Canadian auto production will be essentially flat and industry profits down in 2018, warns a report by the Conference Board of Canada.
Industry production will rise by 0.8 per cent this year, following a 3.8 per cent drop in 2017, the research group says.
Canada will feel the effects of a declining U.S. market as the vast majority of Canada's automotive exports — upwards of 80 per cent — are destined for the United States.
Sales in the United States dipped 1.8 per cent to 17.25 million for all of 2017 — ending a string of seven annual gains that had propelled the industry there to new highs following the 2008-09 market collapse.
“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 U.S. and Canada and urban millennials’ purchasing fewer vehicles due to ready access to ride-sharing,” Sabrina Bond, and economist at the Conference Board of Canada, said in a statement.
The report says the decline in the U.S. new-vehicle market will be gradual because several economic factors south of the border remain strong. Fuel prices are relatively low, U.S. labour markets are near full employment, interest rates are below historical averages, and exchange rates favour U.S. consumers.
But the board says millennials, who are opting for ride-sharing services over new cars in some cases, will help “drive drive U.S. vehicle sales down to historical norms.”
“American millennials buy new vehicles at half the rate of those aged 35 to 54,” the report says.
Light vehicle sales in the United States 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.
“We’ve seen five years of record sales in Canada, however vehicle production in Canada is more closely linked with vehicle sales in the United States, given that the U.S. is the destination for about 85 per cent of Canadian production,” David Adams, president of the Global Automakers of Canada (GAC), told Automotive News Canada in an email.
The GAC represents and lobbies for the interests of more than 20 global automakers.
“To the extent that the U.S. market continues to contract — regardless of reason — it would be logical that Canadian production would contract more or less proportionately unless the five Manufacturers sell more of their output to Canadians or find other markets (such as the EU under the CETA) to sell their production,” Adams said.
General Motors, Ford, Fiat Chrysler Automobiles, Honda and Toyota all produce vehicles in Canada.
“Meanwhile, the industry will have to contend with potential changes to rules of origin in the existing NAFTA, which could take a sizeable bite out of Canadian auto exports and investment in manufacturing,” Bond said.
Due to automakers’ heavy reliance on internationally integrated supply chains, the current unease in North American trade relations poses a risk to automakers’ investment and production in Canada. Potential changes to rules-of-origin requirements — the United States wants North American content raised to 80 per cent and U.S.-only content to 50 per cent. That could take a sizeable bite out of Canadian auto exports and GDP, the report warns. The current outlook assumes the continuation of NAFTA.
In all, the Canadian industry’s financial performance is expected to weaken in 2018. Industry pre-tax profits are expected to be $1.6 billion in 2018, down from $1.9 billion in 2017, with both revenues and costs dropping. However, the decline in revenues is expected to outpace the drop in costs, leading to weaker profitability.
‘JURY STILL OUT’
Adams says changes to the NAFTA rules of origin will not “take a bite out of Canadian production.”
“The jury is still out on where the NAFTA Automotive provisions will end up, and more importantly where the NAFTA as an agreement will end up,” Adams told Automotive News Canada in an email. “In any case, change will not happen over night, but the impact of any change is difficult to assess without knowing the specifics of the changes.
“With the current U.S. proposal, it has been suggested that some automakers would forego NAFTA preference and simply pay the 2.5 per cent tariff to export vehicles to the U.S. It’s conceivable that increased cost could reduce demand for Canadian-produced vehicles, but at this point everything is very hypothetical until we know the NAFTA outcome.”
The Automotive Parts Manufacturers’ Association and Canadian Vehicle Manufacturers’ Association didn’t immediately respond to requests for comment.