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Assembly allocation to Mexico will grow at Canada's expense




The Polk forecasting team is in a position to report good news as the North American assembly and sales volumes continue to improve year over year. This is the direct result of modest economic improvement and the satisfaction of pent-up demand. Polk anticipates North American assembly volumes will increase by 10% (14.4 M) in 2012, following a 10% increase in 2011 (13.1 M) and a 39% increase in 2010 (12M), following a dreadful fall to 8.6 million units in 2009.

North America Light Vehicle Assembly

However, there is at least one fly in the ointment, besides the threat of Europe’s problems derailing our recovery, and that is the fact that Canada and the U.S. will continue to lose new vehicle assembly allocation to lower-cost Mexico.  As illustrated in the graph below, Canada will likely produce 16% (2.2 million) of all light vehicles assembled in North America in 2012, down from 17% in 2007 (2.5 million). The U.S. will likely produce 66% (9.5 million) of all vehicles in 2012, down from 70% (12.1 million) in 2002 and 78% (11.6 million) in 1995.

However, if you dig deeper into the data you learn that the U.S. market, while losing ground on a percentage basis, will likely realize an increase of over 2 million units by the year 2022 when compared to anticipated 2012 assembly volumes. This is largely related to an improving industry and capacity expansion by non-domestic automakers.

North America Light Vehicle Assembly Allocation by Country

Canada, on the other hand, will continue to lose assembly volumes and many well-paying automotive jobs to Mexico. This is largely related to cost. Many Canadian automotive plants in operation were constructed at a time when exchange rates made Canada a lower cost alternative to the U.S. However, now that the Canadian dollar value is nearly on par with the U.S. dollar, Canadian labor costs are relatively high. In fact, The Windsor Star recently quoted Dan Akerson, General Motors’ CEO as saying, “Canada is the most expensive auto-producing jurisdiction in the world and the Canadian Auto Workers union must close the labor cost gap with their U.S. counterparts in upcoming contract talks.”  In U.S. dollars, the CAW's total labor cost for hourly wages and benefits is about $60 per hour, compared with $58 for U.S. workers at General Motors, $56 at Ford and about $50 at Chrysler, according to the Center for Automotive Research.

Related to this, GM has confirmed it will follow through on its plans to shutter a portion of its Oshawa plant in mid-2013, which will likely eliminate 2,000 jobs. GM will continue operations at its Ingersoll, Ontario plant.

GM’s announcement is creating a great deal of tension with the Canadian Auto Workers (CAW) as they enter contract negotiations in August (contract expires on September 17). Tensions are also high for Canadians who contributed billions of dollars to preserve automotive jobs. The CAW, which impacts only Chrysler, Ford and GM, will likely refuse to accept wage reductions that automakers are requesting to match current UAW wages in the U.S.

North America Light Vehicle Assembly Forecast by Country: 2012 - 2022

Country 2007 2012 2017 2022
Canada 2,542,150 2,210,000 2,030,000 2,040,000
Mexico 2,033,658 2,752,000 3,339,800 3,604,400
USA 10,555,043 9,484,400 11,272,870 11,564,100
Total 15,130,851 14,446,400 16,642,670 17,208,500

Polk will monitor the CAW negotiations as well as Mexico’s growing automotive industry. Mexico assembly will likely continue to grow as a result of attractive labor wages, experienced labor force and free trade agreements with countries in South America and the European Union. However, drug-related crime, also known as narcoterrorism, has been on the rise. Mexico’s new president, Enrique Peña Nieto, said he is committed to fighting drug violence and corruption. We will also watch this situation and its potential impact on the auto industry.

Assembly allocation is often dictated by cost – the low cost producer wins. During the 1970s Canada benefited from their lower cost and increased capacity allocation. More recently, Mexico is the benefactor.

Posted by Anthony Pratt, Director, Forecasting (07.09.2012)

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