Canadian Auto Parts Suppliers Performing Well in Turbulent Market

According to the latest Canadian Auto Report released today by Scotia Economics, the Canadian auto parts industry continues to perform well despite a drop in production by major domestic automakers.
While overall vehicle sales remain healthy across North America, the auto industry is going through turbulent times.
The traditional Big Three–major customers for Canadian suppliers–continue to lose market share. Several large U.S. parts suppliers have gone into chapter eleven bankruptcy in recent months, raising concerns about the industry’s outlook.
“Shipments of Canadian auto parts have held up well and were largely flat through March, despite a 9% year-over-year drop in vehicle output by their largest clients – General Motors, Ford and DaimlerChrysler – through April, largely reflecting an inventory overhang at U.S dealerships,” says Carlos Gomes, Scotiabank’s auto industry specialist.
“Furthermore, while the 30% appreciation of the Canadian dollar over the past three years has lessened the competitiveness of Canada’s auto industry, the financial performance of the Canadian auto parts sector remains much healthier than its U.S. counterpart.” According to the report, even with the appreciation of the currency, operating margins for a sample of publicly traded Canadian parts makers totalled 12.8% in the first quarter of 2005 – more than double the 5.4% average for a sample of U.S. suppliers. Automakers continue to pay their Canadian suppliers in Canadian dollars – a practice that has partly insulated parts makers from the impact of the currency’s advance in recent years.
“Canadian parts makers also continue to garner market share from U.S. suppliers, who have experienced a 2% drop in shipments so far this year,” says Gomes. “We estimate that Canadian parts producers now supply nearly 10% of all auto parts sold in the U.S. market, up from less than 8% as recently as 1998. Canadian suppliers have also successfully recaptured some U.S. market share from Mexico. During the first quarter of 2005, auto parts exports from Mexico accounted for 10.2% of the U.S. parts market – only 0.3 percentage points above the share of Canadian suppliers. As recently as 2001, the Mexican auto parts industry had more than a percentage point advantage over Canadian suppliers.” Nevertheless, Canadian parts makers continue to face pressure from suppliers in low-cost countries such as China. For example, U.S. auto parts imports from low-cost countries now represent more than 20% of the U.S. market, up from roughly 15% five years ago. Auto parts exports from China to the United States will likely approach US$5 billion in 2005, up from only US$1.6 billion five years ago. Canadian auto parts exports to the United States totalled US$20 billion in 2004.
“Recent hyper-competitive conditions facing parts makers will likely ease in coming months, as the inventory overhang that prompted North American automakers to slash production has been significantly reduced. Vehicle inventories held at Big Three dealerships in the United States declined 8% below a year ago in April and are now at the lowest level in two years,” comments Gomes. Turning to overall vehicle sales, car and light truck sales gained momentum across North America (Canada, the United States and Mexico) in April, climbing to an annualized 20.3 million units from an average of 19.1 million during the previous three months and a total of 19.5 million for all of last year. U.S. passenger vehicle purchases rose to an annualized 17.4 million units in April – the highest level since last December, when volumes were inflated by year-end incentives. Asian brands led the way, with a 15% year- over-year advance, capturing a record 37.6% of the U.S. market. In contrast, purchases from the traditional Big Three fell 4% below a year ago, with consumers continuing to shy away from large gas-guzzling SUVs amid high gasoline prices. Light truck sales at the two largest domestic automakers posted a double-digit decline, undermined by a 30% slump in purchases of large SUVs.
“Car and light truck sales in Canada advanced 4% above a year earlier in April to an annualized 1.69 million units – well above the 1.56 million unit pace of the first quarter. Last month’s solid performance boosted year-to-date volumes 2.5% above a year earlier, suggesting that Canadians have overcome the ‘gasoline price shock’ that undermined purchases last year,” comments Gomes. “Data from the Conference Board of Canada indicates that 60% of Canadian households indicate that now is a good time to buy a new vehicle, up from 53% late last year.”