Challenges ahead for auto sector despite record 2015

Canadian economic struggles expected to drive industry profits down by $2 billion in 2016, the Conference Board says.

OTTAWA — Canada’s motor vehicle manufacturing industry had a record year in 2015, but in the near future is expected to faces a number of medium-and long-term challenges related to production, a sluggish domestic economy and volatile global trade agreements, according to The Conference Board of Canada’s industry outlook.

Thanks to record sales in both Canada and the US and a declining Canadian dollar, industry profits in 2015 are estimated to have surged by 79% to almost $2.5 billion and the industry’s pre-tax profit margin reached 4% – the highest since 2000.

But the economic headwinds facing the Canadian economy are sufficient to ensure profits drop to $2 billion this year, and are expected to continue a steady decline through 2020.

“Despite the strong short-term results, the Canadian auto assembly industry is struggling to grow,” said Michael Burt, Director, Industrial Economic Trends. “Over the next five years, no growth in production is expected in Canada.

While both Canada and the US posted record sales in 2015, the outlook suggests Canadian sales will soon plateau with US demand continuing on the upswing. It is also expected that more manufacturers will shift car production to the Souther US and Mexico. In Canada, low petroleum is driving demand for trucks and crossovers, for which automakers will retool their plants to handle increased capacities.

And the Conference Board suggests the yet-to-be ratified Trans-Pacific Partnership agreement will pose a number of challenges to Canadian vehicles and parts manufacturers.

“While the impact of the Trans-Pacific Partnership (the TPP) agreement is still somewhat uncertain, it is expected to heighten competition for Canadian assemblers and parts manufacturers,” said Burt. “The agreement calls for the elimination of tariffs on imported Japanese vehicles within five years of ratification, leading to enhanced competition in the saturated Canadian market.”

Although Canadian producers have not traditionally exported a lot to Asian countries, the TPP will also increase their market access to member countries, creating new opportunities, he added.

For vehicle manufacturers, tariffs on Japanese vehicles are to be eliminated within five years of ratification. In contrast, US tariffs on Japanese vehicles, although higher, would not be eliminated fully for 25 years.

Parts manufacturers currently operate under provisions that require vehicles to contain at least 62.5% of their content from the three countries—Canada, Mexico or the US Under the TPP, that share will drop to 45%, 40% or even 35%, depending on the parts in question. These provisions increase the likelihood that more imported parts will make their way into North American supply chains.

As a whole, however, Canada is continuing to lose out on auto sector investment to the southern US and Mexico.

Toyota is ending Corolla production in Canada and replacing it with the crossover RAV4. Although its lifespan has been extended, the Consolidated Line at General Motors’ Oshawa Assembly is now slated to close in 2017 and no replacement model has been identified. Labour negotiations in 2016 may play a key role in whether the Detroit Three automakers direct new models to Canadian plants.

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