Boom in automotive shipments only a short-term reprieve
Anyone feeling optimistic about what the summer’s rise in automotive shipments from the Detroit Three indicated about the future, should be sobered by this week’s news from General Motors about significant layoffs. That development, I believe, is more indicative of the short term future of those automotive clients than the summer’s boost in shipments.
Sales for the Detroit Three are down about 4% so far this year and economists such as Steven Poloz of Export Development Canada believe this picture is likely to persist, given the uncertainties that U.S. consumers face from the housing market. Even with the more successful offshore manufacturers included, auto sales are down about 1.6% this year. (True, Canada’s car sales have been solid, but since they account for only about a tenth of the North American market, they’re not a reliable indicator.)
So how can shipments be up when sales are down? The Detroit Three became concerned during the summer about their inventories of unsold vehicles. As Poloz recently pointed out, inventory levels, ideally around 60 days of sales, fell from 91 days last January to about 51 days in May. So despite still weak sales, the Detroit-Three have been ramping up production, on both sides of the border.
Also all three companies were at the start of contract negotiations with their workers and their concern about strike action created another reason to build up their inventories, thus boosting shipments.
But this mini-boom is only a temporary reprieve. The impact from the bursting of the housing market bubble in the US has still not worked itself out.
It would also be wise to remember the concerns voiced by the major manufacturing representatives in Canada at the close of last year.
“We are in for another challenging year in manufacturing,” was the dour outlook provided by Jason Myers, senior vice president and chief economist with the Canadian Manufacturers and Exporters.
Although manufacturing in Western Canada is booming, Ontario accounts for about half the country’s manufacturing output and it is smarting from the combined pressure of high energy costs and a high Canadian dollar which reduces the attractiveness of our manufactured products on the US market. Over the past decade Ontario’s manufacturing sector has outperformed that of every other western country in terms of growth, according to Myers but the pace has cooled down since 2004.
Mark Nantais, president of the Canadian Vehicle Manufacturers Association, expressed concern the current shift in sourcing from plants in the US, Mexico and overseas will be compounded by inefficient border crossings.
“During production vehicle parts and components and subassemblies can cross the border up to seven times a day due to the integrated nature of the automotive industry. If there isn’t a reliable, predictable border, it gets factored into investment decisions,” Nantais said. “The border has become layered with overlapping and inefficient regulations. It continues to get stickier. We are going in the wrong direction. It’s very clear that if we don’t do something, the next event will have a significant impact on how we move products across the border.”
On a more positive note, motor carriers best able to tap into the growth in Western Canada have much to look forward to. Over the next 10 years there may be as much opportunity serving the western boom as spending 80 years chasing the current volume of business from our trade with China, according to Myers.
And while the Big Three automakers are having their troubles, the offshore manufacturers who have set up production in Canada are booming. Japanese automotive manufacturers, for example, have increased their market share from 24% to 35% since 1999 while the Big Three’s market share has dropped from 71% to 53%, according to David Adams, president of the Association of International Automobile Manufacturers of Canada.
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