Auto industry sees ongoing surge, may not last suggests report

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In light of the ongoing bleak news about Alberta’s oil and gas industry, the automotive industry’s positive performance is welcome news for Canada’s manufacturing sector. Recent reports about recording breaking sales for Toyota Canada and Mercedes Benz and record results for Linamar lend support to this statement. However, the positive short-term results may not last, suggests a report from The Conference Board of Canada.

Toyota Canada hit a new February record for sales selling 14,284 Scion and Lexus vehicles in that month, up 9.9 per cent compared to 2015. This follows a new January record.

Mercedes-Benz Canada also recorded its best February on record with a sales increase of 28.7 per cent compared to February 2015. Total year-to-date sales for the company are up 23.1 per cent when compared to the same period last year.

Linamar announced on March 9 that it had achieved its fifth consecutive year of record results with a sales increase of 24 per cent over 2014, reaching a total of $5.2 billion. Its industrial segment experienced operating earnings increasing 42 per cent to $156.2 billion on a sales increase of 23 per cent, while Powertrain/Driveline sales and operating earnings growth was up 31 per cent to $440,8 million from 2014 on a sales increase of 24 per cent.

The good news though is being overshadowed by a report from The Conference Board of Canada that suggests the automotive industry is facing medium and longer term challenges.

The report says that thanks to record sales in both Canada and the United States and a declining Canadian dollar, industry profits in 2015 are estimated to have surged by 79 per cent to almost $2.5 billion and the industry’s pre-tax profit margin reached 4 per cent – the highest since 2000. However, the economic headwinds facing the Canadian economy are sufficient to ensure profits drop to $2 billion this year, and continue to decline steadily through 2020.

“Despite the strong short-term results, the Canadian auto assembly industry is struggling to grow,” says Michael Burt, director, Industrial Economic Trends. “Over the next five years, no growth in production is expected in Canada.

“While the impact of the Trans-Pacific Partnership (the TPP) agreement is still somewhat uncertain, it is expected to heighten competition for Canadian assemblers and parts manufacturers. The agreement calls for the elimination of tariffs on imported Japanese vehicles within five years of ratification, leading to enhanced competition in the saturated Canadian market. Although Canadian producers have not traditionally exported a lot to Asian countries, the TPP will also increase their market access to member countries, creating new opportunities.”

For vehicle manufacturers, tariffs on Japanese vehicles are to be eliminated within five years of ratification. In contrast, U.S. tariffs on Japanese vehicles, although higher, would not be eliminated fully for 25 years.

Parts manufacturers currently operate under provisions that require vehicles to contain at least 62.5 per cent of their content from the three countries—Canada, Mexico or the U.S. Under the TPP, that share will drop to 45 per cent, 40 per cent or even 35 per cent, depending on the parts in question. These provisions increase the likelihood that more imported parts will make their way into North American supply chains.

Low petroleum prices are contributing to rising demand for trucks and crossover vehicles at the expense of passenger cars, which is a boost for Canadian-based assembly plants. Manufacturers are shifting car production to the Southern United States and Mexico, and retooling Canadian plants for truck and crossover assembly, which produce higher profits per vehicle.

As a whole, however, Canada is continuing to lose out on auto sector investment to the southern US and Mexico. Toyota is ending Corolla production in Canada and replacing it with the crossover RAV4. Although its lifespan has been extended, the Consolidated Line at General Motors’ Oshawa Assembly is now slated to close in 2017 and no replacement model has been identified. Labour negotiations in 2016 may play a key role in whether the Detroit Three automakers direct new models to Canadian plants.

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