The outlook brightens, but forecast remains cloudy
With a nod to the pop band The Cars with their 1979 hit, is there a case to be made today for “letting the good times roll” in the Canadian automotive industry? According to the Conference Board of Canada, which recently released its industrial outlook for Canada’s motor vehicle manufacturing industry, the vehicle assembly industry in Canada is expected to post profits of $1 billion in 2011, up significantly from $114 million in 2010.
Likewise, the Conference Board noted that Canada’s parts manufacturers would generate profits of $455 million this year, up from $255 million last year. The trade press has also suggested that with the Japanese disaster of March 11th affecting new vehicle supply, manufacturers were able to take the foot off of the gas pedal of incentives allowing transaction prices to strengthen. The shortage of new vehicles has also led to the strengthening of prices for used vehicles as well. So, maybe the good times are here. But let’s dive a little deeper.
Look at the year so far
I don’t have access to the latest numbers as I write this article, but at almost half way through the year, it is worthwhile to take a look at some of the key industry statistics to see what inferences can be drawn for the entire year from what is available to us in late June.
Vehicle sales through May are ahead only 1.8% over last year, and May 2011 was the weakest May in the last six years with vehicle sales down about 20,000 units from the average of the last five years of May sales. Importantly for vehicle production in Canada, U.S. vehicle sales slipped about 4% as well in May. Given that roughly 85% of Canadian vehicle production is sold in the U.S., for Canadian-based vehicle manufacturers to be successful, a robust U.S. sales environment is required.
At the end of May, vehicle production in Canada was tracking at 2.3% higher than in 2010, with 854,809 units being produced, which is impressive given that production at Honda and Toyota year to date is down 22% and a little over 6% respectively, owing to parts and components shortages arising from the natural disasters in Japan. By all accounts, however, vehicle production is coming back online more quickly than anticipated.
In Canada, Toyota expects to be up to 100% production for the RAV4 and Lexus RX350 by September from the 60% and 25% levels respectively in early June. Meanwhile production for the Corolla and Matrix returned to 100% at the beginning of June. Likewise with Honda, its Plant 1 in Alliston, which builds the new 2012 Civic, is expected to return to two shift production in September while Plant 2 which makes the Civic as well as the Acura MDX and ZDX is expected to return to full production by mid-October. If you’ve been watching TV or reading the newspapers you will have noticed that Toyota is touting its
vast inventories and comprehensive supply
of vehicles.
Other ripples abroad
Based on the above, it would appear that sales for this year are likely to be on par with last year while production will be a little stronger. It is maybe too easy, however, to look at our own industry in isolation from everything else going on in the world around us.
As much as Greece may not be on our minds every day, what happens there may have significant impact on the European economy – if not the global economy going forward. On Tuesday, June 28th the Greek parliament passed severe austerity measures worth about €78 billion that caused a mass rallies and civil unrest in that country. If the Greeks end up defaulting on their debt, one can expect the contagion to spread throughout Europe, especially in the remainder of the PIGS nations (Portugal, Ireland, Spain) and any economic fallout likely won’t end in Europe.
U.S. economy a mixed bag
Greece is not alone, however, in its financial challenges. Our neighbour to the south is having its own fiscal difficulties and is mired in political intransigence as the Republicans and Democrats square off over how to raise the $14.29 trillion debt ceiling by August 2nd. The Republicans are loath to consider tax increases and appear adamant that President Obama significantly increase spending cuts. If a resolution is not found by the beginning of August, the U.S. will default on its loan payments which some economists have suggested would plummet the North American economy back into recession.
Hopefully, that situation will get sorted out, but even if it does the U.S. (and Canada for that matter) continue to struggle with lower economic growth than projected and persistently high unemployment. Additionally, much of the public economic stimulus and quantitative easing instituted to combat the recession has now ended but things have not really gotten a whole lot better. Just last week the International Energy Agency – for only the third time in its history – released 60 million barrels of oil from its strategic reserves, presumably to increase supply and therefore moderate high gas prices heading into the long weekend at the beginning of July.
So, lots to think about and lots of potential storm clouds on the horizon. By the time you read this article all of the important dates I have commented on will have come and gone and we will be in a position to see what impact these events have made to our global economy and to our industry. Let’s hope we are in a situation where the good times can continue to roll for the automotive industry.
