Parts suppliers need to get global and more innovative to continue growth as pent-up demand dries up.
February 15, 2013
by Matt Powell, Assistant Editor
Canada’s automotive sector enjoyed its second-best year ever in 2012. It sold more than 1.6 million vehicles, a level reached only once before in 2002, thanks to pent-up post-recession demand, consumer confidence and buying power, and Japanese automakers looking to diversify their supply chains.
In the US, 15 million units boosted demand for Canadian-made parts, helping to bring overall North American sales to their highest level since 2007. Of course, the economic meltdown that followed in 2008-2009 sent the auto sector into a skid that required a multi-billion dollar bailouts from Canadian and US governments, so it has been quite a rebound. The Canadian industry earned pre-tax profits of $1.35 billion last year, while surging double-digit sales growth in the US culminated in a 15% boost to Canadian exports, according to the Conference Board of Canada, an Ottawa-based research agency.
DesRosiers Automotive Consultants, based in Richmond Hill, Ont., reports Canadian production was up 24%, producing 2.003 million units through the end of October, compared to 1.6 million units during the same period in 2011.
Parts production also ended the year on a high note, increasing by 22.4%, according to the Conference Board. Its Autumn 2012 Industrial Outlook suggested increases in parts output, like vehicle production, were led by heavier sales in the US and more activity by Japanese automakers.
Honda’s North American vehicle production was up 29% in October to 161,142 vehicles, while Toyota, which led nationwide sales increases (up 14.8%), will increase RAV4 production at its Woodstock, Ont. plant to 200,000 units from a current 150,000.
US manufacturing production is another accurate indicator of what’s going on in Canada.
“What happens in the US is really a key driver for the Canadian automotive industry because so much of our production goes there,” says Carlos Gomes, senior economist and automotive industry specialist at Scotiabank Economics.
Indeed, about 80% of Canadian vehicle and part production is shipped to customers south of the border
And despite all the hubbub created by the “fiscal cliff,” the outlook for 2013 is rosy. Low-interest rates, attractive buying incentives, and aging vehicles are driving demand, while healthier job numbers have boosted consumer confidence and buying power.
Gomes says the cost of living is at its lowest level in a decade, averaging 16% of disposable income, a factor that puts more cash in consumers’ wallets to replace the clunker leaking oil all over the driveway.
“As long as people have the ability to buy, we will continue to see the auto sector improve,” he says.
That’s good news for the parts sector.
2012 Canadian vehicle manufacturing
Source: Conference Board of Canada
Thanks to a strong showing in 2012, parts companies are handling increases in demand by boosting capacity, hiring more employees and investing in new machinery and equipment to make their operations more efficient, says Remi Tosti, manufacturing lead for southwestern Ontario at Toronto-based consultancy Deloitte LLP.
“A lot of companies have introduced six sigma and lean manufacturing practices in their operations, so they’ve cut a lot of fat to boost capacity,” he says.
Toyota Boshoku, which supplies seat, door trim panels and interior components for the Woodstock-built Toyota RAV4, is adding up to 100 positions to handle
increased demand for the popular crossover. Meanwhile, Aurora, Ont.-based Magna International has projected 2013 sales will exceed $32.7 billion, 70% of which will come from North American operations.
Among assemblers, Toyota is adding 400 jobs at its Woodstock, Ont. RAV4 plant to handle production increases.
Ford is adding 300 jobs at its Oakville, Ont. plant to make more Edge, Flex, MKX and MKT crossovers, albeit those positions were required by a ratified labour agreement with the Canadian Auto Workers (CAW) union, and will likely be given to some of Ford’s employees laid-off by the closure of the company’s St. Thomas, Ont. plant last year.
The impact of General Motors’ decision to relocate production of the Chevrolet Camaro from its Oshawa, Ont. flex-plant to Michigan remains unknown. The automaker cited lower capital investment needs and improved efficiencies to validate the move, but it has angered CAW president Ken Lewenza, who called the relocation a betrayal to Canada.
