The Canadian auto parts industry outperformed in 2012, with full-year shipments surging 18% to an annualized $23.8 billion, according to the Scotiabank Global Auto Report released today.
“One of the emerging trends in today’s auto industry is that vehicles are increasingly becoming more reliant on electronics,” said Carlos Gomes, Scotiabank’s Senior Economist and Auto Industry Specialist. “We’re also seeing competitive cost challenges dictate that much of the electronics in today’s vehicles is now being imported from low-wage countries.”
For more details about the Scotiabank Global Auto Report, please read the full report below.
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ENERGIZED ELECTRONICS IMPORTS
Imports Displace Canadian and U.S. Shipments
Global vehicle sales moderated in February, undercut by weak volumes in Western Europe and the impact of the Lunar New Year holidays in China which distorted purchasing patterns. However, combined results for January and February indicate that car sales in China have advanced 19% so far this year. Outside of China and Western Europe, car sales continued to improve in February, led by a 3.5% year-over-year (yr/yr) gain in North America.
Given the ongoing difficulties in Western Europe, we have downgraded our full-year 2013 sales forecast for the region to a 5% slide from our original estimate of a flat performance. This reflects the recurring financial, economic and political problems which are undermining confidence and increasing strains in the banking sector. Lending for vehicle purchases in the Euro zone contracted in February at the sharpest pace since data collection began in the late 1990s.
More recent data for March point to ongoing strength in the U.S. Purchases totalled an annualized 15.3 million units last month, in line with the average so far this year. However, looking at the sales on a daily rate basis, last month’s performance was the best since August 2007, and highlights the broad-based strength currently evident across much of the U.S. economy.
European automakers led the way in the U.S. last month, with their volumes advancing 7.4% yr/yr – roughly double the overall industry gain. However, pickup trucks were the strongest segment, with volumes buoyed by a robust U.S. housing market recovery and an improving capital spending cycle.
In contrast, purchases in Canada fell 1% below a year earlier in March and remained below a year ago for the fourth consecutive month. Despite the weakness, we estimate volumes totalled an annualized 1.66 million units, in line with the average of the previous three months.
Double-digit declines at several automakers held back overall volumes in Canada last month. However, sales improved across most of the industry and are expected to gain momentum during the spring selling season. As a result, we still expect full-year 2013 sales to reach our forecast of 1.69 million units – the second highest on record.
Electronics Surge in New Vehicles Sales
The Canadian auto parts industry outperformed in 2012, with full-year shipments surging 18% to an annualized $23.8 billion. This solid performance outpaced an 11% gain in parts shipments south of the border last year and even the 15% jump in Canadian vehicle production. Metal stamping – a traditional source of strength for Canadian suppliers – led the way with sales soaring 36% last year. However, even with this gain, the content of Canadian-made parts in each North American-built vehicle only edged up $11 last year to $1,500, and still remains 17% below the $1,800 average of the past decade. Furthermore, last year’s sales improvement was uneven, with weakness in several segments, including brakes and transmissions, and particularly electrical and electronic products.
Two important trends have emerged in the today’s auto industry. The first is that today’s vehicles are increasingly more reliant on electronics. Each car and light truck built in North America (Canada, the U.S. and Mexico) now contains nearly US$3,200 of electronic equipment, up from just under US$1,500 a decade ago. The increase is being driven by new technology in powertrain management, safety, comfort and entertainment, as well as navigation systems. Historically, the replacement of mechanical systems with electronically controlled systems, such as power steering and power windows had been the key growth drivers in vehicle electronics.
Estimates suggest that the use of electronics in vehicles will advance in excess of 7% per annum through the end of the decade. According to Strategy Analytics, worldwide sales of automotive electronic equipment, including devices that enable the delivery of information and entertainment to the driver and occupants will drive demand from US$189 billion in 2012 to US$274 billion by 2017. Engine and powertrain management are the largest segment, but safety, navigation and entertainment systems are growing more rapidly, advancing at a double-digit pace. In particular, the consulting firm highlights that collision warning systems are expected to advance by 27% per annum through the end of the decade. In particular, camera deployment in U.S. light vehicles could soar to roughly 90 million units by the end of the decade, if the U.S. Department of Transportation mandates that all new cars and trucks have backup cameras by the 2014 model year. Vehicles with keyless entry are also expected to provide rapid growth for vehicle electronics.
Surging Imports from Low-Wage Countries
The second trend is that competitive cost challenges dictate that much of the electronics in today’s vehicles is imported. North American companies still design semiconductor chips, censors and control devices used in automotive electronics, however the assembly of electrical systems that route power and signals throughout a vehicle is very labour-intensive and is increasingly being performed in low-wage countries. As a result, despite the rising content of electronics in new vehicles, this segment now accounts for only 4% of overall Canadian auto parts shipments, down from 5% as recently as 2005. In fact, imported electronic parts currently supply more than 85% of the Canadian market. The U.S. is still the largest provider of electronic auto parts for the Canadian market, accounting for roughly 40% of overall imports. However, U.S. parts are increasingly being displaced by shipments from low-cost countries. Mexico, China and the Philippines are the top three exporters of vehicle electronics to Canada after the United Sates. Canadian purchases from low-cost nations have nearly tripled over the past five years – led by skyrocketing advances from Vietnam and Nicaragua – while imports from the U.S. have been flat.
The shift in automotive electronics to low-wage regions is also evident in the U.S. Data from the U.S. Department of Commerce indicate that imports now account for nearly two-thirds of the U.S. automotive electronics market, more than double the level of a decade ago. Mexico remains the largest exporter to the U.S., with a 57% share of overall vehicle electronics imports. However, Mexico’s share peaked in 2002, and is being displaced by lower-cost jurisdictions, such as China, the Philippines, Vietnam and the Central American nations of Honduras and Nicaragua.
