North American auto industry in high gear

The improvement was led by double-digit year-over-year advances in North America and Western Europe, as well as a rebound in China after three consecutive months of declining volumes.

In contrast, activity continues to weaken in Brazil and Russia, undercut by deteriorating economic conditions. However, excluding Russia, vehicle sales in Central and Eastern Europe have gained momentum since the spring, and advanced 8% y/y in September alongside solid employment growth.

More recent data for North America indicate a further acceleration during October.

Purchases in the United States jumped 14% y/y last month to a higher-than-expected annual rate of 18.1 million units — the second consecutive month above 18 million units. The September/October results represent the best back-to-back monthly performance since early 2000, when the global economy was still in the midst of the “tech boom”. Crossover utility vehicles led the way, surging 32% above a year earlier and garnering a record 31% of the U.S. passenger vehicle market.

In Canada, purchases climbed to an all-time high of 2.01 million units in October, up from an average of 1.88 million through September. Imported brands led the way, with crossover volumes surging 26% y/y. This robust performance prompted us to increase our full-year Canadian sales forecast to 1.88 million units.

The North American auto industry is a key driver of economic activity. It is a bright star in the current sluggish overall economic environment, and is outperforming other industrial sectors. Vehicle sales and production are at record highs across North America. Auto sector employment growth has accelerated to the fastest pace in nearly a decade, and exports have gained market share across the globe.

However, while stronger economic conditions should continue to buoy industry volumes over the next several years, significant concerns have arisen over the potential dislocation of sourcing patterns for vehicles and parts once the Trans-Pacific Partnership (TPP) is implemented. The TPP provides the North American auto industry with preferential access to the rapidly growing markets of Asia and South America. However, it reduces the rules of origin requirement for vehicles and parts that have been in place under NAFTA.

This has become a significant concern in Canada, as the industry remains almost exclusively focused on North America. More than 96% of Canadian parts exports are destined to its NAFTA partners.

However, the strength of the North American auto industry is that it has become more innovative in recent years, and has responded to the pressures triggered by globalization. North American auto industry exports are outpacing the increase in overall global automotive exports.

The industry is in a much stronger competitive position than during the previous decade when it consistently lagged its global peers. As a result, auto sector employment across the entire NAFTA region has increased by 6% over the past year. Mexico is leading the way, but payroll growth has also exceeded 5% y/y in both Canada and the United States in recent months. In fact, the pace of job growth in the Canadian industry is the highest since the new millennium, with hiring buoyed by double-digit export gains.

Under the TPP, the local content requirement for vehicles will drop from the current 62.5% North American content to 45% from anywhere within the TPP region. In addition, for auto parts the local content required will fall from the current 60% North American constraint to roughly 40% from anywhere within the TPP region.

Furthermore, some products such as metal stampings and engines are required to have only 35% TPP content. These reductions in local content requirements have raised concerns of significant job losses at both vehicle assembly facilities and auto parts plants across North America, if there is a shift in production to low-cost jurisdictions.

However, the performance trend has actually been moving in the opposite direction in recent years, with North America becoming a preferred location to assemble vehicles for the local market, and increasingly for export as well. Automakers have added more than 1.5 million units of new capacity in North America since 2007, with these facilities geared for sales within North America, as well as for export. In fact, vehicle exports from North America to the rest of the world have increased by 15% per annum over the past decade, more than quadruple the advance in cross-border shipments within the NAFTA region.

Importantly, the North American auto industry has the most highly integrated supply chain network. More than 75% of all motor vehicle parts used in the region are sourced within NAFTA — a much higher level than the current 60% requirement.

In fact, the North American auto industry’s supply chain network has maintained a relatively stable sourcing pattern, despite the emergence of Asia — especially China — as a large global auto parts exporter. For example, Asian auto parts exports destined to North America have increased at an 8% annual rate over the past decade, significantly lower than the double-digit increase in overall auto parts exports from Asia.

In addition, auto parts from Asia have made fewer inroads into North America than into the European Union — a region perceived as the leader in engineering and technological efficiency and innovation. As a result, North American countries have experienced a minimal loss in market share for domestically-sourced automotive parts.

With North American vehicle sales and production at record highs and ownership rates among the highest in the world, the industry needs enhanced access to new growth markets, such as Asia and Latin America.

North American producers have already made significant inroads into jurisdictions with high tariffs — Vietnam has an MFN tariff on imported vehicles of 70%, while Malaysia has a 30% tariff on vehicles imported from outside the ASEAN region. Auto and parts exports from NAFTA to the Trans-Pacific Partnership members have increased by 8% per annum over the past five years, roughly double the pace of volume growth in the mature North American market.

Furthermore, NAFTA’s export growth to its TPP partners is nearly five times larger than the advance in auto parts shipments from the European Union to the TPP members in Asia and Latin America.