Auto Sector Update

As employment and production numbers rebound, we examine where the auto sector is headed

July 25, 2011

Assembly jobs don't necessarily translate into parts jobs

Earlier this year Jim Gillette, director of forecasting for IHS Automotive, Engelwood, Colo., spoke at the Automotive Industry Outlook conference sponsored by the Detroit chapters of the Association for Corporate Growth and the Turnaround Management Association. According to Gillette, automotive OEM profitability has rebounded dramatically since 2009, with the top 12 automakers all reporting major increases in profits.

Slow, steady improvement in sales is expected as the economy improves and a wave of new vehicles enter the market. Light-vehicle production is expected to increase by 1 million units this year to about 12.9 million vehicles.

Longer term, IHS is forecasting 15.9 million vehicles will be produced in North America in 2015, with the majority of additional growth beginning next year.

While future forecasts predict growth, the current state of parts production in Canada does not seem to be as positive.

Parts Market

“There is no doubt that the overall North American original equipment [OE] parts market has been in serious trouble with the collapse of vehicle production between 2007 and 2009,” said automotive sector analyst Dennis DesRosiers. “The size of the North American OE parts market actually peaked in 2006 at U.S. $290 billion and bottomed out in 2009 at only U.S. $162.1 billion, a decline of about 45 percent.”

Of concern is the deterioration of Canada’s position within the greater North American parts market. In 2002 Canadian-made parts represented 17.8 percent of the content in a typical vehicle built in North America. Today that figure has dropped to 9.1 percent.

According to DesRosiers, this is one of the reasons that parts-sector employment has continued to fall despite strong vehicle production.

“Just because the automotive markets are expected to improve in the near term doesn’t mean that the parts sector in Canada will improve, and indeed given these trends, it is more likely to get worse,” said DesRosiers.

The effects of the earthquake in Japan are expected to continue to have an impact on domestic automotive production. However, production delays are expected to shorten.

Employment in the Canadian automotive assembly and parts sector is expected to stabilize as the year goes on. While the number of people employed in automotive manufacturing has dropped fairly consistently over the past decade, there have been signs of growth recently.

However, one of the most essential industries supporting vehicle and parts manufacturing is the machine, tool, die, and mold sector (MTDM). Barring resurgence in this sector, automotive jobs, especially in parts manufacturing, will lag.

In 2006 MTDM employment peaked at nearly 28,000 workers. Since that time employment has fallen, with the industry losing jobs for five consecutive years, and settling at slightly more than 18,000 workers.

These lost jobs also represent some of the most highly skilled in the automotive industry.

“The automotive parts sector has seen a number of cyclical downturns over the last five decades, but it has always returned bigger and stronger,” said DesRosiers. “One of the reasons for this was the incredible structural strength in the MTDM sector. Now that the MTDM sector is struggling, one can question whether the automotive parts sector will ever recover.”

Assembly Versus Parts

According to DesRosiers, there is a fundamental flaw in policy when it comes to the automotive sector. He said there is an assumption that if Canada can maintain its level of vehicle production, then parts production will match it automatically.

New assembly plants will always mean jobs will be created in the parts sector, but these jobs may not be in Canada.

“[These jobs] may be in the U.S. or Mexico or even overseas, but as seen from these jobs numbers, they definitively are not in Canada. This past decade Canada has seen record levels of assembly plant investment, and Canada has maintained its share of North American vehicle production and indeed it is even up a little. Yet each and every year we lose more and more jobs in the parts sector,” said DesRosiers. “Assuming that our parts sector will do well simply because we are attracting assembly investment is just not working.”

At the Automotive Parts Manufacturers' Association (APMA) annual conference and exhibition in June, Minister of Industry Christian Paradis discussed the government’s economic agenda and the opportunities that lie ahead for the automotive industry.

“Canada’s Economic Action Plan has helped create and maintain jobs and has helped firms modernize their operations. We will continue to strengthen our industries, such as auto parts manufacturing, with our low-tax plan to protect the economy, continued deductions for modernizing plants and facilities, and incentives for hiring new workers,” said Paradis.

He also took time to speak about the assistance the government provided to automakers.

“Both Chrysler and GM have repaid their loans, in full and ahead of schedule, to the governments of Canada and Ontario. With the restructuring of two of our key auto manufacturers and the worst of the recession behind us, the automotive industry, including its many important suppliers here today, is looking to the future,” said Paradis.

Forecasters looking to sell capital equipment to automotive parts suppliers say that excess capacity, continued problems with credit availability, and ongoing low profit margins in the industry will remain as barriers to investment until the industry rebounds fully.