Auto Parts Manufacturing Forecast

Among other major changes occurring in the automotive sector this year, Canadian auto parts-makers will cut the work force by one-third as part of a 34 percent reduction in industry costs, according to The Conference Board’s “Canadian Industrial Outlook: Canada’s Motor Vehicle Parts Manufacturing Industry – Spring 2009.”

“Conditions will be undeniably difficult in 2009, and many small and medium-sized firms could potentially go out of business,” said Sabrina Browarski, economist and author of the outlook. “The larger manufacturers, however, stand to increase their global market share when U.S. demand for automobiles starts to recover in 2010.”

This year Canada’s auto parts-makers will lose money for the second consecutive year, but the industry is expected to return to profitability beginning next year. The industry posted a $109 million loss in 2008. With production expected to fall by 39 percent in 2009, a further loss of $173 million is forecast this year.

Extensive cost-cutting, combined with the start of an anticipated rebound in U.S. auto sales next year, will allow the industry to return to profitability quickly, according to the experts. A profit of $222 million is forecast in 2010. By 2013, profit margins are expected to return to historical norms.

Three factors give auto parts manufacturers greater cause for optimism than automakers. First, many of Canada’s largest parts manufacturers are multinational corporations with diversified sales in other markets. Second, parts firms are in better financial shape than the automakers. Third, the industry is not saddled with the legacy costs that the Detroit Three automakers must bear.

The medium-term outlook for the industry is based on the assumption that General Motors will successfully exit Chapter 11 restructuring, and that Chrysler will be restructured under a stable partnership with Fiat.

APMA Applauds Government Action

In recent news from the Automotive Parts Manufacturers’ Association (APMA), the group applauded the work of the government of Canada and recognized that it is doing its best to manage the current economic situation and is appreciative of the recent announcements, specifically about the auto parts sector.

“Automotive parts manufacturing is Canada’s largest manufacturing industry. The federal government had the foresight to assist the industry in its time of need so that it can be a contributor to Canada’s economic recovery,” said Gerry Fedchun, president of APMA.

The APMA also applauded the federal government on the recent initiative of advancing $700 million to the automotive supply industry. The unprecedented drop in automotive production in the first quarter of 2009 has put parts suppliers under severe, although temporary, financial stress. As the economy moves out of recession and vehicle sales start to recover, the APMA stated that it expects the supply industry to recover as well.

The APMA is a national association representing OEM producers of parts, equipment, tools, supplies, and services for the automotive industry.

Instability Leads to Market Share Increase

The country’s largest auto parts-makers may increase market share as well as new sales at the expense of their smaller rivals in the industry. Linamar, Magna, and Martinrea were all hit hard in terms of share price earlier this year, but since that time share prices for these companies have skyrocketed.

An emerging trend from both General Motors and Chrysler will be a dependence solely on stable suppliers, and the current instability of smaller companies may lead to growth in their larger, multinational competition.

In recent news, Martinrea purchased assets from the SKD Automotive Group, a metal forming company with Canadian plants in Mississauga, Milton, and Brampton, Ont., that is currently operating under CCAA protection.

Martinrea has acquired equipment and inventory from SKD that are related to Honda, Ford, and Chrysler. The company will move the equipment to its facilities in Canada and the U.S. and will perform work for those customers from those plants.

“The industry is going through a very difficult time, with volumes so much lower, but there are tremendous opportunities for suppliers who can assist customers also in being able to absorb takeover business without any production disruptions,” explained Fred Jaekel, Martinrea's chief executive officer. “We have taken advantage of these opportunities in the past, and we see more of this in the future as the supply base continues to consolidate. We are very pleased to add significant Honda business to our revenue base, as well as increase our Ford, Chrysler, GM, and Volkswagen business. Finally, we believe the pricing was very good for the assets purchased and the volume of business received.”

At the Linamar head office in Guelph, Ont., announcements have been made that the company has been awarded a multiyear supply contract for driveline modules with a major European auto manufacturer.

The start of production is scheduled for 2011. At anticipated volumes and current exchange rates, Linamar expects annualized sales associated with this program to be in excess of $200 million once the program reaches full production, which is expected to occur in 2014.

“This is a transformational business win for our European group testament to the dedication and focus of our team to realize our globalization and diversification strategies,” said Linamar CEO Linda Hasenfratz. “It is also a huge win for our new driveline systems businesses, which are levering off a global focus on AWD systems.”

Parts manufacturer Magna’s interest in German carmaker Opel continues as the industry waits to see what type of ownership framework can be worked out.

“While the recent negotiations have been intense and difficult at times, I believe we have achieved a constructive solution that represents a ‘win-win’ for all stakeholders and will position Opel to compete and succeed,” said Frank Stronach, chairman of Magna. “We are thankful for the dedication of all interested parties and look forward to continuing to work with General Motors, the German governments, and other stakeholders to turn our concept into a reality in the next phase of the process, as the parties work toward definitive agreements.”