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A GM worker uses human assistance automation to weld vehicle doors at the General Motors assembly plant in Oshawa, Ont., on March 19, 2021.Nathan Denette/The Canadian Press

Vehicle production is plunging across the world as automakers struggle to get their hands on vital computer chips, leading to lengthy downtime at assembly plants and posing a challenge to the economic recovery.

Even so, the Canadian slowdown is especially severe.

In August, light-vehicle production in Canada tumbled 38 per cent from a year earlier, according to data from research firm Wards Intelligence. Production in the U.S. fell 16 per cent over the same span and in Mexico by 20 per cent.

Canada wasn’t always the laggard. In the opening months of the COVID-19 pandemic, the trend in Canadian production largely mirrored that of elsewhere in North America and Europe, marked by plant closings in the spring and a quick rebound over the summer.

This year, however, the chip shortage has stymied output. And while the cuts are widespread, they’ve also been noticeably deeper in Canada, which is on track to produce fewer vehicles this year than in 2020, when the industry came to a standstill.

Analysts and industry veterans say the reason for Canada’s weaker trend is fairly simple: With a tight supply of chips, automakers are prioritizing their highest-margin vehicles – and those happen to be made in other markets.

“The way that automakers decide to apportion a reduced supply of microchips is to pick their most profitable lines,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association. “Usually, that means pickup trucks or large [sport utility vehicles]. … Ostensibly, those aren’t the lines that are built in Canada.”

The auto industry is emblematic of what ails the global economy in its recovery from COVID-19. In the early days of the pandemic, vehicle makers cancelled orders and now can’t get enough computer chips, a situation recently worsened by outbreaks of the Delta variant in Southeast Asia. Those supply issues are exacerbated by a lack of shipping containers and delayed deliveries. Manufacturers have had no choice but to curb output.

Ultimately, there’s less inventory at car dealerships, forcing consumers to fork out more money for vehicles, whether new or used, and feeding into higher inflation that’s become a focal point of debate among economists, investors and central bankers. Many frustrated consumers are simply holding onto their cash.

The fallout is evident in Canada’s labour market. Nearly 10,000 jobs in auto manufacturing have yet to return, and the number of people getting jobless benefits through employment insurance remains high in places such as Windsor, Ont.

It amounts to a sizable hurdle on Canada’s road to recovery, particularly so for parts of Southern Ontario where the auto industry plays an outsized role in the local economy.

“Canada has always been, as it relates to the car industry, at the perils of decisions that are made in other countries,” said Jerry Dias, president at Unifor, whose membership includes thousands of autoworkers. “We have no control over our industry.”

The supply chain disruption has been brutal for U.S. automakers. General Motors Co., Ford Motor Co. and Stellantis NV (which owns Chrysler, Jeep and other brands) have imposed lengthy shutdowns at Canadian assembly plants this year. GM’s CAMI plant in Ingersoll, Ont., has been largely shuttered since February.

Japanese automakers have not been spared either, despite keeping larger inventories of parts. Toyota Motor Corp. and Honda Motor Co. Ltd. have trimmed production, including at Canadian plants.

Those decisions have reverberated in Canada’s auto-parts industry, which in terms of gross domestic product, is much larger than vehicle manufacturing.

“There’s a great big trickle-down effect here,” Mr. Volpe said. “If an assembly plant is down, then all of its feeder plants are down as well. So everybody’s feeling the pain.”

The impact is apparent at car dealerships. In September, vehicle sales in Canada dropped 20 per cent from a year earlier, which analysts blamed on a lack of supply. With fewer cars available, the price of new vehicles has jumped 7.2 per cent over the past year, according to the latest inflation data from Statistics Canada. Lightly used vehicles are often selling for more than when they were new.

“The demand is just super strong, and the willingness to pay is really high,” said Rebekah Young, director of fiscal and provincial economics at Bank of Nova Scotia. “But it’s the supply constraint that’s hurting things.”

The outlook for production is somewhat murky. A recent Scotiabank report said it “looks increasingly optimistic” that global vehicle production will pivot in the fourth quarter, hitting capacity sometime next year. However, with so much pent-up demand for vehicles, supply shortages in North America could persist into 2023.

The Canadian sector should get a boost later this year. Auto assembly is set to return to the GM plant in Oshawa – this time, with Chevy Silverado and GMC Sierra pickup trucks. “They’re supremely profitable vehicles,” said Kristin Dziczek, senior vice-president of research at the Center for Automotive Research in Michigan.

Still, Wards Intelligence is projecting that Canada will make 1.6 million vehicles next year and in 2023 – stronger than this year and last, but short of 1.9 million units in 2019. The Canadian industry finds itself in a transition period that will dampen production, but also comes with historic investments aimed at serving future demand.

For one, the CAMI plant in Ingersoll is retooling to produce commercial electric vehicles starting next year – a process that will see GM phase out assembly of the Chevy Equinox in Canada. Similarly, the Ford plant in Oakville will revamp its operations in 2024 to start making passenger EVs the following year.

It will be a “wonky period of retooling and lower volume,” Ms. Dziczek said. “But it also gives the industry a toehold on the future.”

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