Canada auto industry faces falling profits amid declining US demand

By Tom Davis

Ottawa, Ontario — January 18, 2018 — Faced with declining demand from US consumers and uncertainty surrounding trade relations between the two countries, automotive production in Canada is expected to rise by just 0.8 percent this year.

The slow pace of growth follows strong industry performance over much of the last decade, according to the latest Conference Board of Canada’s Canadian Industrial Outlook: Canada’s Motor Vehicle Manufacturing Industry.

“New vehicle sales in the United States are coming off the peak reached in 2016 as pent-up demand from the aftermath of the global recession is satisfied,” commented Sabrina Bond, Economist at The Conference Board of Canada. “Going forward, demand for new vehicles will continue to ease as a result of the aging of the Baby Boom population in the US and Canada and urban millennials’ purchasing fewer vehicles due to ready access to ride-sharing.”

Lower-than-average vehicle ownership rates among millennial and seniors will have a large affect on the easing US vehicle sales moving forward. Meanwhile, while Canada has benefitted from strong vehicle purchases from the US in recent year, there report claims its high share of exports leaves the sector vulnerable to trade negotiations.

It’s believed the US will seek to adjust the current rules of origin for autos and parts in the ongoing North American Free Trade Agreement (NAFTA) renegotiation. According to Bond, these changes could take a “sizeable bite” out of Canadian auto exports and investment in manufacturing.

Currently, light autos, engines, and transmissions must have 62.5 percent North American content before they can benefit from duty-free access to NAFTA markets. The White House has expressed interest in potentially raising the threshold to more than 70 percent, with an added requirement that anywhere between 35 and 50 percent of content be made in the US.

Though production is expected to expand slightly, the Conference Board forecasts the sector’s profits will decline. Compared to pre-tax industry earnings of $1.9 billion in 2017, lower revenues will translate to profits of $1.6 billion in 2018 in spite of lower costs, the report forecasts.

More information can be found at conferenceboard.ca


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