Outlook 2008 (9 sectors to watch): Automotive

A combination of negative economic factors augur the perfect storm for the auto industry.

Say anything enough and it might just come true, superstitious people insist. Let’s hope that’s not the case for the auto sector. For the past few years, the Canadian Auto Workers have been crying wolf, insisting the sector is in crisis mode while negotiating higher wages from General Motors, Ford and Chrysler — a.k.a. the industry’s weakest players.

The not-so-big-anymore Big Three have all cut back North American operations, but Canadian industry sales, jobs and investments never crashed as predicted. Today, however, currency adjustments, sub-prime woes and the declining effectiveness of incentives to prop up demand appear to be joining forces to produce the long-predicted perfect storm.

Monthly sales in Canada slid to 117,284 units in November, down 5% from the same month in 2006. But that doesn’t mean the number of vehicles bought by Canadians didn’t actually jump. “Sales were down about 6,000 units,” notes analyst Dennis DesRosiers, “and it is quite possible that more than 6K were brought up from the United States” by buyers looking to cash in on the stronger loonie. Either way, the trend does not bode well for local automotive dealers.

And that’s not all the trouble coming from south of the border, where Canadian manufacturers ship most of what they produce. Following another month of lacklustre U.S. sales, GM and Ford recently announced plans to tap the brakes on production (by 11% and 7.4%, respectively) in the first quarter of 2008, when the housing downturn and high energy prices are expected to further erode slumping demand. That is bad news for Canadian auto exporters and parts suppliers, who are heavily exposed to the ongoing market-share erosion of the Detroit trio.

Meanwhile, thanks to recent contract concessions made by American unions, the Canadian arms of GM, Ford and Chrysler are now the most expensive outposts in Big Three operations worldwide — something that will adversely affect cost-cutting and plant reinvestment decisions.

The future looks brighter for Honda and Toyota plants in this country. But then again, everybody is in the same car lot when it comes to demand. The need for new vehicles is rapidly declining, because they last longer than ever. There is also a huge “negative equity” issue with cars and trucks owned by consumers who financed purchases on long terms and now owe more than the vehicles are worth. “It is a big number,” says DesRosiers, “and very troubling for auto demand. It could easily cost the U.S. market a million units next year.” If the vehicle market collapses, he says, “we would likely lose at least Ford and maybe one of the others.”

The only thing that is certain, of course, is that the CAW will still find a way to demand higher wages when it is time to negotiate in 2008.