The North American Auto Market is Out of Alignment, According to Scotia Economics



    TORONTO, Feb. 26 /CNW/ - Faced with weaker-than-expected sales,
automakers continue to aggressively cut production, leading to nearly six
million units of unused capacity across North America this year, one-third of
all vehicle assembly capability in the region according to the latest Global
Auto Report released today by Scotia Economics.
    "Our estimates are based on a full-year 2009 U.S. sales forecast of 11.5
million units, and vehicle production across North America of just under 11
million units, down sharply from an average of 16.1 million over the past
decade," said Carlos Gomes, Scotiabank Senior Economist and Auto Industry
Specialist. "We continue to believe that a moderate sales improvement will
emerge later this year, as the U.S. and global economies begin to respond to
the unprecedented amount of monetary and fiscal stimulus put in place since
last September. These measures should begin to resuscitate economic activity
during the strongest months for vehicle sales", added Mr. Gomes.
    Operating rates could be even lower, as the highly volatile and uncertain
economic and financial environment has prompted automakers to downgrade their
2009 U.S. sales forecast to a conservative 10.1-10.5 million units.
    After the latest round of announced capacity reductions, the Detroit
Three will still have the capability to produce roughly 10 million vehicles
per year in North America, well above their output of 7.2 million units in
2008. Production will fall by more than 20 per cent this year to less than six
million units, pulling their full-year operating rate below 55 per cent for
all of 2009, down from an average of more than 80 per cent over the past
decade. Even with an expected moderate sales gain in 2010, operating rates for
the Detroit Three will remain at about 60 per cent, substantially lower than
the 85 per cent generally required to restore profitability.
    "The sharp appreciation of the Japanese yen in recent months has eroded
the profitability of vehicles exported from Japan, and may benefit North
American facilities if production of some vehicles shifts to North America,"
said Carlos Gomes. "One automaker has indicated that it will move assemblies
of some small cars from Japan to Mexico, because of the surging yen."
    Any shift in production to North America would help Canadian, U.S. and
Mexican plants and suppliers. However, Mexico seems better positioned to
benefit more from this shift than its NAFTA partners. European and Asian
manufacturers account for 45 per cent of Mexico's overall assembly capacity,
compared with 42 per cent in the United States and 38 per cent in Canada.
    The New Domestics have the capacity to produce 1.3 million cars and light
trucks in Mexico, compared with 1.1 million units in Canada. Much of Mexico's
assembly capacity has been put in place over the past five years, as
automakers have come to view Mexico as a good location from which to export
globally, given the country's numerous free trade agreements.

    Global Auto Sales

    The downturn in global car sales continues to intensify. Purchases
slumped nearly 30 per cent year-over-year (y/y) in January alongside a further
deterioration in sales in the United States, Western Europe and Japan.
    U.S. purchases plunged 40 per cent y/y last month, falling to an
annualized 9.5 million units, the lowest level since mid-1982, and down from a
10.3 million unit average in the final months of 2008. The fall-off was driven
by more than a 60 per cent y/y decline in fleet volumes, due to the
industry-wide production shutdown between mid-December and late-January.
    Auto sales in Canada also began 2009 on a weak note. Purchases remained
around an annualized 1.30 million units for the second consecutive month, down
from a full-year 2008 total of 1.64 million units. Volumes are being
undermined by a deteriorating labour market, which has shed more than 200,000
jobs over the past three months.

    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.





For further information:

For further information: Carlos Gomes, Scotia Economics, (416) 866-4735,
carlos_gomes@scotiacapital.com; Paula Cufre, Scotiabank Public Affairs, (416)
933-1093, paula_cufre@scotiacapital.com


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