Unrest in the automotive market

Automotive is one of the most profitable industries in Canada. But lately, cheap labour in Asia has put the squeeze on Canadian suppliers of parts and components for the automotive industry, including plastics processors, leading to financial problems and closures.

For example, Collins & Aikman’s CEO, David Stockman, quit in May, amid mounting problems at the auto interior and trim supplier. The company has fully used up its credit line and is relying on payments from customers to fund its operations. In May, the company had only $13.4 million in available cash and financing against a total debt of $2 billion.

Standard & Poor’s also downgraded the auto supplier’s credit rating two notches to CCC, nine levels below investment grade, and the New York Stock Exchange suspended trading of Collins & Aikman’s stock.

Additionally, Blackhawk Automotive Plastics Inc. (Salem, OH) also announced in May that it has sold its year-and-a-half, 288,000sq-ft injection molding plant in Mississauga, ON, which was stocked with new Mitsubishi injection molding machines.

Lear Corp. (Southfield, MI) also announced a restructuring plan of its global operations. The firm plans to close 20 of its 300 plants around the world, but has not said which facilities will be affected, according to Mel Stephens, Lear’s vice-president of communications.

Lear operates seven facilities in Canada.

RESIN PRICES

David McQueen, president of Plextron Plastic Assembly Solutions (Scarborough, ON) said processors’ inability to pass along resin price increases over to the original equipment manufacturers (OEMs) is a cause of financial difficulty for any plastics processor involved in the automotive industry.

And he speculates some companies expanded too rapidly as a result of the massive pressure from OEMs to operate globally.

“I wonder about the banks, if they have made a conscious decision to pull back from the automotive industry, given what they have seen,” he said, although he hasn’t seen evidence of this in Plextron’s case.

And a report from the Conference Board of Canada (Ottawa, ON) doesn’t indicate a bright outlook for 2005, in terms of production.

“Weaker export demand in the U.S. market will lead to three consecutive quarters of declining production,” said Louis Theriault, associate director of the Conference Board’s Industrial Outlook wing in Quebec City, Que. “Despite the stall in production, efforts to reduce material and labour costs will improve profits compared to 2004. Still the industry is a long way from the heady profit levels and margins enjoyed in the late 1990s.”

With North American demand softening and the Canadian dollar remaining strong, auto exports are expected to decline, limiting production to a meager growth of 0.1% for 2005, the Conference Board said.

In particular, the Big Three are facing structural changes because they are losing market share to foreign manufacturers who compete with low labour costs, Theriault explained.

Additionally, higher gasoline costs are affecting sales of specific models, such as sports utility vehicles (SUVs). Overall, revenues will remain flat for the second straight year in 2005, but declining costs will help the industry’s profits rise from $1.4 billion in 2004 to $3.6 billion in 2005.

As production picks up in 2006, profits are expected to increase gradually, exceeding $5 billion in 2008.

NEW INVESTMENTS

One sign that things will improve is Toyota Motor Corp.’s recent announced of a new automotive assembly plant in Woodstock, ON.

Despite reports that SUV sales are declining, Toyota plans to use the Woodstock plant to build its RAV4 sport utility vehicle.

The new plant will open in 2008, create 1,300 direct new jobs and will have the capacity to build 10,000 automobiles annually. It will also have the distinction of being the first assembly plant built on a greenfield site in Canada since 1986, according to Industry Canada.

“We have been working long and hard along side TMMC, the Canadian Automotive Partnership Council (CAPC) and other stakeholders to sell this investment opportunity,” said Gary Fedchun, president of the Automotive Parts Manufacturers’ Association (APMA). “This will be another feather in our cap for our sector and our industry.”

Toyota also plans to expand Canadian Autoparts Toyota Inc., in Delta, BC. As a result of the $39 million expansion, wheel capacity at the factory will increase by nearly 17% per year, starting in July 2007.