Auto Guru in Canada

Wednesday, January 25, 2012

Automotive Investments Increasing in North America

A lot of articles ( see Wall Street Journal Article below ) recently about investment renewal in the automotive sector in North America … indeed did you listen to Obama last night?

The question I have is “ If the US gets this investment does this preclude Canada? Or does Canada get it’s ‘fair share’ like it has for decades or does Canada actually lose additional plants?” I’m optimistic but a lot of work is going to be required to secure our manufacturing of vehicles this decade.

The big issues that need to be addressed or at the very least better understood are …

1. What happens to the overall North American market ( a rising tide raises all boats and is obviously positive for Canada)

2. What will the CAW do this fall ( do they have a choice but to play? But they have done dump things in the past so who know!)

3. The value of the Canadian dollar ( a resource based economy usually results in a stronger dollar which would hurt Canada )

4. What will be the role of Government ( absolutely every assembly investment in Canada since 1965 has had the heavy hand of Government working in the background but the tools to lever investments are sparse. One thing for sure that is spelled out in this article is that Governments in the US are responding so Canada/Ontario may not have a choice ).

5. Will this investment come from the Detroit Three or New Domestics … ( if new domestic investments then Canada may have problems )

6. Can the industrial North East including Canada compete with the US South and Mexico who have attracted most all new assembly investments the last few years ( absolutely for "C" "D" "E " and "FF" vehicles definitely NOT for "A" and "B" sized vehicles)

7. "C" vehicles are on the bubble from a competitve cost point of view ... are companies willing to build more "C" sized vehicles in the industrial north east or are these destined to be produced in the US South or Mexico and or overseas ( this is very dependent on labour costs and from a Canadian perspective the Value of the dollar )

8. Does the consumer have a choice but to buy more "C' products if fuel regulations are met and where will these be built?

9. Will we see vehicles imported from China and or other areas of the world that traditionally do not send vehicles to NA ( maybe by the end of the decade? )

10. Europe has the most upside in NA this decade so will they supply from on-shore plants or off-shore plants ( if on-shore then a lot of new investments will come to NA and Canada could build a case for some of this investment )

Dennis

More details on the Automotive Sector can be found in the DesRosiers Automotive Reports published by DesRosiers Automotive Consultants Inc. For more information on these reports please contact Albena Saltcheva at (905)881-0400 x18 or albena@desrosiers.ca

Please note that DesRosiers Automotive Consultants Inc. is offering a free three month trial of this publication to better allow for your assessment of the information provided. If you are interested in this free trial or have any questions about this publication, please do not hesitate to contact Albena Saltcheva at (905) 881-0400 x18 or albena@desrosiers.ca.

