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Auto industry crucial to health of North American economy - Scotia Economics

The auto sector is the largest manufacturing industry in the United States and Canada and its stability and future viability are crucial in ensuring the health of both economies, according to the latest Global Auto Report released today by Scotia Economics.

The auto industry accounts for 13.5 percent of overall Canadian manufacturing and more than seven percent of factory output in the United States. However, in regions such as Ontario and Michigan, the auto industry is even more crucial. The sector dominates the Ontario economy, accounting for 26 percent of manufacturing output and 5 percent of overall economic activity.

"Aside from manufacturing, there are also roughly two million people in Canada and the United States employed in the auto wholesale and retail channel," said Carlos Gomes, Scotiabank Senior Economist and Auto Industry Specialist. "In the case of Canada, there are more than 3,400 auto dealerships, with the Detroit Three accounting for nearly half. In Ontario alone, there are more than 1,200 auto dealerships selling both domestic and imported models."

An extensive and diverse quantity of inputs, including steel, plastics, metals and electronics, are required to produce motor vehicles & parts. On average, a vehicle produced in North America weighs over 4,000 pounds and contains roughly 2,600 pounds of steel. Plastics (including paint) are also key inputs for the motor vehicle industry, with each new vehicle containing nearly 550 pounds of plastics, 13 percent of overall vehicle weight, the report said.

The auto industry is also a key source of overall investment and innovation. For example, the industry has invested more than $35 billion in Canada over the past decade, accounting for more than 17 percent of overall manufacturing investment. In fact, since 2003, auto industry investment on machinery and equipment has averaged roughly $1,100 per vehicle assembled in Ontario, up from less than $800 during the previous six years. Investment will peak at nearly $1,300 per unit in 2008, as several automakers modernize their facilities to flexible assembly plants, Scotia Economics estimates.

"Despite these significant investments, the sharp fall-off in vehicle demand in recent months will reduce operating rates at assembly plants across North America to roughly 76 percent in 2008, one of the lowest levels on record," added Gomes. "Highlighting the difficult conditions facing automakers, operating rates at the Detroit Three will likely remain below 70 percent through the end of the decade, well below the 80 percent rate they were facing when they began to close plants earlier this decade."

Global vehicle sales remain in the midst of a precipitous fall-off, led by sharp declines in the mature markets of the United States, Western Europe and Japan. Purchases have also lost momentum in emerging markets, which until recently cushioned the decline in global volumes. The slowdown reflects the intensifying global economic downturn and the sharp plunge in equity markets that has slashed valuations by nearly US$30 trillion over the past year, undermining household wealth and confidence.

The fall-off is steepest in the United States, with vehicle purchases plunging 32 percent year-over-year in October to a 25-year low of 10.6 million units, down from an average of 14.1 million units during the previous nine months. Preliminary data suggest that sales remained close to this level in November as well. The drop is being reinforced by record-low US consumer confidence and a rapidly deteriorating job market that will likely get even worse in the months ahead. Given the sharp contraction in demand, automakers are slashing production and have moved forward their year-end clearance sales.

In contrast to the global downturn, vehicle sales in Canada continued to advance through October, climbing 2 percent year-over-year. Purchases totaled an annualized 1.64 million units last month, only marginally lower than the 1.70 million unit average through September. European automakers posted double-digit gains, with the increase buoyed by their small car line-ups. In fact, small cars accounted for all of the increase in overall sales last month. Preliminary estimates point to some softening in Canadian purchases in November.

Used car prices, a leading indicator of new vehicle demand, are also holding up in Canada and have actually edged up in recent months, as a lower Canadian dollar has cut into the number of vehicles imported from the United States. Imports slumped 35 percent year-over-year in October when the Canadian dollar fell below US90 cents, partly reversing the 84 percent surge during the previous nine months.

"Nevertheless, we expect the sharp erosion in global economic conditions and equity markets will increasingly take a toll on Canadian prospects. As a result, we are reducing our 2009 Canadian new vehicle sales forecast to 1.50 million units, down from 1.67 million this year and an average of 1.60 million so far this decade," Gomes said.