The move affects 14 Canadian parts suppliers that will now have to deal with higher costs and longer travel times. GM may reconsider its Camaro supplier base, but the president of the Automotive Parts Manufacturers’ Association of Canada (APMA) is optimistic that’s unlikely.
“It’s a negative factor and a sad story, but the impact should be muted,” says Steve Rodgers. “Lansing’s not that far away. Canadian suppliers will have ample opportunities to bid on that business.”
2012 top Canadian automakers
Source: DesRosiers Automotive Consultants
Rodgers says the overall outlook for parts suppliers in Canada beyond 2014 is positive, and growth will be helped along by Japanese automakers, such as Toyota, making significant investments in the Canadian market.
He’s also confident that Buy American legislation won’t hamper cross-border business.
“It’s not a huge factor in our business thanks to NAFTA,” he says. “OEMs have a tendency to seek out the best, most competitive suppliers and don’t make much of a fuss over such factors.”
Toyota, for instance, has been awarded $34 million by the federal and Ontario governments to compliment its $125 million investment to construct new assembly lines at its Cambridge plant to produce the Lexus RX 450h SUV, which will become the first hybrid vehicle assembled in Canada once production starts in 2014. Rodgers says it’s a welcome addition to Canadian auto production.
“We know that Toyota’s first preference will be to eliminate logistics costs and to source locally, so Canadian companies will definitely get the first look,” he says. “If you’re competitive, you’ll have a chance.”
Gomes believes there’s major opportunities for Canadian suppliers globally, and there’s a major requirement for parts makers to look abroad for business, but they also need to be more innovative.
Competitive threats from growing economies such as Mexico and China, where wages are lower and quality is improving, are putting pressure on the Canadian sector. Mexico is already home to more than 1,100 parts manufacturers and 300 Tier-1 suppliers. Mazda and Nissan have made significant investments in new Mexican manufacturing operations recently, and the APMA expects automotive production sales there to exceed $120 billion by 2020.
Rodgers isn’t overly concerned about current production being moved from Canada to Mexico, but he is concerned that Mexico will pull new business away; however the NAFTA partner represents an opportunity.
“Mexico will become the sixth or seventh biggest automotive production centre in the world; it’s only a matter of time,” he says. “But then again, it’s a lot easier for Canadians to get to Mexico than it is to get to China. There’s opportunity there; to expand your company’s global reach.
Gomes agrees growth will be in emerging markets.
“One of the risks the Canadian industry faces is its almost exclusive reliance on the US,” he says. “If we don’t start to focus on diversifying, we run the risk of losing out on growth happening globally.”
Although Mexico may represent the next big wave, Tosti offers a few words of caution.
“Mexico is risky. Despite a strong, skilled workforce, my experience with setting companies up there is that managerial talent is lacking, so be ready to send management, or find a strong strategic partner to make sure the operation is run properly.”
Innovation will also be key for parts makers that enter global supply chains and earn new business abroad.
The federal government is providing some help to the automotive sector by extending a five-year, $250-million innovation subsidy. The program was created in 2008 to help keep the sector afloat during the recession.
The fund will help auto companies be more innovation and competitive, but will require companies to invest their own cash to access the money for specific research and development projects.
The gains attained in 2012 are exceptional, and can’t be sustained forever, but Rodgers is confident production increases will continue.
“NAFTA production will likely hit 15.8 million units by 2014, and grow to 16 million by 2016, so there’s still growth, but it will likely plateau by [then],” he says.
Gomes is confident the Canadian sector will continue to enjoy gains of up to 5% in 2013, although much lower than the 20% seen in 2012. And the Conference Board suggests Canadian sales gains will be limited over the next five years as demand built-up during the recession subsides, but in the short term it expects 11.4% in 2013 and 7.4% in 2014.
If life is a highway, the Canadian auto sector will be enjoying the ride for the next few years, a welcome change from the highway to hell of 2008-09.