PLANT print issue: Canada’s eroding auto industry
Without more investment, it will run out of gas.
There’s a troubling development in Canada’s automotive manufacturing sector that’s bringing into question the longer-term health of an industry that Canada (especially Ontario) depends on as a major contributor to overall economic health.
In June, industry analysts presenting at the Automotive Parts Manufacturer’s Association (APMA) conference in Windsor, Ont. pleasantly proclaimed it was ‘a good time to be in the auto sector.’
Sure, auto sales are booming at record levels and parts manufacturers are working at capacity. Business has certainly picked up post-recession to levels that will sustain jobs and meagre growth in the short-term. But vehicle and parts manufacturing aren’t safe, nor is the sector sustainable in its present form, mostly because of Canada’s shrinking industry investment, which is quickly eroding Canada’s share of North American light vehicle production.
Across the entire industry, investment levels have dropped by more than 50%, according to a report by Richmond Hill, Ont.-based DesRosiers Automotive Consultants, and production is down as vehicle sales are rising.
Statistics Canada data compiled by DesRosiers shows that automakers invested just $767 million in Canada last year. That’s only 9% of the their investment between US and Canadian operations, and it’s the first time that number has been in the single digits since 1990. As recently as 2007, investment stood at 40%.
“This is the best recovery in the automotive sector in decades, and Canada, from a manufacturing perspective, isn’t participating,” auto analyst Dennis DesRosiers told the Globe and Mail in June.
The sector on a global scale is significantly healthier than it was a few years ago. The global vehicles sales outlook for 2013 is 85 million units, according to IRN Automotive, an industry research firm based in Grand Rapids, Mich. North American production will top 17.5 million units, of which Canada will be responsible for 2.5 million, while Mexico will build 3 million vehicles this year.
In Canada, vehicle parts manufacturers are expected to post pre-tax profits of $1.16 billion in 2013, down more than 16% from 2012 levels and production will edge up a meagre 0.1% due to weaker demand, according to the Conference Board of Canada. The ongoing shift to move vehicle assembly away from Ontario and the US Midwest will also continue to threaten the long-term growth and stability of Canada’s auto sector.
Light vehicle production, despite rebounding strongly after the recession, fell 7% during the first half of this year, which is a glaring contrast to gains seen by the US (6%) and Mexico (5%), according to a TD Economics note by economist Dina Ignjatovic.
“This puts Canada’s auto sector on track to record its largest annual decline outside a recessionary year going back to 1990,” she wrote in the Aug. 16 note.
Production is down at GM (-11.5%), Chrysler (-6.1%) and Toyota (-11.2%) over 2012. Only Ford (3.1%) and Honda (0.1%) increased production between January and June 2013. The result is Canada’s share of North American production stands at 14.6%, relative to a 16.6% average between 2000 to 2010, according to the TD report.
Toyota is the only automaker that has recently expanded capacity in Canada. Its Cambridge, Ont. assembly plant has produced 178,000 vehicles in 2012, and another investment of $134 million that brought the company’s Lexus RH350 h luxury SUV to the plant will increase capacity to 200,000 in 2013.
Ford is also in the process of completing a proposed $1.2 billion rejuvenation of its Oakville assembly plant to produce more Edge SUVs, which have seen a 7% sales jump in the US so far this year. The investment, however, hinges on how much help the federal and Ontario governments will commit.
And while GM committed $250 million to retool its CAMI assembly plant in Ingersoll, Ont. where it produces the Chevrolet Equinox and GMC Terrain SUVs, gains there are expected to be offset by production losses when the automaker shutters its Oshawa 2 plant where it makes the Camaro. Production will move to Michigan when it introduces an updated model in 2015. Some of its Impala and Equinox production is also moving south.
“This bodes very poorly for the ability of the Canadian auto sector to improve its performance as it is impossible to increase manufacturing output without first making capital investments,” writes Dennis DesRosiers in his latest report, The Canaries are Chirping. “Growing our share…requires a wholesale rethink of our automotive investment strategy…and even then, it is questionable whether this is possible.”
Once the recession released its phantom brake pedal, global automakers invested $42.3 billion in North American operations between 2010 and 2012, according to data from the Centre for Automotive Research, an automotive industry forecaster based in Ann Arbor, Mich.
How much was spent in Canada? A mere $2.3 billion, or 5.4%.
Where the money is going
According to Statistics Canada, automotive businesses invested $1.6 billion in structures, and machinery and equipment in 2012, which is a 7.1% increase over 2011, but it was the first increase in capital spending since 2007, and the latest data from the Ottawa agency already points to a 1.2% reduction in 2013.
Automotive investment peaked in 2007 at $4.2 billion, only to plunge to a of low $1.5 billion in 2011, while other manufacturing industries increased capital spending by 15.4% last year. In fact, Statistics Canada data suggests investment levels in manufacturing were higher in 2012 than any year during the 2000s.
