While Canadian auto sales are expected to hold steady in 2007, the Canadian automotive industry is in for another rough year as the effects of restructuring that has wiped out 884,000 jobs in North America over the past five years continue to be felt in the automotive heartland of southern Ontario.

Sales within Canada are expected to rise modestly from 1.61 million vehicles in 2006 - the second best year so far - to 1.62 million vehicles in 2007 and 1.63 million in 2008.

The affordability of vehicles is improving as household income gains outpace the growth in purchase and leasing costs, according to a presentation by Standard & Poor's at the Toronto International Auto Show in February.

While Canadian auto sales reflect the relative buoyancy of the Canadian economy, it is U.S. auto sales that ultimately drive job levels in Ontario's autobelt, because most of the vehicles produced in Windsor, Oshawa and Oakville ultimately are exported to the U.S. (Canada accounts for 16 per cent of North American production.)

File photo by Ken Kerr, Business Edge
Ford Canada and other North American automakers are introducing new models in an attempt to keep Asian manufacturers from further gains in the marketplace.

"If you put them in a horse race, I would think that GM is probably ahead of the game in its restructuring," says Richard Cooper, executive director of J.D. Power & Associates Canada. "Ford has probably gone through the most difficult part of the restructuring from a cost and infrastructure point of view, and that's what DaimlerChrysler is going through now."

In addition to Detroit's moves to reduce excess capacity, Canada's auto industry faces a series of tough challenges, including the pricey Canadian dollar, steep energy costs, global trade issues, an uncertain border and pressure to reduce greenhouse gas emissions.

While U.S. retail sales are finally reversing a downward trend, future gains may be tepid, according to Robert Schnorbus, chief economist at J.D. Power. The firm forecasts flat U.S. retail sales in 2007 and softer fleet sales.

Canadian sales, predicts Power, will be either flat or post a one-per-cent increase. "They're in a holding pattern on both sides of the border," said Rohan Lobo, manager, syndicated automotive research products at J.D. Power.

In Canada, GM holds a 26.3-per-cent market share, followed by Chrysler with 19 per cent and Ford with 13.4 per cent. Toyota has 10.1 per cent, Honda 6.7 per cent; Mazda and Hyundai have 4.1 per cent each.

But the Asian quartet is forecast to grow its Canadian market share to 28.9 per cent by 2012 from 25 per cent today - at the expense of the American Big Three.

DaimlerChrysler's mid-February restructuring news, which included the planned elimination of 2,000 jobs in Canada over the next three years, overshadows the impressive sales numbers that the company has reported in the Canadian market.

DaimlerChrysler ended 2006 with six consecutive months of sales increases, as consumers reacted positively to new models such as the SUV Jeep Compass, mini SUV Jeep Wrangler and the five-door hatchback Dodge Caliber, as well as to the company's volume leaders: The Dodge Ram pickup and Dodge Caravan minivan.

"We're very pleased with our sales growth," said Dave Buckingham, vice-president of sales at DaimlerChrysler Canada. "It's very unusual to be up six consecutive months like that. We're looking at a strong shot for '07."

Sales were up only marginally in January, but that's compared with sales in January 2006, a strong month.

"The influx of new product that we launched in late '06 and are going to launch in '07 is perfect for this Canadian market," says Buckingham. He points to the compact Dodge Caliber, the Jeep Compass and the Jeep Patriot - "they're hitting this gigantic sweet spot of segmentation in Canada - all under $20,000."

Alluding to the continued strong expectations for the Caravan in '07, he adds: "We see some of these other OEMs (original equipment manufacturers) getting out of the minivan segment. Quite frankly, we don't get it.

"Until you can show me something that has room for seven passengers, gets 30 miles to the gallon and is about $20,000, I think the minivan will be around for a while."

But is there the possibility of negative consumer psychology in the aftermath of DaimlerChrysler's restructuring announcement?

The restructuring "makes for a stronger company, better focused on the products people want to buy," says Ed Saenz, a company spokesman.

DaimlerChrysler's Canadian job losses will be in Brampton, Ont., where the Chrysler 300 and Dodge Charger sedans and Dodge Magnum stationwagons are made, and in Windsor, where the Dodge Grand Caravan, Chrysler Town & Country and Chrysler Pacifica are made.

But none of DaimlerChrysler's plant closings are in Canada. In fact, the day before the company unveiled its restructuring, it disclosed that production of the Dodge Challenger, a two-door sports coupe, will begin in Brampton in spring 2008.

Meanwhile, Ford Canada president Bill Osborne told the Auto Show in February that his company hopes to repeat its 2006 sales performance in 2007.

It was unclear whether that means selling another 230,000 vehicles in Canada or boosting year-over-year sales by eight per cent again.

"We outperformed the industry in 2006, and we're interested in keeping the momentum that we built in 2006 moving," said Lauren More, vice-president of public affairs. "I don't think he's put a specific number to it."

The Ford Fusion mid-sized sedan and the Focus compact helped boost Ford Canada's car sales by 25.3 per cent in 2006. Even in January 2007, when Ford's car sales in Canada tumbled by 12 per cent, sales of the Fusion were up 50 per cent.

Another continuing success for Ford was its F-series pickup trucks, which in 2006 - for the fourth straight year - were Canada's overall best-selling vehicle. Its sales were up 17 per cent in January 2007.

While pickup trucks and SUVs have fallen out of favour with energy-conscious drivers in the U.S., More says "there is a pickup truck segment in Canada where there is a lot less personal use of pickup trucks, compared to the U.S.

