Canadian auto parts firms hampered by loonie

Continued strength in the loonie is driving up the cost of Canadian employees, and that could put pressure on auto parts and vehicle makers to send more jobs to the U.S., where labour costs are lower, according to an independent think tank.

“Canada will have a challenge ahead to maintain its cost-competitiveness relative to the U.S. and Mexico. The expected sustained strength of the Canadian dollar could shift production to Mexico and the United States as automakers seek to lower costs,” according to a report issued by the Conference Board of Canada.

The board predicted a continued recovery in the auto industry on the back of soaring demand for vehicles in the U.S., providing substantial opportunity for the Canadian sector. But that growth potential will not necessarily benefit Canadian employees, the board warned in separate reports on the auto parts and vehicle assembly sectors.

A high loonie adds to labour costs in Canada relative to developing countries, and makes Canadian exports less cost-competitive, which is sending auto companies to look south when they make decisions about where to set up new plants, the board said.

“Furthermore, wages of Canadian auto workers are at risk of moving out of line with those of their American counterparts. Wage negotiations to take place in 2012 have the potential to affect investment decisions, and consequently production, in the medium term and beyond.”

Those industries, key components of Canada’s economy, have experienced a swift turnaround since last year after struggling to maintain profits during the economic downturn of 2008-2009.

American demand for autos will soar at a double-digit pace this year and will exceed pre-recession levels by 2014, a sign of growth for Canadian producers as an estimated 84 percent of Canadian-assembled vehicles go to the U.S., the board said.

Canada’s auto parts industry had a $255-million profit in 2010 – the first since 2007 – and is on track to be profitable again this year as output grows in the second half after a slow start early in the year, the report said.

“The reopening of Chrysler and GM plants that were shuttered during restructuring has led to a surge in demand for parts,” the report said.

Revenues are expected to grow briskly beyond next year – at an annual average pace of 10.5 percent through 2013 to 2015. But the high loonie will detract from revenue growth at Canadian auto parts makers like Magna International, MartinRea and Linamar, which could be forced to lower prices to compete with foreign manufacturers.

Employment in the auto parts sector is expected to rise by 2,000 this year and by another 12,000 in 2012 as production returns to more normal levels. But those jobs won’t necessarily be in Canada.

Magna and MartinRea are already shipping jobs to Mexico, following automakers who saw cost-cutting opportunities in the country.

The Canadian auto assembly industry is forecast to post profits of nearly $1 billion in 2011, an increase from $114 million in 2010.

Industry revenues shot up by 29 percent last year and will rise a further eight percent in 2011.

“After the industry slashed costs during the recession, expenditures are expected to rise slower than revenues, leading to an improved bottom line,” the board said.

However, as with auto parts manufacturers, the Conference Board warned that Canada’s high dollar is putting its vehicle assembly plants at a disadvantage.