• Global Auto Sales Recovery Continues

TORONTO, March 29 /CNW/ - The recovery in global car sales remains on track, with purchases in February posting a double-digit gain for the second consecutive month, according to the latest Global Auto Report released today by Scotia Economics. Russia is leading the way, with sales surging 80 per cent year-over-year (y/y) last month, and 77 per cent year-to-date. Volumes have even started to improve in Western Europe, climbing one per cent in February and reversing ten consecutive months of y/y declines.

Activity accelerated in North America last month, with purchases in the United States soaring 27 per cent above a year earlier to an annualized 13.4 million units - the highest level since the cash-for-clunkers program in August 2009 - up from 12.6 million the previous month. In Canada, car and light truck sales softened four per cent below a year earlier in February, the first y/y decline since October 2009.

Parts Shortages Threaten Global Output

"Japanese automakers continue to extend their vehicle production shutdown following the March 11^th earthquake and subsequent tsunami," said Carlos Gomes, Senior Economist, Scotia Economics. "Production cutbacks are also increasingly spreading outside of Japan, as shortages of key auto parts emerge in many countries, especially in other Asian nations. However, global vehicle demand remains strong and assemblies will bounce back sharply once conditions stabilize in Japan."

Assembly plant shutdowns in Japan have led to losses in vehicle production of about 37,000 units per day since the earthquake, with cumulative losses approaching 400,000 units through March 25^th. These plant closures alone will lead to at least a one per cent drop in Japan's industrial activity in the month of March, as autos are the second-largest manufacturing sector, accounting for 13 per cent of overall industrial activity.

"The shutdowns in Japan represent nearly 14 per cent of global vehicle output, but the major risk to the global auto industry, including non-Japanese automakers, lies in the potential for auto parts shortages globally and its impact on the global supply chain, due to delays in the resumption of component deliveries by Japanese suppliers," continued Mr. Gomes. "Japan is the world's second-largest auto parts exporter behind Germany, and hundreds of parts suppliers are located in northeastern Japan near the epicentre of the earthquake."

Several assembly plants of Japanese automakers outside of Japan have already started to be impacted by component shortages. For example, a major Japanese car manufacturer has stopped overtime operations at 14 plants in North America. If these closures spread, the impact on the global auto industry could be greater than the shutdowns in Japan. Japanese automakers produce 1.3 vehicles outside of Japan for each car or truck assembled domestically.

According the report, the risk is greatest for electronic products, such as semiconductors and infotainment systems, as well as for chemical resins used to make automotive paint. Japan supplies 21 per cent of global semiconductors and is a major producer of integrated circuits and sensors for automobiles. Compounding the problem is the fact that automakers are unable to get supplies from alternative sources due to the proprietary nature of many of these niche products. A shiny pigment, called Xirallic, used in automotive paints is also in short supply globally, due to damage to a plant that produces the pigment in northeastern Japan. This shortage will limit the vehicle colours that consumers can choose.

The United States is the world's largest auto parts importer at more US$43 bn annually, including US$7.6 bn from Japan, creating significant risk of parts shortages. However, roughly 80 per cent of all auto parts used in assembling new vehicles in the United States and Canada are produced in North America - the United States, Canada or Mexico. Japanese-made parts now account for only about a six per cent share of all auto parts purchased in Canada and the United States. In addition, their share of overall auto parts imported into the United States has fallen to 14 per cent - half of the level prevailing in the mid-1990s.

"We believe that the greatest risk remains in Asia, as nearly half of all Japanese auto parts shipments are destined to China and other Asian nations," concluded Mr. Gomes.  "China became the largest importer of Japanese-made auto parts in 2009, surpassing the United States, and its imports from Japan surged an additional 33 per cent last year to US$7.9 bn."

In fact, Asia (including Japan) now produces more than 55 per cent of all new vehicles assembled globally, up from only 30 per cent a decade ago.  On a per vehicle basis, the risk is greatest in Thailand, with each assembled vehicle containing more than US$1,714 of Japanese-made auto parts. In fact, Japan accounts for more than 57 per cent of all auto parts destined to Thailand - a nation that produced 1.6 million cars and trucks last year, a level rapidly approaching the 2 million units assembled in Canada last year. Taiwan also imports more than half of all its auto parts from Japan, while shipments to the Philippines and China exceed 40 per cent of their overall auto parts imports.

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