TORONTO, Nov. 28 /CNW/ - 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 per cent of overall Canadian
manufacturing and more than seven per cent 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
per cent of manufacturing output and five per cent 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 per cent of overall vehicle weight.
    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 per cent 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.
    "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 per cent in 2008, one of the lowest levels on
record," added Mr. Gomes. "Highlighting the difficult conditions facing
automakers, operating rates at the Detroit Three will likely remain below 70
per cent through the end of the decade, well below the 80 per cent rate they
were facing when they began to close plants earlier this decade."

    Global Vehicle Sales

    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 per cent 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 U.S. 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 two per cent 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 per cent year-over-year in October when the
Canadian dollar fell below US90 cents, partly reversing the 84 per cent 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," said Mr. Gomes.

    Scotia Economics provides clients with in-depth research into the factors
shaping the outlook for Canada and the global economy, including macroeconomic
developments, currency and capital market trends, commodity and industry
performance, as well as monetary, fiscal and public policy issues.