Automotive sector in Canada 2019: Fresh Start
- February 8, 2019
Cautious optimism for growth prevails in Canada's automotive manufacturing sector
It’s easy to fall into a doom and gloom perspective reading the latest headlines on the future of Canada’s automotive manufacturing sector—particularly the recent announcement about GM closing its Oshawa, ON, assembly plant, which prompted media to throw the automotive sector under a magnifying glass. Certainly, if you do a deep dive into our manufacturing and export numbers, it’s clear that automotive is lagging, or in some cases has fallen completely flat in comparison to previous decades. And then take into consideration regulatory burdens, disruptive tariffs and overall manufacturing costs in Canada. Of course one would deduce that the
future is bleak.
But according to industry associations, while there are challenges, there is actually nothing grim about our manufacturing future. In fact, it’s robust and booming.
Canadian Manufacturers and Exporters (CME) recently published Industries 2030 Ontario, a comprehensive action plan that delves into the state of the industry across the country and solutions that will address major challenges we are faced with, such as reducing the cost of doing business, the lack of skilled workers, and programs and policies to assist companies with future growth.
Ontario is clearly a major focus as it has always been a manufacturing hub for the Canadian economy and the most concentrated jurisdiction for automotive manufacturers—Canada’s largest exporting sector.
The action plan states that in 2017, Ontario’s manufacturing sales hit a record high of more than $300 billion, an output driven by motor vehicles and parts, food products, and chemicals—three sectors that account for more than 51 per cent of all manufacturing output in the province for that year.
As extraordinary as that sales number might be, the underlying issue is that Ontario has been the worst performer in the country for both output and export growth for years, according to the CME’s action plan, and the province’s manufacturing sales growth was three times slower than the national average.
Dennis Darby, president of CME, says that what has been stalling any sort of growth momentum has been a lack of capital investment due to uncertainty around an unstable trade agreement with our biggest customer, our neighbours south of the border.
“The one statistic to take away in terms of the manufacturing sector in Canada is that it’s been woefully underinvested in for almost the last decade. While our dollar output of manufacturing has gone up, our capital investment has not kept pace, which we need to improve productivity and competitiveness. We’ve also been running fairly significant manufacturing trade deficits, particularly with the U.S. And the fact that the U.S. economy has been strong has sort of masked the fact that we really haven’t been improving our position on an absolute basis. We’ve been carried along because the U.S. can buy anything we can make, but the risk is always that if the U.S. slows down, we do too.”
Our automotive manufacturing sector is also challenged with being a very cyclical industry. It will always be faced with navigating an ever changing marketplace, adopting new technologies, keeping up with customer demands, and a potential softening of the market.
“The auto industry in Canada is still a very strong and viable industry,” says Mark Nantais, president of the Canadian Vehicle Manufacturers’ Association.
“Not withstanding the recent announcement from GM, we still have plants that are some of the most capable, efficient, high quality, award winning facilities. With the inclusion of the GM plant, there are eight plants, plus engine transmission and parts component plants producing top-notch quality products. Roughly 99 per cent of all vehicle and parts production is concentrated in Ontario and I think that’s going to remain the case for the foreseeable future.
“We’ve had roughly 10 years of year-over-year growth, but now we’re seeing signs of the market plateauing or softening a little bit. That’s part of the normal cycle. If there’s talk about interest rates going up, it has a negative influence on consumers purchasing rather expensive products,” continues Nantais. “The key thing for the future is in adapting to that [changing marketplace] and looking at new products that consumers want and demand. And then we have, of course, the new rather disruptive technologies in the auto industry—connected vehicles, electric vehicles and autonomous vehicle technology. That’s where we’re at as an industry and there are some real exciting opportunities as we go forward.”
The days of the sedan are quickly diminishing. Today’s consumers are favouring crossover and sport utility vehicles, and trucks, according to Nantais. And as consumers become more informed about electric vehicles as a transportation choice that’s cleaner and will ultimately cost less in terms of operation, the industry is starting to see an uptick in the market.
For the automotive aftermarket sector, president of the Automotive Industries Association (AIA) JF Champagne says “we continue to have great manufacturers that are based here, supporting the aftermarket. And yes the recent announcement from GM is concerning for everyone in the business and will have an impact on parts suppliers into the supply chain. We do want to have a dominant car name that’s supportive of manufacturing and hopefully we will continue to see actions by government such as innovation funds that will stimulate investment in manufacturing and help maintain what we currently have.”
