Positive long-term auto sector outlook means opportunities for suppliers

Contrary to popular belief, North America’s automotive sector is alive and well, according to Andrew King, a consultant with DesRosiers Automotive Consultants Inc. in Richmond Hill, Ont.

The automotive sector is declining in some regions of Canada, but the industry itself is strong, King told attendees at an automotive outlook conference held by Export Development Canada and PricewaterhouseCoopers for mold, tool and die makers on October 17 in Mississauga, Ont.

King identified several factors making Canada a desirable locale for Asian and European auto-makers. To begin, he said, Canada is now one of the leading centres for research, design, development and testing of vehicles, which has become the fastest growing aspect of the Canadian automotive sector. Related to this, he continued, Canada’s auto industry has become a global centre for intellectual capital, with over $1.5 billion in intellectual capital invested over the last five years.

AUTOMOTIVE SAFE HAVEN

Those automotive manufacturers that invest in Canada can reap enormous benefits. Toyota’s Cambridge, Ont. facility, for example, is the company’s most successful plant outside of Japan and its only non-Japanese plant to produce a Lexus vehicle.

Toyota already accounts for 11.7 per cent of Canada’s auto assembly, a share that will likely increase when the company opens a new assembly plant in Woodstock, Ont. in 2008.

As another example, Honda accounts for 14.7 per cent of auto assembly in Canada. King noted that Honda uses its Alliston, Ont. facility to launch its new products, including the Pilot, Odyssey, and Ridgeline models.

Canada has become a safe and attractive business environment for these Asian transplants, offering duty-free access to the U.S. and Mexican markets, as well as being well-integrated into the U.S. transportation network, King said. Adding to this is the fact that Canada’s auto assembly sector has always been 100 per cent foreign owned, with virtually no domestic automotive OEMs to speak of. As a result, Canadians have always valued foreign investment, King explained, and working with foreign parts suppliers has therefore never been an issue for members of Canada’s auto parts sector.

One negative side effect of the inroads made in Canada by Asian auto manufacturers is that the marketshare of the North American ‘Big Three’ is shrinking, King said. Nonetheless, General Motors (GM) still accounts for 32 per cent of Canadian auto assembly, followed by DaimlerChrysler at 25.9 per cent. Ford, the third member of the triumvirate, accounts for a relatively small 8.5 per cent, King said.

NEW DOMESTIC CHALLENGE

A second negative development affecting the Canadian auto industry, King said, is that European and Asian transplants don’t just bring auto assembly to North America — they often bring their suppliers with them. These suppliers set up shop in new facilities and have advantages over Canadian parts and component suppliers because they have newer equipment, which means fewer costs associated with older machinery. They also tend to have a younger, more skilled workforce, King continued, and are better attuned to philosophies that can improve manufacturing efficiency. Additionally, they’re mostly non-unionized, King explained.

And these parts suppliers are now branching out, looking for new business from the North American ‘Big Three’, which have struggled to get their suppliers to increase efficiency, King noted.

The new domestic parts suppliers operating in North America represent an avenue that Canadian moldmakers should explore — although without forgetting about GM and DaimlerChrysler, King said, which still dominate the sector.

MOLDMAKERS TO CAPITALIZE

The good news is that Canadian moldmakers are in fact in a very good position to explore these opportunities. “Demand doesn’t appear to be the problem in the mold, tool and die sector,” King said. “Indeed there will likely be strong demand for tools in North America.”

One reason for this is the increasing number of new vehicle models being introduced into the market, which, because of design improvements, tend to last longer on the roads than previous generations. Plus, the U.S. still imports more molds, tools and dies from Canada than any other country in the world, King said. “U.S. imports of offshore tooling is declining, indicating that demand is being sourced increasingly from onshore mold, tool and diemakers,” he explained.

King said that the danger lurking beneath this opportunity is that, at present, it’s these foreign parts suppliers, or “new domestics” — and not the molds, tools and dies from China and Korea — that are hampering the ability of the “old domestics” to stay profitable. “[The] mold tool and diemaking sector is struggling badly with this shift,” he noted.

Imports from China and Korea are for commodity parts, which is not an area where Canadian moldmakers should be competing, according to King. In 2005, the U.S. imported 45.6 per cent of its molds, tools and dies from Canada; 22.6 per cent from Japan; 4.5 per cent from China and 4.5 per cent of Korea, with other countries accounting for 22.8 per cent, according to data from DesRosiers Automotive Consultants.

To date in 2006, the U.S. has imported 38.8 per cent of its molds, tools and dies from Canada, 26.9 per cent from Japan, 4.6 per cent from China, and 3.0 per cent from Korea, with other countries accounting for 26.7 per cent.

In the long-term, vehicle demand should remain healthy, King said. In the short-term, however, there remains a downside threat because of the risk of further bankruptcies in the supply chain. There are two competing theories about the short-term outlook for the auto market, King explained. “Those with heavy weighting on the economic variables are generally positive,” he said. “Those with heavy weighting on the industry variables are generally negative.”

With no definitive answer for the short-term, all parts suppliers can do is wait and see, while actively pursuing new business from the new domestics. “Many North American original equipment parts suppliers are vulnerable to failure and large supplier failures could set off a domino effect,” King said.

Answering speculations that Ford or GM could become bankrupt, King conceded it is a possibility, but a highly unlikely one.

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