Canadian parts makers must think global in face of dwindling auto production at home

MISSISSAUGA, Ont.—The future of the automotive industry in Canada is bleak and parts makers need to take a global approach in order to not only thrive, but simply survive.

Speaking at the Automotive Parts Manufacturers’ Association (APMA) outlook conference hosted in conjunction with the Canadian Manufacturing Technology Show (CMTS) in Mississauga, Ont., analyst Joe McCabe painted a grim picture of the what the near future of the industry looks like.

According to McCabe, president of automotive forecasting and planning firm AutomotiveCompass LLC, 2.5 million light vehicles were made in Canada in 2012, ranking it ninth overall when stacked up against its global peers.

In less than six years, however, those numbers are projected to plummet, with McCabe “conservatively” predicting 1.8 million vehicles will be built here in 2019.

That’s a volume drop of more than 28 per cent, and pushes Canada out of the global top 10 of car building nations.

“Generally what we’ve seen is the (Canadian) labour cost, as an effect of exchange rate issues, makes Canada one of the most expensive countries in the world,” McCabe said. “That’s a story that everyone’s been talking about for years.

“But coupling that with … areas that are just as attractive in terms of production or manufacturing capability but lower in cost and labour, it has given a double-edged sword to the Canadian market.”

Long touted as the golden child of Canadian manufacturing, the sector is now hemorrhaging.

And while the state of the nation’s automotive sector may not come as a surprise to some, the numbers are still staggering.

It’s a rapid fall from grace, and, barring a sharp turn in the Loonie’s exchange rate or a change of heart on behalf of automakers, not much can be done to preserve the state of the industry that makes it such a key driver to the Canadian economy.

For parts makers, however, there is still opportunity for growth outside Canada, and it starts with globalization.

“Canadian parts manufacturers can’t control vehicle manufacturers leaving,” McCabe said, “so they need to say, ‘Where’s my growth going to come from?'”

While Canadian vehicle production may be evaporating, the industry-wide use of global platforms present tremendous opportunity for program contributors to look outside Canada’s physical borders and start pitching in abroad.

“When you’re talking about vehicle platforms that are in the millions-of-units range and there’s a shared concept that it might have the same underpinnings or the same hood latches, suppliers need to jump in that pool now,” he said.

That begins with leveraging supply deals and relationships in order to find out where those global platforms are heading in order to land another deal.

“It’s the responsibility of the suppliers to leverage what they’re on now and (find out) how they can position themselves to follow the business even though they’re whole (national) market may be reducing in size,” McCabe said.

“The global competitive landscape does not have borders.”

But, according to McCabe, globalization represents both some of the biggest risk and reward, so it’s important to not just follow a nation but to follow automakers and keep up on trends of where they forecast growth.

Newly advanced economies like Brazil, Russia, India and China (BRIC) offer room for Canadian expansion, with automakers projecting growth in vehicle production and consumption to satisfy demand from a growing middle class.

It’s another group of nations, however, that remain relatively untapped, yet poised for substantial industry growth.

Mexico, Indonesia, South Korea and Turkey (MIST) are seeing their respective auto markets rise, and they could represent the future for Canadian parts makers.

Indonesia in particular, McCabe said, represents a major new market for the industry, with industry players like General Motors, Volkswagen and Mazda viewing the world’s fourth largest country by population and Southeast Asia’s largest economy as the next big thing in auto assembly.

On the “plus” side

Another key area of focus should be on the “plus” side of vehicle programs.

According to McCabe, the concept of a “NAFTA+” vehicle—the idea of a vehicle built in a country or region plus parts from at least one other—leaves meat on the bone for Canadian suppliers to contribute to programs built in the United States, Mexico or elsewhere.

“Because more global platform consolidation is going to happen, it’s easier for vehicle manufacturers to put in a proven platform (rather) than create one for a specific market,” he said. “So if you know Indonesia may be considered an emerging market, it’s going to leverage a platform that’s being built in mature markets. If you have products on those vehicles, follow them.”

A key part of this, however, is opening up supply chain communication, a hurdle that has been in the way for years.

With automakers and higher-tier suppliers playing their cards close to their chest to conceal their plans, it’s important for Canadian suppliers to get a better understanding of what’s next in order to follow international production.

“Too often we deal with suppliers that aren’t educated from the vehicle manufacturer down,” McCabe said. “They need better access to data and resources to find out how they’re going to grow.”

While this strategy may seem reactionary in nature, McCabe said it’s important to replace that connotation with the idea of being proactive to the change that’s coming.

“They’re reacting to a downturn in (the) market, but the idea is they have time now to react,” he said. “Being proactive to what the industry’s going to look like is critical.”