Champagne admits there is a big buzz in Canada about global conversations regarding electric and autonomous vehicles and the reduction of required parts needed in vehicles. “But all of those macro economics are really further down the road,” he says. “The average age of vehicles on the road in Canada continues to grow and the demand on the aftermarket supply chain is growing and vibrant. And our latest study placed the entire aftermarket as a $21.6 billion sector. We did that same outlook study two years ago and we are actually outperforming our own forecast in terms of growth.”
The good, the bad and the tariffs
With a new trade agreement finally signed between the U.S., Mexico and Canada, a level of much needed certainty has been restored for manufacturers. Now called the USMCA, the new agreement is essentially NAFTA 2.0.
“We were pleased with the conclusion of the negotiation and that Canada did as well as it did given the attitude of the U.S. administration going into it,” says Darby. “We didn’t lose access to the U.S. market and there are tighter rules of origin on auto parts, which we think is positive for Canada because it leveled the playing field between the three countries. And there were a number of technical changes that came out of the trade deal that will be better for manufacturers, such as the commitment towards mutual recognition.”
Nantais agrees. “The government of Canada had done an exemplary job of reaching out to the automotive industry and consulting with them throughout the negotiations. Preserving the three-country approach [in the new trade agreement] is really critical to the global competitiveness of the integrated automotive supply chain.”
Indeed, there are some higher levels of content that the automotive industry will have to achieve. “But I think companies understand that and are working their way through the details, how that will impact the supply chain and contracts, as well as the administrative side of the agreement and how they can comply with that,” says Nantais. “The most important thing is retaining that high integration of our supply chain, which makes us more competitive overall as a trade block for the industry, both suppliers and vehicle manufacturers.”
That’s not to say that Canada got everything it wanted. There are still provisions, or rather a very limited list of professionals that can access the U.S. border for installations or equipment repair. “The U.S. wouldn’t agree to change that list, so it will still be a stumbling block,” says Darby.
And, of course, the steel and aluminum tariffs are still in place.
“Our view is that when you have an agreement like the one we just signed, there should be no tariffs on steel and aluminum, nor should there be tariffs on vehicles themselves,” says Nantais.
“We believe these tariffs are illegal and inappropriate. There’s no way Canada is a security threat to the U.S. And we’ve been carrying that message as hard as we can to the federal government,” says Darby.
Trade associations north and south of the border all agree. Such tariffs on steel and aluminum are just adding unnecessary cost for everyone, especially manufacturers that are often locked into a supply chain for certain sources of materials. And although Canada did apply a counter tariff on steel and aluminum coming in from other countries, Darby points out that this move has an inflationary affect on CME members depending on where they’re located in the country and if they have to source steel from offshore companies. “I’m not an economist, I am an engineer,” he says. “But I understand that whenever you start to apply tariffs, it starts to apply inflation, it raises prices for no good reason. This current situation is unsustainable.”
With the absence of an assured agreement, the only capital investment the CME has observed is Canadian companies investing in the U.S. “That’s not good, obviously, for our supply chain,” says Darby. “With the new agreement we’ve seen some lifting of that and there’s also been some tax treatment changes for capital in Canada.”
In the fall economic statement, the federal government announced that there will be quicker write-offs for manufacturers investing in new equipment as well as accelerated
write-offs on anything related to improved energy efficiencies and the reduction of GHG emissions. And there is government funding for technology Super Clusters to aid Canadian companies in becoming globally competitive.
Manufacturers know they need new technology and that Industry 4.0 is the way of the future. The CME has observed that it’s not that the money isn’t there, but rather manufacturers have been waiting, and questioning what to do. But what the industry really needs is a healthy business environment and a tax regime that will encourage them to invest. What’s also top of mind, and a major focus of the CME, CVMA and AIA, is lowering the cost of doing business—Canada is obviously a high cost jurisdiction in terms of energy and labour compared to the global market—and attracting the next generation of skilled workers.
The automotive sector, and industry in general, is at a very important launch point to play a significant role in the global market. There’s no question that there will be headwinds to contend with moving forward. And while industry associations are launching innovative programs to aid manufacturers, they are also leaning heavily on the government to rethink the education system to attract the next generation of skilled workers and help lower costs. Besides, the cost of doing business will ultimately be the deciding factor for companies building or expanding in Canada. Darby says, “I think the government has a really tough role. And I don’t envy them
for a minute.” SMT