US demand is driving the automotive industry
Global forces continue to impact the Canadian automotive industry, which could lead to rising prices for consumers but business is looking good for vehicle and parts manufacturers, according to a Conference Board of Canada report.
OTTAWA: Global forces continue to impact the Canadian automotive industry, which could lead to rising prices for consumers but business is looking good for vehicle and parts manufacturers, according to a Conference Board of Canada report.
Canada’s Canadian Industrial Outlook: Canada’s Motor Vehicle Manufacturing Industry-Spring 2011 predicts profits of almost $1 billion this year, an increase from $114 million in 2010. Revenues were up by 29% last year, and will rise another 8% this year.
The Ottawa-based think tank said after cost slashing during the recession, automotive manufacturers’ expenditures will rise slower than revenues, leading to improved profits, driven by recovery in US light vehicle sales.
About 84% of Canadian-assembled vehicles go to the US, and sales there are on pace to exceed 13 million units this year, but there’s room for growth with normal market conditions more like 16 million units per year.
The earthquake and tsunami in Japan hit Canadian Toyota and Honda plants particularly hard. In the second quarter, Toyota slashed production by 56% and Honda by 31% because of difficulties getting parts.
The Conference Board expects this year’s production to increase by 11.8%, down from 15% in the Autumn 2010 forecast. But the production slowdown will be temporary and supply should return to more normal levels later this year.
For consumers, one effect of the Japanese earthquake is likely higher prices, as Toyota and Honda attempt to conserve their vehicle inventories. The report said Detroit automakers may gain additional market share as a result of the disruptions.
Growing demand and cost restructuring led the parts industry to a $255-million profit last year, the first profitable year for the industry since 2007. Strong gains in production in the second half of the year will lead to a profit of about $455 million in 2011.
However, the Conference Board warns that because of the strong dollar, profit margins will remain below their pre-recession levels through the forecast period.
And the loonie’s continued strength is driving Canadian labour costs higher, which could put pressure on vehicle and auto parts makers to send more jobs south of the border.
“Canada will have a challenge ahead to maintain its cost-competitiveness relative to the US and Mexico,” says the report.
“The expected sustained strength of the Canadian dollar could shift production to Mexico and the United States as automakers seek to lower costs.”
Files from The Canadian Press