Jobs also play a critical role in all of this. The auto sector employed 115,000 people in Canada last year, 7.7% of all manufacturing jobs in the country and 81.9% of these jobs are located in Ontario – Canada’s manufacturing’s heartland. However, the sector lost 30% of its workforce during the recession, and has yet to refill those positions despite record sales years and peaked capacities. The number of automotive jobs in 2012 was still 24.6% lower than pre-recession levels and 33.1% lower than in 2000, according to Statistics Canada.
Happily, manufacturing sales in automotive industries increased 19.1% to reach $82.6 billion – a third consecutive annual increase. Between 2009 to 2012, sales increased by 54.4%.
The Canadian automotive landscape is undoubtedly changing. Automakers are diversifying production to cheaper labour markets such as China, India and particularly Mexico, where the Detroit Three, Mazda and Nissan are either setting up shop or expanding existing facilities. Parts makers, including Denso and Magna, are also beefing up their Mexican operations. Employment there has ballooned to 500,000 jobs, and as local suppliers pop-up, OEMs will use them to cut costs.
Mexico’s parts exports to the US have grown to more than $33 billion, compared to $14 billion in 2000, according to DesRosiers. Canadian parts exports to the US now represent less than 50% of that, at $14 billion. And the other NAFTA partner’s labour costs are too attractive for automakers to not invest there and quality has improved significantly.
“Mexico is a bigger threat than any of the BRIC countries right now,” says Jim Stanford, chief economist at Canadian Auto Workers (CAW). “We sell less auto products to Mexico than we did in 2005, and that’s a huge issue as they continue to take a larger share of the global market.”
Canadian auto parts content per vehicle built in North America dropped to 7.5% last year from 9.9% in 2007, according to DesRosiers.
The US is also creating striking financial incentives in ‘right-to-work’ non-union states, which now includes Michigan, in an effort to draw investment. For instance, Kentucky has approved more than $146 million in tax incentives for Toyota to expand its Georgetown plant, already its largest operation in North America. The Japanese automaker will spend $531 million and create 570 jobs to receive the full value of the benefits.
“While part of Canada’s decline comes down to increased growth of vehicle manufacturing in Mexico, where cost structure is lower and there’s greater access to Latin American markets, the US is seeing increased investment activity thanks in large part to government incentives,” writes Ignjatovic.
Automakers have taken steps to close the cost gap in Canada, including the latest labour contract signed with the CAW, and past cuts in corporate income taxes, adds Ignjatovic.
Also, publicly funded health-care is no longer a key contributor to Canada’s value proposition because those costs have been offloaded to unions in the US.
The investments Canada needs, however, aren’t necessarily new plants, although that would seem to make sense since existing plants are operating at capacity and adding new shifts to meet demand.
The road ahead
Rather than worrying about a lack of new facilities, Canadian spending needs to be focused on improving plants currently operating at full bore, according to Stanford.
“The plants that are left are good plants, and they’re highly utilized, but several of them are coming up to decision points on investment in capital and new products, and its going to be important for all stakeholders to be focused on doing whatever we can to cement new investments mandates for the plants that we do have,” he says.
Auto investment is typically cyclical, explains Stanford. An investment cycle usually lasts two model cycles before new tooling is required, and a number of Canadian plants are coming to the end of those periods.
“Chrysler spent more than $1 billion on its Canadian production facilities before the meltdown, so they don’t necessarily need to invest right now. It’s those investments three or four years down the road that need to be secured,” he says.
“It’s always nice to dream about Volkswagen or some other Greenfield plant coming here, but that’s like winning the lottery…”
The auto industry’s performance on the trade front is even worse. In 2001, its contribution was a trade surplus of $11.6-billion. By last year, there was a $17.3-billion deficit.
The federal government, currently negotiating trade deals with Japan and the EU, is seeking new automotive investments from Japanese automakers in exchange for dropping a 6.1% tariff on imported vehicles.
The Canadian Press also reported in June that Canada would get expanded automotive quotas in its free-trade deal with the EU. Car sales to Europe would increase eight-fold to 100,000 units in exchange for eliminating foreign ownership rules on uranium mining and liberalized ownership rules in the telecom sector.
In the meantime, much will depend on demand for vehicles built at Canadian plants. In the US where sales are expected to top 16 million units, demand is high for vehicles such as Ford’s Edge, a fact the automaker will leverage for government funding to modernize the Oakville plant. Yet auto production in Canada is likely to underperform compared to its counterparts in the US and Mexico. TD estimates a 4% to 5% per year slide over the next few years, compared to gains south of the border.
Whether or not Canada’s industry ultimately runs out of gas will depend on how OEMs, parts makers, the province and the federal government respond to competition for investment in North America and the growing markets of the developing world.
This article appears in the Sept. 2013 edition of PLANT.
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