Canada’s export outlook is pretty positive this year, given that the global economy is in the best shape it has been in for over eight years. But a key soft spot is the very important auto sector.
In 2004, auto-related exports were close to $75 billion, which represents over 20% of Canada’s total goods exports and 17% of all exports when we include services. This is big, any way you slice it, but these figures do exaggerate the importance of the sector to the economy. The reason is that the auto sector uses a lot of trade both in and out to get the job done with the result that our automotive exports contain a lot of imports. Only the value added in Canada contributes to Canada’s measures of economic growth, and by this measure the sector contributes about 2% of total GDP, plus perhaps an equivalent amount in additional spin-offs which is still a lot.
But recent attention has been focused on the declining importance of the sector, and what should be done about it. Usually, this analysis makes use of information from North America’s so-called "Big Three" automakers, even though nationality is much foggier these days due to globalisation of both automaker ownership and plant location. Nevertheless, the Big Three share of North American sales has fallen from 75% in the early 1990s to below 60% today.
Given this shrinkage during the past 10 years, it may seem surprising to find that the contribution of the auto sector to Canada’s GDP has actually increased. How is this possible? The reason is that stagnation in the auto assembly sector has been offset by solid growth in the auto parts sector. To illustrate, employment in vehicle assembly in Canada has declined from 56,000 to 48,000 since 1994, while employment in the auto parts sector has risen from 73,000 to 101,000.
This means that Canada’s auto parts manufacturers have managed to garner an increasing share of the global auto market, whether amongst the Big Three, or with the so-called transplant auto companies here in North America, or with foreign automakers operating outside of North America. To compete in this business they have brought many innovations to the marketplace, and increasingly have tapped into global supply chains to reduce costs in the end, the auto assemblers will only be able to compete if their parts suppliers are able to reduce costs outright.
And what of the automotive export outlook? After growth of 4.7% in 2004, EDC is expecting zero growth in 2005. But the sub-sector performance will vary widely. Exports of assembled vehicles are forecast to decline by 2%, because the U.S. vehicle market is saturated and U.S. consumer spending is expected to slow. But Canada’s exports of automotive parts are forecast to grow by 4%, in support of the development of new vehicles. Also, our exports of medium- and heavy-duty trucks are expected to remain robust, growing by 6% this year after over 20% growth last year.
The bottom line? It is natural to associate the health of Canada’s automotive sector with the travails of the traditional Big Three. But the auto picture is much bigger than that, and not as fragile as many seem to think.
Stephen Poloz is Senior Vice-President and Chief Economist, Export Development Canada. His column on export-related issues appears weekly on www.ctl.ca