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January 9, 2018

Canadian auto industry to ‘gear down’ in 2018

Canada's motor vehicle manufacturing industry is facing declining demand from US consumers and uncertainty surrounding trade relations is raising questions about the industry's future prospects, according to a Canadian research body.

Canada's motor vehicle manufacturing industry is facing declining demand from US consumers and uncertainty surrounding trade relations is raising questions about the industry's future prospects, according to a Canadian research body.

Following a 3.8 per cent drop in 2017, industry production in Canada will rise by just 0.8 per cent this year, according to the latest Conference Board of Canada's (CBC) 'Canadian Industrial Outlook: Canada's Motor Vehicle Manufacturing Industry'.

"New vehicle sales in the United States are coming off the peak reached in 2016 as pent-up demand from the aftermath of the global recession is satisfied. Going forward, demand for new vehicles will continue to ease as a result of the aging of the Baby Boom population in the US and Canada and urban millennials' purchasing fewer vehicles due to ready access to ride-sharing" said Sabrina Bond, Economist, The Conference Board of Canada.

"Meanwhile, the industry will have to contend with potential changes to rules of origin in the existing NAFTA, which could take a sizable bite out of Canadian auto exports and investment in manufacturing."

Broad economic conditions south of the border will continue to support Canadian motor vehicle manufacturing: fuel prices remain low, US labour markets are operating near full employment levels, interest rates are below historical averages, and a strong US dollar favours US consumers. Despite the positive economic conditions, lower-than-average vehicle ownership rates among millennials and seniors will ease US vehicle sales going forward, the report says. Spurred by improving vehicle technology extending the average length of ownership and the proliferation of ride-sharing services, American millennials buy new vehicles at half the rate of those aged 35 to 54. This will drive US vehicle sales down to historical norms. Light vehicle sales reached a high of 17.46 million units in 2016, but will average just above 16 million units per year over the next five years, CBC forecasts.

Canada 'vulnerable' to NAFTA trade negotations

While Canada has benefited from strong vehicle purchases from the US, its high share of exports leaves the sector vulnerable to trade negotiations. The CBC maintains that preliminary indications are that the US will seek to adjust the current rules of origin for autos and parts in the ongoing North American Free Trade Agreement (NAFTA) renegotiation. Currently, light autos, engines, and transmissions must have 62.5 per cent North American content before they can benefit from duty-free access to NAFTA markets. The White House has expressed interest in potentially raising the threshold to more than 70 per cent, with an added requirement that anywhere between 35 and 50 per cent of content be made in the US This outlook assumes status-quo trade arrangements, with the industry's export profile flattening through the medium term in response to more subdued US vehicle consumption patterns.

In all, the industry's financial performance is expected to weaken in 2018. Industry pre-tax profits are expected to drop from $1.9 billion in 2017 to $1.6 billion in 2018, with both revenues and costs dropping. However, the decline in revenues is expected to outpace the drop in costs, leading to weaker profitability.

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