Without more investment, it will run out of gas.
There’s a troubling development in Canada’s automotive manufacturing sector that’s bringing into question the longer-term health of an industry that Canada (especially Ontario) depends on as a major contributor to overall economic health.
In June, industry analysts presenting at the Automotive Parts Manufacturer’s Association (APMA) conference in Windsor, Ont. pleasantly proclaimed it was ‘a good time to be in the auto sector.’
Sure, auto sales are booming at record levels and parts manufacturers are working at capacity. Business has certainly picked up post-recession to levels that will sustain jobs and meagre growth in the short-term. But vehicle and parts manufacturing aren’t safe, nor is the sector sustainable in its present form, mostly because of Canada’s shrinking industry investment, which is quickly eroding Canada’s share of North American light vehicle production.
Across the entire industry, investment levels have dropped by more than 50%, according to a report by Richmond Hill, Ont.-based DesRosiers Automotive Consultants, and production is down as vehicle sales are rising.
Statistics Canada data compiled by DesRosiers shows that automakers invested just $767 million in Canada last year. That’s only 9% of the their investment between US and Canadian operations, and it’s the first time that number has been in the single digits since 1990. As recently as 2007, investment stood at 40%.
“This is the best recovery in the automotive sector in decades, and Canada, from a manufacturing perspective, isn’t participating,” auto analyst Dennis DesRosiers told the Globe and Mail in June.
The sector on a global scale is significantly healthier than it was a few years ago. The global vehicles sales outlook for 2013 is 85 million units, according to IRN Automotive, an industry research firm based in Grand Rapids, Mich. North American production will top 17.5 million units, of which Canada will be responsible for 2.5 million, while Mexico will build 3 million vehicles this year.
In Canada, vehicle parts manufacturers are expected to post pre-tax profits of $1.16 billion in 2013, down more than 16% from 2012 levels and production will edge up a meagre 0.1% due to weaker demand, according to the Conference Board of Canada. The ongoing shift to move vehicle assembly away from Ontario and the US Midwest will also continue to threaten the long-term growth and stability of Canada’s auto sector.
Light vehicle production, despite rebounding strongly after the recession, fell 7% during the first half of this year, which is a glaring contrast to gains seen by the US (6%) and Mexico (5%), according to a TD Economics note by economist Dina Ignjatovic.
“This puts Canada’s auto sector on track to record its largest annual decline outside a recessionary year going back to 1990,” she wrote in the Aug. 16 note.
Production is down at GM (-11.5%), Chrysler (-6.1%) and Toyota (-11.2%) over 2012. Only Ford (3.1%) and Honda (0.1%) increased production between January and June 2013. The result is Canada’s share of North American production stands at 14.6%, relative to a 16.6% average between 2000 to 2010, according to the TD report.
Toyota is the only automaker that has recently expanded capacity in Canada. Its Cambridge, Ont. assembly plant has produced 178,000 vehicles in 2012, and another investment of $134 million that brought the company’s Lexus RH350 h luxury SUV to the plant will increase capacity to 200,000 in 2013.