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Lack of new investment puts auto sector at risk: analyst

File photo of an auto dealership.

Tibor Kolley/The Globe and Mail

Canada's automotive industry is showing a strong rebound, but there are dark clouds on the horizon because of a lack of new investment in the sector.

A new report from Bank of Nova Scotia economist Carlos Gomes warns that Canada's auto sector is at risk because of falling investments in assembly and parts plants.

This year, total investment will be only $1.2-billion, his report says, the lowest level since the mid-1980s and almost two-thirds below the $3.1-billion average over the past decade.

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That puts at risk Canada's share of North American automotive assembly, because there is considerably more investment activity going on in Mexico and the United States, Mr. Gomes said.

Over the long term, a decline in the auto sector would damage parts makers and other participants in Canada's automotive supply chain, he said. "It has enormous implications for the overall manufacturing sector."

While General Motors and Honda have recently announced new products and increased hiring in Canada, these pale in comparison with the news coming out of Mexico, Mr. Gomes' report says. In the past six months, the auto industry has unveiled nearly $3-billion of plant expansion or new building in that country.

Mr. Gomes said Japanese auto makers in particular are interested in expanding in Mexico because it is a low cost jurisdiction. The appreciating yen is making the Japanese very sensitive to their cost structure, he said.

A decline in investment in Canada will make it very difficult to increase our market share of car assembly, which currently stands at about 16 per cent, he said. That could eventually mean a reduction in employment in manufacturing, which is still a crucial engine for the economy, particularly in Ontario. "The auto sector is the largest manufacturing base for Ontario ... It accounts for 20 per cent of overall manufacturing in the province," he said.

However, automotive analyst Dennis DesRosiers said he does not see such dire consequences in the investment numbers. Automotive investment has declined in every developed country in the last three years, he noted, and Canada is no exception.

"Countries like China, India, [and]Mexico have seen significant increases in automotive activity, so there is a general move to less developed countries," he said. What is more important is our performance relative to the United States, and "on that account we are doing pretty well," he said.

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The most recent data available, for 2009, show Canada gets almost 26 per cent of North American investment in automotive assembly, Mr. DesRosiers said, and that is high considering our market is only 8 per cent of the continent's sales. The parts sector gets about 10 per cent of investment, and that number has not budged much in years.

Canadian Auto Workers economist Jim Stanford said he, too, is not terribly concerned about the declining investment numbers. Capital spending on plants tends to be very "lumpy," he said, because huge amounts may be invested retooling or building new plants in one year, followed by several years when spending dips before more upgrades are needed.

"So it's a bit risky to look at one particular year and say that it is way below the long-run trend," he said, "because the fact is some of our plants have just gone through [a re-tooling]process."

Mr. Stanford said his big worry is about investment in Mexico, which is attracting many new plants because of its extremely low wage rates.

Despite his concerns, Mr. Gomes said the current snapshot of the Canadian car sector is positive. The industry rebounded well from the economic downturn and from the supply disruptions caused by the disasters in Japan and Thailand, he said.

Canada will produce more than 2.1 million vehicles this year, its best performance since 2007. Employment is up by 10 per cent since it hit its nadir in 2009, and in the past year alone the sector has boosted the number of jobs by 2 per cent.

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