Canadian Auto Industry Rebounds, But Lacks Export Strategy, According to
Scotia Economics

- Exports still driven by slow-growth U.S. market

TORONTO, Oct. 28 /CNW/ - Global car sales powered ahead in September, posting the strongest year-over-year increase since May, a reversal from several months of weakness, according to the latest Global Auto Report released today by Scotia Economics. The improvement was led by the emerging markets of Russia, India and China, but virtually every region reported higher volumes.

"The latest upturn highlights that the global economy still retains significant forward momentum, even in the face of sovereign debt problems in Western Europe, which have accelerated fiscal consolidation in many countries, and ongoing household deleveraging in key markets," said Carlos Gomes, Senior Economist, Scotia Economics.

"The Canadian auto industry is bouncing back, with vehicle production surging by 56 per cent in the year to September, outpacing a 49 per cent increase in the United States," continued Mr. Gomes. "Employment has picked up, mainly in vehicle assemblies. However, vehicle exports remain almost exclusively destined to a U.S. market that has limited upside potential in a period of protracted household and fiscal consolidation, limiting Canada's growth opportunities. In fact, Canada is the only major auto manufacturing nation that relies almost exclusively on one export market, and is not diversified and well positioned to benefit from rapid sales gains in emerging markets."

According to the report, Canada and Mexico have benefitted from the integration of the North American auto industry under NAFTA. Canada's share of North American vehicle output climbed to 17 per cent in 2009 and has advanced to 17.4 per cent so far this year, up from an average of 16 per cent over the past two decades. Mexico's share gain has been even greater based on its low-cost platform, with vehicle output overtaking Canada last year, and now garnering nearly 18 per cent of overall North American vehicle assemblies. Both countries remain heavily dependant on exports to the United States, with Canada the largest vehicle exporter, and Mexico in third place behind Germany. Canada continues to rely on the United States for the destination of virtually all its motor vehicle exports. In contrast, Mexico has been diversifying its export base over the past decade, reducing the share destined to its NAFTA partners to just over 70 per cent currently, from about 95 per cent a decade ago.

The United States now ships nearly 60 per cent of its overall vehicle exports overseas. In fact, despite the sharp downturn in global vehicle sales and production last year, the United States still exported nearly 1.0 million cars and trucks overseas in 2009, up from less than 800,000 units five years ago. Germany, Saudi Arabia, the UAE (United Arab Emirates) and the United Kingdom have historically been the largest purchasers of U.S. cars and light trucks. However, U.S. exports to China have been surging at an astonishing rate so far this year, climbing nearly fivefold, to surpass Germany as the third-largest market for U.S.-made cars and trucks - behind Canada and Mexico. In fact, China and the other fast-growing BRIC (Brazil, Russia, India and China) markets now account for nearly 10 per cent of overall U.S. vehicle exports, up from virtually nothing a decade ago.

Even India, which surpassed both Canada and Mexico in vehicle assemblies in 2008 and is currently the world's seventh largest vehicle-producing nation, but ranks only twenty-second in automotive exports, plans to boost and diversify its export base. Currently, India's motor vehicle exports total about $4.5 billion annually, but the government's Automotive Action Plan has set a $12 billion target by 2016 - a near-tripling over the next six years.

"From a Canadian perspective, it is important that a major automaker recently announced that it will begin exporting Canadian-made vehicles to China, in response to strong sales of sport utility vehicles in the world's largest auto market," concluded Mr. Gomes. "However, the company's targets are modest initially, with only 4,000-5,000 units expected to be exported annually. The Canadian industry should continue to seek opportunities to redirect some of their output to the fast-growing emerging auto markets, to keep Canada from slipping further down the global production ladder. Canada was the world's eighth-largest vehicle producer as recently as 2005, but has since dropped out of the top ten."

Scotia Economics 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.

For further information: Carlos Gomes, Scotia Economics, [phone], [email protected]; Patty Stathokostas, Scotiabank Media Communications, [phone], [email protected].