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May 7, 2008

ANALYSIS: Canadian automotive industry may become unviable

The Canadian automotive industry is in the face of long-term decline, and may struggle to remain viable.

The Canadian automotive industry is in the face of long-term decline, and may struggle to remain viable.

According to SupplierBusiness , the main challenge is that the industry has faced a strengthening of the local currency, wiping out one of its major competitive advantages. The Canadian dollar has strengthened from around C$1.25 to the US dollar three years ago to hover around parity in the last few months.

Last week GM announced it was dropping the second shift at its Oshawa, Ontario, truck plant.  At the beginning of the year the plant was operating full-time.

The Canadian industry produces around 2.5m light vehicles a year, and has a substantial positive trade balance with the US. But the ‘thickening’ of the border crossing with the US and in particular the Windsor-Detroit crossing over the last few years with security concerns remaining at a high level, has made it more risky for the Detroit Three to source from Canada, according to SupplierBusiness .

Agreements between the Detroit companies and the UAW to offer substantially lower wages to new workers and improve workforce flexibility have started to unwind the labour cost advantage that Canada has enjoyed – and the reduction in the healthcare burden faced by the Big Three, with the transfer of responsibilities to the unions, has meant that the advantage provided by Canada’s universal health care coverage will diminish in the future.

At the same time Canadian car parts suppliers have been buffeted by the same pressures as the US supply base from higher raw material prices and pressures on credit lines as banks retrench their lending.

Longer term, with the continued deterioration of the market position of the Detroit Three, the centre of gravity of the US industry is shifting south and away from the Canadian border.  The Canadian supply base is more diversified than in the 1980s when over 90% of production went to the Detroit Three but they still accounted for almost two thirds (65.7%) of production in 2007. Honda and Toyota accounted for another 27.3% while the Suzuki /GM CAMI assembly operation accounted for a further 7%.

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