Canada's auto parts industry gaining ground, still room for growth: Scotiabank

TORONTO, May 8, 2013 /CNW/ - The Canadian auto parts industry performed well last year in select markets including Mexico, the United States, as well as advances in sales to India and South Korea, according to the Scotiabank Global Auto Report released today.

"Outside of these countries, offshore shipments were largely flat, as the Canadian auto parts sector is still searching for a strategy that will enable it to benefit from the rapid growth occurring outside of the mature auto market of North America," said Carlos Gomes, Scotiabank's Senior Economist and Auto Industry Specialist. "Also, Canada is heavily reliant on imported auto parts with each vehicle built in Canada containing nearly $15,000 of imported auto parts - double the global average of US$7,400."

For more details about the Scotiabank Global Auto Report, please read the full report below.

Scotiabank 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.

Scotiabank is a leading multinational financial services provider and Canada's most international bank. With more than 82,000 employees, Scotiabank and its affiliates serve some 19 million customers in more than 55 countries around the world. Scotiabank offers a broad range of products and services including personal, commercial, corporate and investment banking. In December 2012, Scotiabank became the first Canadian bank to be named Global Bank of the Year and Bank of the Year in the Americas by The Banker magazine, a Financial Times publication. With assets of $736 billion (as at January 31, 2013), Scotiabank trades on the Toronto (BNS) and New York Exchanges (BNS). For more information please visit www.scotiabank.com.

For high-resolution video clips visit http://media.scotiabank.com/cdaen/multimedia/mc-videos.html. For more Scotiabank economic publications visit http://www.scotiabank.com/ca/en/0,,3112,00.html

CANADIAN AUTO PARTS INDUSTRY:  THE WORLD'S IMPORT-INTENSITY LEADER

Recent global car sales trends

Global vehicle sales edged down in March, undercut by a double-digit slump in Western Europe and some recent softening in Eastern Europe. However, purchases remained strong in all other regions, leaving global volumes up 2% year-over-year during the first quarter. More recent data for April point to stronger sales, including the first year-over-year increase in Japanese purchases in seven months. The improvement likely reflects the depreciation of the yen and the recent stock market rally which have boosted consumer confidence in Japan to the highest level since June 2007.

In the United States, car and light truck sales advanced 8% above a year earlier in April, with volumes buoyed by robust sales of pickup trucks and crossover utility vehicles. In particular, sales of the Ram pickup surged 41% year-over-year, while GM's stable of large pickups jumped 19% and Ford's industry-leading F-series climbed 18%.  We estimate retail car and light truck purchases in the United States climbed to 12.4 million units in April from an average of 12 million during the first quarter. However, fleet volumes, which tend to be volatile on a month-to-month basis, fell in April and trimmed overall purchases below an annualized 15 million units for the first time since October 2012.

In Canada, passenger vehicle sales in April posted the first year-over-year gain in five months. We estimate that purchases accelerated to an annualized 1.72 million units last month from an average of 1.66 million during the first quarter. The improvement was broad-based, with both the Detroit Three and Japanese automakers posting double-digit gains. Year-to-date volumes have advanced 1% through April and remain on target to meet our full-year forecast of 1.69 million units - the second-highest on record.

CANADIAN AUTO PARTS EXPORTS MAKE INROADS, BUT UNABLE TO CRACK "GLOBAL TOP 10"

The Canadian auto parts sector performed well last year, with exports posting a double-digit increase - a sharp acceleration from a 3% gain in 2011. This solid performance enabled the industry to move up the global auto parts export ladder. However, the industry was unable to recapture a position among the global "top 10" auto parts exporters and had to settle for being the world's eleventh largest exporter last year. In fact, the industry has not been among the global "top 10" in the past five years. Prior to the global economic downturn, Canada was traditionally a top exporter and in 2007 - its last year among the "top 10" - was the world's eighth largest parts exporter.

Last year's improvement reflects a double-digit increase in auto parts exports to Mexico, a 7% gain in shipments to the United States, as well as solid advances in sales to India and South Korea.  However, outside of these countries, offshore shipments were largely flat, as the Canadian auto parts sector is still searching for a strategy that will enable it to benefit from the rapid growth occurring outside of the mature auto market of North America.  Ninety-eight per cent of Canadian auto parts shipments still remain in North America - either in Canada, or exported to its NAFTA partners - a level in line with the average of the past several decades.  However, the region's share of global vehicle production has slumped sharply, falling to 19% in 2012, down from one-third of global output in the late 1990s.

Despite last year's improvement, Canadian auto parts exports are still 20% below the level prevailing at the top of the previous economic cycle in 2007 - one of the worst performance among the top auto parts-exporting nations. In contrast, U.S. and global auto parts exports are more than 20% above the previous cycle peak in 2007. Foreign sales of auto parts by competitors such as Mexico have surged a stunning 44% over this period. In fact, while Canada has lost it "top 10"export ranking, Mexico has continued to move up the global ladder and is currently the world's 5th largest parts exporter.

While most of Mexico's auto parts exports are destined to its NAFTA partners, sales outside of North America have surged nearly 70% since 2007, and now account for 6% of the country's overall parts exports. In particular, Mexico's shipments to Asia - a region that now accounts for more than half of global vehicle output - have soared by 86% over the past six years. In contrast, Canada's auto parts exports outside of NAFTA have been cut in half over the past six years.

Aside from the lack of an effective export strategy outside of North America, Canada is also heavily reliant on imported auto parts. While the nation's status as a "top 10" global auto manufacturer is being challenged by developing nations, Canada's auto parts industry has consistently been among the top three importers in the world - behind the United States and Germany. As a result, Canadian-made vehicles have the highest content of imported parts among the major vehicle-producing nations. Each vehicle built in Canada contains nearly $15,000 of imported auto parts - double the global average of US$7,400.

Each vehicle assembled in Canada contains at least 25% more imported parts than vehicles built in either the United States or Mexico. We estimate that cars and trucks assembled in the United States have an average of US$11,000 of imported parts. The foreign-content of Mexican-built vehicles is marginally lower, averaging US$10,500 per car and truck. The import content is even less in Western Europe, averaging just over US$10,000 per vehicle in Germany, France and Spain - the continent's largest auto manufacturers.

The higher import content for models built in Canada and the United States reflects the large two-way trade between the two countries in semi-finished auto parts. In fact, the bilateral auto parts trade between Canada and the United States totals roughly US$40 billion per year — more than 3% of the US$1.2 trillion in global auto parts trade. However, the net impact of the high import penetration in Canadian-built vehicles is that rising vehicle assemblies will have limited impact on reducing Canada's automotive trade deficit.

Engines are the largest component of auto parts imported into Canada, accounting for nearly one-quarter of the sector's overall imports. Despite several top-notch engine plants in Canada, over 80% of all vehicles built in Canada contain imported engines. Transmissions and electrical systems are the next categories of auto parts heavily imported into Canada. In fact, we estimate that these three categories account for roughly half of Canada's overall auto parts imports.  Given the increasing electronics content in today's vehicles, Canada's deficit in auto parts will be hard pressed to shrink going forward.

SOURCE: Scotiabank - Economic Reports

Carlos Gomes, Scotiabank Economics, [phone], [email protected]; or
Devinder Lamsar, Scotiabank Media Communications, [phone], [email protected].