By Mike Davey
Toronto, Ontario -- January 25, 2016 -- There’s a cloud behind every silver lining. At least that’s what a new report seems to indicate about the record high auto sales across North America in 2015.
The report, "Canada’s Motor Vehicle Manufacturing Industry: Industrial Outlook Autumn 2015," notes that while times have been good, the automotive manufacturing sector faces a number of medium and long-term challenges. The report was written by Fares Bounajim and Brent Dowdall and issued by the Conference Board of Canada.
The final tallies still aren’t in, but estimates say that auto industry profits in 2015 climbed by 79 percent, reaching a total of $2.5 billion. This is the highest since 2000. However, according to the report, factors impacting the Canadian economy mean the profits will drop to $2 billion in 2016 and continue declining through 2020.
Part of this is due to changes in where vehicles are assembled, and the vehicles that Canada will be assembling. GM and Toyota are both investing in Canadian plants, but overall investment is well below peak.
Lower prices at the pump are a boost to demand for trucks and crossover, and that’s a point in Canada’s favour. Trucks and SUVs usually produce higher profits per vehicle. However, many manufacturers are shifting car production to plants in Mexico and the southern US. Regardless of profit per vehicle, the sheer volume of passenger cars means relatively lower profits for Canadian plants.
"Despite the strong short-term results, the Canadian auto assembly industry is struggling to grow," says Michael Burt, Director, Industrial Economic Trends for the Conference Board of Canada. "Over the next five years, no growth in production is expected in Canada.”
There’s also the Consolidated Line at General Motors’ Oshawa assembly plant. Although GM recently extended the lifespan of the plant to 2017, it is still expected to close at that time.
Then there’s the Trans-Pacific Partnership (TPP). This agreement may pose challenges for Canadian vehicle and parts manufacturers.
"While the impact of the Trans-Pacific Partnership agreement is still somewhat uncertain, it is expected to heighten competition for Canadian assemblers and parts manufacturers,” says Burt. "The agreement calls for the elimination of tariffs on imported Japanese vehicles within five years of ratification, leading to enhanced competition in the saturated Canadian market. Although Canadian producers have not traditionally exported a lot to Asian countries, the TPP will also increase their market access to member countries, creating new opportunities."
Parts manufacturers currently operate under provisions that require vehicles to contain at least 62.5 per cent of their content from the three countries—Canada, Mexico or the US. Under the TPP, that share will drop to 45 percent, 40 percent or even 35 percent, depending on the parts in question. These provisions increase the likelihood that more imported parts will make their way into North American supply chains.