Canada rallies in cyclical automotive sector

The cyclical automotive manufacturing sector in Canada has entered a positive patch over the last year. Investment announcements at Ford, Chrysler, Honda and Linamar are a testament to this industry rally.

0 January 15, 2015

This confidence is reflected in a Scotiabank report that forecasts auto sales in Canada and Mexico this year will top the record-setting pace they set in 2014.

Scotiabank analyst Carlos Gomes predicts Canadian auto sales will rise to 1.86 million vehicles in 2015, from 1.85 million in 2014, while sales in Mexico will total 1.17 million this year, up from 1.13 million.

Meanwhile Americans are expected to buy roughly 17 million new vehicles in 2015, the highest level since 2001, and an increase from 16.4 million last year.

The report says strong economic growth, improving household finances and aging vehicles in need of replacing will be behind the sales boost in the U.S.

Robust U.S. demand will, in turn, improve exports for Canadian and Mexican automakers.

Combined, auto sales in Canada, the U.S. and Mexico are forecast to total 20.03 million this year, topping the previous peak set in 2000, when there were 19.8 million vehicles sold.

The Conference Board of Canada senior VP and chief economist Glen Hodgson told the Globe and Mail, “In the high-profile vehicle manufacturing sector, sales revenue and profitability have recovered nicely from the 2009 recession, with profits finally breaking through the $1-billion barrier.

“The U.S. recovery has been critical to the rebound, since more than 80 per cent of vehicles manufactured in Canada are exported. Employment has also grown since 2009, but much more slowly than output; manufacturers are increasingly relying on investment in technology to produce cars and trucks.”

Honda has announced an $857 million investment in its plants in Alliston, ON, and named Alliston as the lead plant for its next-generation Civic. This investment will improve efficiency and ensure the plants’ operation.

However, automotive OEMs have developed a parts manufacturing strategy that matches the need for just-in-time, local deliveries to keep production lines humming.

“In vehicle parts, sales and profits have improved but not as strongly, and employment has not increased since 2011,” said Hodgson. “Moreover, in order to be included in key supply chains, parts manufacturers have to position their production close to their clients’ sites for final assembly.

“This means investing in productive capacity outside Canada. Vehicle and parts production is highly globalized; location and related production costs both play a central role. Canada does not automatically have future special advantages in these areas.”

Government investments such as those at Linamar recently are helping to play a part in this manufacturing sector’s recovery in Canada.

“There’s no shortage of regions that are willing to offer all kinds of incentives to companies,” Linamar CEO Linda Hasenfratz said at a government funding announcement ceremony. “And I think it’s wonderful to see our governments stepping up and being competitive.”

According to Hodgson, “Canada’s competitive advantage in manufacturing has already shifted. We can no longer rely on factors like a relatively weak currency or duty-free access to the U.S. market.

“Nor can Canadian manufacturers compete on the basis of low labor costs; others can do repetitive manufacturing jobs much more cheaply. Canadian manufacturing firms have to constantly innovate, specialize and focus on higher value-added activities if they are to compete successfully.”

Linamar said its $506.8-million expansion will focus on producing lighter, more efficient automobile transmission and power train parts. The $101 million from the two governments will be used to purchase new equipment and will fund research and development of new products, said Hasenfratz.

Sounds like a sustainable, profitable plan to me.

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