.