Can global auto industry sustain growth?

New report from Scotiabank points to continued rebound, but global events hindering growth

The global automotive industry continues to rebound and grow, despite the recent disruptions in the Japanese automotive industry.

A new report from Scotiabank on the global automotive industry notes global car sales have strengthened in recent months. In the US alone, car and light truck sales remained an annualized 13 million units for the third consecutive month in April 2011, even as gasoline prices approached US$4 per gallon, a level that derailed the market in 2008, notes Carlos Gomez, an economist with Scotiabank.

“The improvement continues to be led by strong retail purchase—an expanding job market is boosting confidence and incomes, and enabling Americans to replace their older vehicles.

Canadian automotive sales

Canada is also experiencing better times in the automotive market. Sales in Canada averaged an annualized 1.67 million units in March and April, above Scotiabank’s full year 2011 forecast of 1.59 million units.

“Given this stronger-than-expected performance, we are maintaining our full-year sales forecast unchanged even as volumes are expected to weaken over the summer and early autumn, due to a shortage of vehicles from Japanese automakers.”

What’s interesting is that the growth is being lead by Western Canada. Purchases of automobiles wet of the Ontario-Manitoba border jumped 14 per cent year-over-year in March, to an annualized 520,000 units, the higest level since the summer of 2008.

Steve Rodgers, president of the Canadian Automotive Parts Manufacturers' Association, says the good news bodes well fore automotive production in North America.

"The economic trends are all positive and it's good times for the Detroit Three especially. They have good product line-ups and they were less hurt by the global events such as the Japanese earthquake and tsunami. The Detroit Three have picked up some market share from Toyota, Honda and Nissan, who were all affected by parts shortages in Japan."

He's not surprised by the Western Canada growth in automotive sales. He cites three main reasons why the western provinces are experiencing higher automotive sales.

"The West has come off from a weaker base. The impact of the recession in that region didn't hit as hard as it did in Ontario and other provinces in the East. So the recovery in the West looks better. Second, the rising price of a barrel of oil is spiking activity in the oil field and third, the increasing demand for raw materials throughout the global economy is creating activity in the resource-rich provinces like Alberta that have oil, lumber and potash."

Is automotive growth sustainable in Canada?

While it’s all good news to date, suppliers to the automotive industry are a bit skeptical about the long-term growth of the industry, given the continual competitive pressures of a high Canadian dollar, high energy costs and the ongoing outward flow of manufacturing to low-labour cost countries such as Mexico and China. Indeed, even if sales do continue to rise, some question whether Canada’s manufacturing industry will even benefit from this.

One certified Tier 3 supplier to the automotive industry doesn’t hold a lot of hope for the long-term growth of the automotive industry in Canada.

Sven Poulsen is president of S&E Manufacturing in Bradford, ON, a company he founded in 1989 with his wife Elizabeth.

“I believe the manufacturing industry in Canada is similar to the dinosaurs; it won’t exist in the future. I don’t see how the automotive manufacturing industry is going to be able to compete in the future with all the cheaper products coming into Canada. I think politics will be the only business left in Canada.”

Poulsen says his company has done all the things it’s supposed to do to remain competitive. For instance it has improved productivity in its plant.

“In 2004 we had a contract for 100,000 units a month with an auto parts supplier. To do it, we needed two machines working 24 hours a day, five days a week. Today, we can make those same 100,000 parts using one machine, one shift, four days a week. Our productivity improvements have been enormous.”

But it’s not enough for the long term future of S&E if it continues to focus on the automotive industry, adds Sven.

“Many of the automotive OEMs have shifted or are shifting manufacturing to cheaper countries like Mexico. I’m sure some other manufacturing industry will come along, possibly there will be opportunities in solar, nuclear and wind. Linamar is one example of a company moving into the solar market.”

Asked if he thinks his business will be in operation in five years, “I don’t know if we’ll be in business and as for automotive, I don’t think so. We are facing many challenges in Canada as manufacturers and we have even considered moving our manufacturing to Michigan because our high Canadian dollar is here to stay and it does make us very competitive.”

Scotiabank’s outlook is decidedly more positive. While the automotive industry is being “clouded by near-record oil prices and ongoing parts shortages emanating from the tsunami in Japan,…”, the reports states “the global sales recovery should persist, with purchases expected to climb to a record high in 2011. Sale gains will continue to be led by emerging markets and strengthening replacement demand in the US. However, the surge in oil prices has created an additional headwind, and a shift in the type of vehicles that households are buying—especially in North America.

APMA's Steve Rodgers says his automotive parts supplier members are obviously pleased with the sector's rebound, but many are concerned about the long-term impact of a high Canadian dollar and the rising cost of gasoline.

"A lot of people are nervous about factors that might impact the rebound and affect profitability of the automotive OEMs in North America. What it means is that companies need to be more competitive and find the ways they can do this to remain competitive in the market."

To download the full report, visit Scotiabank online.