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Missing the boat

Several months of weak global car sales ended in September with the strongest year-over-year increase since May and Scotia Economics is forecasting sales this year will top 56 million units, a 5-million unit improvement over 2009.


December 8, 2010
by Joe Terrett, Editor

Emerging markets will provide the most opportunity for global automotive sales.

Photo: iStockphoto

Several months of weak global car sales ended in September with the strongest year-over-year increase since May and Scotia Economics is forecasting sales this year will top 56 million units, a 5-million unit improvement over 2009.

The Canadian auto industry is riding the wave, with vehicle production up 56%, and it’s outpacing US growth by 6%, but Scotia Economics’ Global Auto Report attributes much of the global turnaround to Russia, India and China. Indeed, it’s the developing economies that offer the most opportunity for future growth.

That presents a problem for Canada with vehicle exports tied almost exclusively to the US, a market chief economist Carlos Gomes describes as having “limited upside.”

“In fact, Canada is the only major auto manufacturing nation that relies almost exclusively on one export market, and is not diversified and well positioned to benefit from rapid sales gains in emerging markets,” he noted in the report.

As of last year, Canada has dropped out of the top 10 vehicle producers in the world from eighth place, even slipping behind Mexico’s 18% of the North American market’s assemblies with 17.4%.

Unlike Canada, Mexico is diversifying its export base. Over the past 10 years it has been reducing the number of North American-bound assemblies from 95% to 70%. Almost 9% of its car and truck exports are going to South America, 12% to Europe and 4% to Asia.

The US is also looking farther a field with nearly 60% of its output heading overseas, up from 20% 10 years ago. Most of its exports have gone to Germany, Saudi Arabia, the United Arab Emirates and the UK, but the report notes sales to China have climbed nearly fivefold, surpassing Germany as its third-largest market. Now China, Brazil, Russia and India account for nearly 10% of overall US vehicle exports, up from virtually nothing a decade ago.

Even India, the world’s seventh largest vehicle-producing nation, and twenty-second in automotive exports, has an Automotive Action Plan that aims to boost exports from about $4.5 billion annually to $12 billion by 2016.

Gomes cited Ford Motor Co.’s plans to export the mid-sized Edge crossover made in Oakville, Ont. to China, but initial annual quantities will be just 4,000 to 5,000 units.

“The Canadian industry should continue to seek opportunities to redirect some of their output to the fast-growing emerging auto markets, to keep Canada from slipping further down the global production ladder.”

Auto parts suppliers are doing just that. The Automotive Parts Manufacturers’ Association (APMA) recognizes the need to break out of the North American market and Steve Rodgers, the trade group’s president, has been on the road promoting Canadian export opportunities, a journey that has taken him to China, Mexico, and a technology show in Wolfsburg, Germany. He also made a return trip to Wolfsburg for the Automotive Excellence Awards where two Canadian suppliers have won innovation awards. “This is the first year that Canada has ever been allowed to compete in this prestigious competition and we went after that right to get visibility for Canadian technology and to increase the business opportunities,” says Rodgers.

But raising Canada’s export profile beyond the North America is not a simple matter.

“We have to remember that the automotive industry is still generally a just-in-time, very competitive business where local suppliers always have a cost advantage over those shipping from a distance,” says Rodgers.

He doesn’t think a national automotive trade strategy like India’s would change the export dynamic much. “Virtually every country requires a certain amount of local content. In NAFTA we have a very integrated trade model. A national strategy that might attract an engine and transmission plant here would not necessarily increase exports. Key components probably would logically come from the US and Mexico, dropping us below the threshold where the engine or transmission could be shipped duty free back to a European country. This further reduces competitiveness.”

Invest in emerging markets
Peter Hatges, head of KPMG in Canada’s corporate finance practice, acknowledges North America is one of the most saturated markets in the world, but he thinks the question for parts suppliers is less about exporting product to China and more about whether Canadian companies are willing to make the necessary investments in emerging markets.  “Magna doesn’t necessarily supply its European operations from Canada. They have plants all over the world. Are Canadian firms as global as they should be?”

He says the future of automotive production for parts suppliers and OEMs will be coping with global expansion and being meaningful suppliers on a global scale.

Off course, another factor hampering wider global export is the fact Canada doesn’t have its own car companies and the global companies that own the plants aren’t thinking about Canada’s exports.

“They put a plant in Canada to service certain needs and goals of the company…They view us as part of the North American market and that’s what the plants are here for,” says Jim Stanford, chief economist for the Canadian Auto Workers union (CAW).

He considers trade policy to be a significant issue for the Canadian industry, citing the $12.1 billion disparity between the number of vehicles shipped out of North America and the number that came in last year. North America is perhaps the most open vehicle market in the world (30% is imports), but he says trade policies in Asia have very effective limitations on imports. Even Europe limits imports to less than 10%.

There are measures the government could take other than free trade agreements to aid vehicle exports. Stanford suggests incentives for capital costs that could build capacity for offshore trade and there are policy initiatives that could be implemented. An example is a duty drawdown system that would give a company credit on import duties it pays on vehicles it brings into the country reflecting based on the Canadian-made vehicles being exported offshore.

“Japan, China and Korea don’t practise free trade,” says Stanford. “They do what they need to do to build their domestic markets. It’s time Canada took off the Boy Scout uniform.”