Canadian Auto Parts Rebound, But Are Missing Out on Globalization, According
to Scotia Economics

- Nearly Eighty Per Cent of Sales Remain in Canada or the Great Lakes States

TORONTO, March 30 /CNW/ - Global car sales remain in the passing lane, with purchases advancing 26 per cent year-over-year in February - the fifth consecutive double-digit increase, according to the latest Global Auto Report released today by Scotia Economics.

"Asia is leading the way, but every region, with the exception of Europe where the expiry of vehicle scrappage subsidies are dampening demand, is now reporting double-digit gains," said Carlos Gomes, Senior Economist, Scotia Economics. "Faced with strengthening sales and low inventories, automakers announced plans to boost North American production to an annualized 11.5 million units in the second quarter, up from an average of 11 million during the last six months."

Auto Parts Industry Bounces Back

"Rising vehicle assemblies across North America will support the current bounce back in Canada's auto parts industry, helping to lift shipments by more than 20 per cent in 2010," added Mr. Gomes. "However, a strengthening Canadian dollar is undercutting the competitiveness of Canada's supply chain, reducing their share of overall Canadian/U.S. auto parts shipments to less than 8 per cent - the lowest level in more than a decade. The share of Canadian suppliers peaked at 10 per cent in 2005, when the Canadian dollar averaged 82.5 cents (US)."

While orders and shipments are reviving, the industry is increasingly focusing on the domestic market at the expense of exports. Canadian auto parts exports to the United States, the destination for 92 per cent of Canadian exports, slumped by 32 per cent last year to less than $9 billion, less than half the average of the past decade and the lowest level since the early 1990s. With exports pressured by the appreciation of the Canadian dollar vis-à-vis the greenback, Canadian auto parts captured only 6.7 per cent of the U.S. market last year - nearly half the 12 per cent share garnered by suppliers from Mexico. As recently as 1997, Canada was the leading auto parts exporter to the United States. Canadian exports to other regions fared worse last year, plunging by nearly 40 per cent.

More than 45 per cent of overall Canadian auto parts shipments remained in the country in 2009, a jump of nearly ten percentage points above the average of the past decade. Each car and truck assembled to Canada now contains $5,260 of locally-made parts, up from $3,520 a decade ago. Despite this increase, suppliers from low-cost nations continue to make significant inroads in the Canadian market. Each vehicle assembled in Canada now contains $4,600 of non-U.S. auto parts imports. Mexico has made the largest gain, increasing its content to $1,650 per vehicle in 2009 - double the $800-content in 2003. Each Canadian-made vehicle also contains more than $600 in parts imported from China - up from $320 only five years ago. Brakes and electrical systems account for about one-third of China's auto parts exports to Canada.

In addition, more than 60 per cent of auto parts exported to the United States are destined for the Great Lakes States - primarily to the traditional vehicle-producing states of Michigan and Ohio. "One of the problems of focusing excessively on the domestic and traditional markets is that Canada and the Great Lakes States represent only 5 per cent of global vehicle output, but are the destination for nearly 80 per cent of Canadian parts shipments, leaving suppliers without a presence in most other markets, especially in rapidly growing emerging nations. For example, Asia now accounts for more than half of overall global vehicle output, but is the destination for only 1 per cent of Canadian auto parts exports," stated Mr. Gomes.

The report states that if the Canadian supply base is to prosper in the long term, it has to boost innovation and investment in order to make inroads in the rapidly growing emerging markets, as well as to counter the gains in North America from the low-cost countries in Latin America and Asia. While the Canadian auto parts sector includes several industry leaders that conduct leading edge R&D, the sector's overall capital investment is well below its U.S. counterpart. Canadian suppliers normally invest only 3 per cent of overall sales, nearly a percentage point lower than suppliers in the United States. Investment slumped even further last year, declining to only 1.8 per cent of sales - one of the lowest levels on record. "Given the increased importance of innovation in driving competitiveness, the Canadian auto parts sector needs to boost capital expenditures to ensure that it is in the forefront of innovative new products, such as green technologies and fuel-efficient engines, and to be able to make inroads in rapidly growing emerging markets," concluded Mr. Gomes.

Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.

SOURCE Scotiabank - Economic Reports

For further information: For further information: Carlos Gomes, Scotia Economics, (416) 866-4735, carlos_gomes@scotiacapital.com; Patty Stathokostas, Scotiabank Public Affairs, (416) 866-3625, patty_stathokostas@scotiacapital.com


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