Falling auto-parts profits more bad news for car sector

Canada's car-parts sector will see its profits tumble by two-thirds next year and not recover until after 2013, according to a new study released Thursday by the Conference Board of Canada.

Over the past few months, auto parts producers have endured falling demand for cars, volatility in the Canadian dollar and requests from automakers for deep pricing discounts, the Ottawa-based business think-tank said.

As a result, what was a $1.7-billion sector-wide profit will plunge to $700 million by the end of 2009 and only recover to approximately $1.3 billion by the end of 2013, the Conference Board said.

"Severely reduced vehicle production will restrain demand for motor vehicle parts over the next two years, causing industry profits to fall to their lowest level" since the board starting following the industry, analyst Sabrina Browarski writes in the 11-page report.

Job loss woes

The Canadian parts sector, which employed 120,000 people as late as 2006, should see employment levels plunge 20 per cent to approximately 96,000 workers by 2010, according to the Conference Board.

The board's report comes hard on the heels of a leaked analysis prepared for the Ontario government that said almost 600,000 jobs in Canada would be at risk from a collapse of Chrysler, Ford and General Motors.

The assessment, compiled by a U.S. economics consultancy, was anticipating the bankruptcy of all three large American carmakers, something once seen as science-fiction but now considered a realistic scenario.

Vehicle assemblers have been cutting jobs and idling plants while executives wait for Washington to decide on a financial rescue package for the Big Three carmakers.

In the latest cash-saving move, Chrysler said it will close all 30 of its production plants for January. The company said it is close to running out of money to fund its operations.

Historically, the first month of the year is the slowest for car sales, equalling only five per cent of Canada's total vehicles sales in 2007.

Sales stumble

The auto and auto-parts sectors in Canada and the United States are suffering from plummeting U.S. sales, down almost 37 per cent for light vehicles in November from the same period a year ago.

The sector is now on track to sell 10.6 million units in 2008, the smallest number in 25 years.

Equally distressing for the parts industry, Americans are spending relatively less on car components. As a percentage of U.S. GDP, spending on autos and parts is expected to fall below 4.5 per cent, compared with a historical average of 5.4 per cent, according to Conference Board figures.

Less demand for all things auto-related has had a cascading effect whereby assemblers cut production and squeeze parts makers for price discounts.

As a result, companies such as Magna International Inc. and Linamar Corp. are looking at lower demand for their products and a reduced price for those bits and pieces that they do sell.

Magna now expects North American car and truck production to stoop to 12.8 million units by the end of 2008, a significant drop from its own projections earlier in the year.

On the price side, the Conference Board predicted that parts prices will fall 8.5 per cent from 2002 levels by the end of 2008.