Canada's export outlook is pretty positive this year, given that the global economy is in the best shape it has been in for more than eight years.
But a key soft spot is the very important auto sector.
In 2004, auto-related exports were close to $75 billion, which represents more than 20 per cent of Canada's total goods exports and 17 per cent of all exports when we include services.
This is big, any way you slice it, but these figures do exaggerate the importance of the sector to the economy. The reason is that the auto sector uses a lot of trade both in and out to get the job done - with the result that our automotive exports contain a lot of imports. Only the value added in Canada contributes to Canada's measures of economic growth, and by this measure the sector contributes about two per cent of total gross domestic product (GDP), plus perhaps an equivalent amount in additional spinoffs - which is still a lot.
But recent attention has been focused on the declining importance of the sector and what should be done. Usually, this analysis makes use of information from North America's so-called Big Three automakers, even though nationality is much foggier these days due to globalization of both automaker ownership and plant location. Nevertheless, the Big Three share of North American sales has fallen from 75 per cent in the early 1990s to below 60 per cent today.
Given this shrinkage during the past 10 years, it may seem surprising to find that the contribution of the auto sector to Canada's GDP has actually increased. How is this possible? The reason is that stagnation in the auto'-assembly sector has been offset by solid growth in the auto- parts sector. To illustrate, employment in vehicle assembly in Canada has declined from 56,000 to 48,000 since 1994, while employment in the auto-parts sector has risen from 73,000 to 101,000.
This means that Canada's auto-parts manufacturers have managed to garner an increasing share of the global auto market, whether among the Big Three, or with the so-called transplant auto companies here in North America, or with foreign automakers operating outside North America.
To compete in this business they have brought many innovations to the marketplace and increasingly have tapped into global supply chains to reduce costs - in the end, the auto assemblers will only be able to compete if their parts suppliers are able to reduce costs outright.
And what of the automotive export outlook? After growth of 4.7 per cent in 2004, EDC is expecting zero growth in 2005. But the sub-sector performance will vary widely.
Exports of assembled vehicles are forecast to decline by two per cent because the U.S. vehicle market is saturated and U.S. consumer spending is expected to slow. But Canada's exports of automotive parts are forecast to grow by four per cent in support of the development of new vehicles. Also, our exports of medium- and heavy-duty trucks are expected to remain robust, growing by six per cent this year after more than 20- per-cent growth last year.
The bottom line? It is natural to associate the health of Canada's automotive sector with the travails of the traditional Big Three. But the auto picture is much bigger than that and not as fragile as many seem to think.
(Stephen Poloz is senior vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)
