THE BOTTOM LINE: NAFTA’s auto sector evolving

The auto sector has traditionally been front and centre when it comes to understanding Canadian export performance. But recent trends have taken the sector down a notch in relative importance, and the outlook for 2008 is for more of the same.

Autos and parts remain the second-largest export sector for Canada, at just over $70 billion in 2007. Energy exports have leapt into first place, generating revenues of nearly $92 billion in 2007. Close behind autos is exports of services tourism, financial services, engineering and professional services, and so on at nearly $68 billion.

This is more than a case of energy exports outpacing the rest of the field, however, as Canada’s exports of autos and parts have been falling in absolute terms. Back in 2002, for example, our exports were about $85 billion, and they were as high as $87 billion in 1999-2000. That makes for a drop of nearly 20% from 1999-2000 to 2007.

Fact is, Canada is now producing fewer vehicles. Production of light vehicles was over 2.9 million units annually back in 1999-2000, but that was down to 2.5 million in 2007, a drop of about 14%. There was an even larger drop in the U.S. over the same period, from 12.5 million units to 10.5 million, or a 16% drop. Contrast that with developments in Mexico, where production averaged 1.7 million units back in 1999-2000, but edged over 2 million units in 2007, an 18% increase.

The parts sector has been faring better than the assembly sector. Canadian exports of auto parts have fallen by about 9% since the 1999-2000 boom versus a drop of over 20% for vehicles. Moreover, Canadian parts suppliers have managed to connect themselves to the Mexican auto growth story Canadian parts exports to Mexico have grown by over 40% since 1999-2000.

So, what’s the story? There are undoubtedly a lot of factors at play consolidation in the industry, increased competition from imported vehicles, declining retail prices for autos and the passing-down of these pressures into the parts supply chain, to cite a few. The rise in the Canadian dollar also would have played a contributing role. Indeed, while the Canadian dollar appreciated from around 0.67 against the U.S. dollar back in 1999-2000 to average 0.94 in 2007, the Mexican peso remained relatively stable at around 10 pesos per dollar. What is evident from the figures is that the parts sector has played better defence in these conditions than the assembly sector.

This is important, for there are considerably more Canadian workers in the parts sector than in the vehicle assembly sector. Back in 1999-2000 there were nearly 57,000 workers in assembly, but an average of 95,000 workers in the parts sector. By 2007, assembly workers had fallen to around 50,000, but there were still 97,000 workers employed in auto parts. All signs suggest that Canada’s parts producers are increasingly tapping into the global auto market, which is performing well, not just the North American one, which is likely to struggle for the next while.

The bottom line? There can be little doubt that Canada’s auto sector will look different five years from now than it does today. But experience over the past 7-8 years suggests that the sector is populated with innovative survivors.

Stephen S. Poloz is Senior Vice-President, Corporate Affairs and Chief Economist Export Development Canada