The motor vehicle manufacturing industry in Canada got good news in 2015, but the industry faces numerous medium- and long-term challenges in its outlook, according to The Conference Board of Canada’s industry outlook.
The board said that thanks to record sales in both Canada and the US and a declining Canadian dollar, industry profits in 2015 are estimated to have surged by 79 per cent to almost C$2.5 billion and the industry’s pre-tax profit margin reached 4 per cent – the highest since 2000. However, the economic headwinds facing the Canadian economy are sufficient to ensure profits drop to C$2 billion this year, and continue to decline steadily through 2020.
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“Despite the strong short-term results, the Canadian auto assembly industry is struggling to grow,” said Michael Burt, Director, Industrial Economic Trends. “Over the next five years, no growth in production is expected in Canada.
“While the impact of the Trans-Pacific Partnership (the TPP) agreement is still somewhat uncertain, it is expected to heighten competition for Canadian assemblers and parts manufacturers. 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.”
Suppliers in Canada have voiced concern that the TPP will encourage Japanese manufacturers with plants in the US to import more parts from outside of North America.
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 U.S. Under the TPP, that share will drop to 45 per cent, 40 per cent or even 35 per cent, depending on the parts in question. These provisions increase the likelihood that more imported parts will make their way into North American supply chains, some analysts say.
On the plus side for Canada, low petroleum prices are contributing to rising demand for trucks and crossover vehicles at the expense of passenger cars, which is a boost for Canadian-based assembly plants. Manufacturers are shifting car production to the Southern United States and Mexico, and retooling Canadian plants for truck and crossover assembly, which produce higher profits per vehicle.
As a whole, however, Canada is continuing to lose out on auto sector investment to the southern US and Mexico. Toyota is ending Corolla production in Canada and replacing it with the crossover RAV4. Although its lifespan has been extended, the Consolidated Line at General Motors’ Oshawa Assembly is now slated to close in 2017 and no replacement model has been identified. Labour negotiations in 2016 may play a key role in whether the Detroit Three automakers direct new models to Canadian plants.