"Canadians who purchase a pickup truck really require a pickup truck. It's not just a statement of their taste. It's less of a discretionary choice than in the U.S., and therefore the truck segment in Canada has been less sensitive to changes in gas prices."

While Ford Canada sold almost 230,000 vehicles last year for its highest sales results since 2003, it manufactured only 196,374 vehicles at two assembly plants - its lowest production in more than 40 years. Sales of minivans made in Oakville tumbled, while sedans made in St. Thomas, Ont., slumped in the U.S. market.

As recently as 1985, Ford Canada produced one of every three vehicles in Canada, but that fell last year to less than one in 10, with its output representing only eight per cent of Canadian output. Ford barely finished fifth place among six manufacturers in Canada - producing only 46 more vehicles than CAMI Automotive Inc., a General Motors Corp.-Suzuki Motor Corp. joint venture in Ingersoll, Ont.

Ford plans to close its Windsor casting plant in July, and also will shut its Essex engine plant in Windsor.

Those operations employ 1,200 workers. The St. Thomas plant, which now employs 2,300 people, will be adding the Lincoln Town Car, a luxury sedan, to its production of the full-size Ford Crown Victoria and Mercury's flagship sedan Grand Marquis.

Meanwhile, General Motors Canada is struggling. Its 2006 sales tumbled 7.7 per cent, although more than one in every four vehicles sold in Canada is a GM car or truck. GM sales in Canada slipped by 1.6 per cent in January 2007.

GM Canada's sales faltered last year partly due to the company's decision to reduce its dependence on fleet sales and heavy incentives. GM Canada president Arturo Elias told reporters at the Auto Show in Toronto that he foresaw a similar industry and similar GM sales in 2007.

Marc Comeau, vice-president of sales, service and marketing, called 2006 "a transition year" for GM, as it realigned its sales and marketing strategy to reduce dependence on incentives and daily rentals.

"Our small utilities and cars, like the Chevrolet Equinox/ Pontiac Torrent and Chevrolet Cobalt/Pontiac G5, had strong sales for the year. Cadillac and Saab also saw record performance. We have robust results from the new and redesigned vehicles launched in the second half of 2006, including our Silverado and Sierra pickups, and the Chevrolet Aveo and Pontiac Wave sedans."

In March 2005, GM announced a $2.5-billion R&D initiative known as the Beacon Project, which includes $400-million in federal and provincial subsidies, and represents the largest automotive investment in Canada's history.

The investment will finance significant retooling, a new paint shop, environmental improvements, new automotive research, energy-related projects and training initiatives at GM's three Oshawa assembly plants, and the joint CAMI venture with Suzuki in Ingersoll.

GM will also invest in enhancing its engineering capabilities in Oshawa and upgrading parts operations in St. Catharines and Windsor.

The investment in additional engineering will enable GM to become the first automaker in Canada to design, engineer and build a vehicle without any help from outside the country.

GM will be the first automaker to build hybrid vehicles in Canada. Its truck assembly plant in Oshawa will produce the new Two-Mode Hybrid Chevrolet Silverado and GMC Sierra pickup trucks, which are set to appear on showroom floors in fall 2008.

Hybrids combine a traditional internal combustion engine with a battery to allow for lower gasoline use. However, hybrid penetration is expected to be less than two per cent of the market by 2013, according to J.D. Power.

The streamlining of the North American auto industry has driven employment in Canada's autoparts sector down 11 per cent from its peak in 2003. Historically, a large majority of the Canadian component manufacturers have mainly supplied the Big Three, and the problems that have afflicted those automakers have spread down to the parts sector.

In contrast to the Asian automakers, Detroit has not taken a collaborative approach with its suppliers. Instead, it has forced them to assume more responsibility for design and development of components, while also demanding price cuts of five per cent or more annually.

Faced with this squeeze, several of the largest U.S. parts makers had to file for bankruptcy protection.

Dana Corp., Collins & Aikman Corp., Dura Automotive Systems Inc. and Tower Automotive Inc. are all operating in Chapter 11 bankruptcy protection and have shut, or are about to shut, Canadian factories.

Dura, for example, will close its Brantford plant, which makes automotive column shift assemblies, by June. The shutdown will eliminate 120 jobs. Dana closed its Guelph plant, which employs 25 people and makes front and rear frame structures, at the end of February. Its factory in Thorold, which has 150 employees and manufactures metal stampings, is expected to close by June 30.

However, two global auto parts titans, Linamar Corp. and Magna International Inc., are notable exceptions to the sector's malaise. Linamar is in the midst of a five-year, $1.1-billion expansion of its operations in Ontario and CEO Linda Hasenfratz believes restructuring at DaimlerChrysler, Ford and GM will benefit her company.

"The opportunity comes for a company like Linamar when the things that are not core for the OEMs fall into our scope of expertise," Hasenfratz says. "For example, some 75 per cent of power-train drive-line work is still being done in-house by the OEMs, but they are deciding it is not as core as final assembly. If the choice is between power train and finally assembly, they're going to go with final assembly and outsource more of the power train kind of work."

While the production cuts by the Big Three had a "short-term impact" on Linamar, Hasenfratz notes the Guelph-based supplier has "a lot of new business in the pipeline for a variety of customers," and will be adding 3,000 jobs as part of its five-year Ontario expansion. "There is an expectation that additional facilities will be required in that timeframe."

(Sheldon Gordon can be reached at gordon@businessedge.ca)