WSJ
Car Makers’ U-Turn Steers Job Gains
By Joseph B. White, Jeff Bennett and Lauren Weber
Big auto makers and their suppliers are spending billions to expand and retool U.S. factories, pushing heartland states to jockey to land new auto jobs.
Executives say the industry's U-turn from bankruptcy filings and layoffs to hirings and capital spending is driven by rising demand and a new view of manufacturing in the U.S. as a way to guard against volatile currency markets and other risks.
Auto-industry employment in the U.S. is predicted to jump to 756,800 in 2015 from 566,400 in 2010, with most of that increase in Michigan, according to the Center for Automotive Research in Ann Arbor, Mich. While that falls well short of the 1.1 million workers employed in the sector in 1999, it indicates the hemorrhaging has been stanched.
The center also said major auto companies indicate they expect to increase capital spending in the next few years.
"It's a generational opportunity," says Missouri Gov. Jay Nixon, a Democrat, who has taken a high profile in his pursuit of car-company jobs. Mr. Nixon called Missouri's legislature into a special session last year to pass a bill offering new tax breaks to manufacturers, and earlier this month he visited the North American International Auto Show in Detroit.
That effort shows signs of paying off. Ford Motor Co. said it plans to spend $1.1 billion to retool a plant near Kansas City, adding 1,600 jobs, and General Motors Co. has said it would spend about $380 million to refit its Wentzville, Mo., plant to build midsize pickups.
"Everything we get as an incentive from that state…is a very important part of the decision," says Mark Reuss, head of GM's North American operations.
The buoyant auto industry is helping to boost the Midwest hiring outlook. A report from staffing company ManpowerGroup estimated a net 10% of Midwest employers plan to hire in the first quarter, after factoring in companies that said they would cut jobs. That slightly surpasses the Northeast, South and West and the national forecast of 9% and is the strongest result for the Midwest since the third quarter of 2008.
Car makers' improving health has a ripple effect on other businesses in the region, from suppliers to business services to retailers, said Phil Gardner, director of the Collegiate Employment Research Institute at Michigan State University. For two years running, the institute has seen double-digit increases in employers' plans to hire recent college graduates in the Great Lakes states. He said he is hearing more optimism than usual from small businesses and start-ups in the region.
It isn't just the Midwest that is benefiting from the improved auto outlook. Honda Motor Co. plans to expand capacity at plants in Ohio but also in Alabama, and BMW AG this month said it would spend $900 million to add a new model at its big plant in Greer, S.C., and add 300 jobs. South Carolina's Republican Gov. Nikki Haley has made landing more automotive- and aircraft-manufacturing jobs a focus of economic development and state incentives.
"BMW locating here 20 years ago changed the look of the state," said Amy Love, marketing and communications director with the state Department of Commerce. A new Boeing Co. aircraft factory "likely wouldn't be here if BMW hadn't landed," she said.
Investments by big car makers can bring along more jobs from parts makers.
GM once pushed suppliers to shift operations to low-wage countries. Now, the company is encouraging parts makers that supply its U.S. operations to locate "as close to the plant as they can," Mr. Reuss said.
Japanese auto technology supplier Denso International, which operates its North American headquarters in Southfield, Mich., plans to add about 50 engineers to its operations this year, more than double last year. Most of the hires will either work in a company lab aimed at reducing the size of the battery pack in electric vehicles, or in a facility aimed at improving in-car multimedia and navigation systems.
"Everybody wants more technology in their vehicles, and it just seems that the U.S. is the hot spot," said Doug Patton, Denso's senior vice president of engineering in the Americas.
Freudenberg-NOK Sealing Technologies, of Plymouth, Mich., hired 140 workers in its U.S. operations last year and expects to do the same this year."The markets have rebounded, and with that rebound we have had to hire to meet demand," said Sarah O'Hare, vice president of human resources. "We are trying to get enough people to get back to our fighting weight."
Of course, the positive trends are relative. Long before the recession, Michigan and other manufacturing-heavy states were suffering amid structural changes in the global economy. Unemployment rates in some Midwestern states are still above the December national average of 8.5%.
In Michigan, unemployment stood at 9.8% in November, the latest month for which state figures are available. In Illinois and Indiana, the rates were 10% and 9%, respectively. But they are falling and have remained low in such states as North Dakota (3.4%), Iowa (5.7%) and Wisconsin (7.3%).
"With the global economy continuing to expand and the automotive industry yet to see more gains, there's medium-term sustainability to this trend," said William Testa, director of regional research at the Federal Reserve Bank of Chicago, of the Midwest hiring outlook. He added that anecdotal evidence of insourcing—U.S. companies bringing jobs back to these shores for logistical or economic reasons—could portend another slight boost for manufacturing jobs.
But because of increasing automation in factories and cost pressures that will keep driving jobs to lower-wage areas overseas or to the South, Midwest automotive jobs remain at risk. "That's the basic structure and it hasn't changed," Mr. Testa said.

Friday, January 20, 2012

And the Winners Are?

And the winners are …. Drumbeat please Maestro … The Honda Civic was the best-selling passenger car in 2011 with final sales of 55,090 units a decline of 5.6 percent from their 2010 levels but still number one within the passenger car segment. And the Ford F-Series Pick-up truck was the best-selling light truck and best-selling vehicle of any class with sales of 97,913 units a slight decline of 1.6 percent from levels achieved in 2010.

More details on Canadian Top Ten Model Sales can be found in the DesRosiers Automotive Reports published by DesRosiers Automotive Consultants Inc. For more information on these reports please contact Albena Saltcheva at (905)881-0400 x18 or albena@desrosiers.ca

Dispelling the Myth that Labour Costs Don't Matter.

During the difficult Government bailout time in 2008 and 2009 the Labour Unions in North America and in particular the CAW in Canada began using an interesting new angle as to why they didn't need to offer concessions to the unionized OEM's. A new phrase entered the lexicon of automotive lingo ... “Wages only represent 7 percent of the cost of a vehicle but get 99 percent of the attention" was the clarion call of the CAW. Their argument obviously was that since 'wages' were so little a portion of the cost of a vehicle then labour didn't need to come to the table to help the OEMs that were threatened.

It is worth examining this contention in more detail because nothing can be further from the truth and we do have Labour negotiations later this summer. When a group is in trouble (and labour unions are in serious trouble across all industries in North America) they usually revert to miss-leading statements and or in some cases outright lies. The above statement is miss-leading to the N'th degree and needs to be dispelled as an outright myth.

Assembly worker wages actually do represent only about 7 percent of the manufacturing cost of a vehicle (actually between 7 and 10 percent depending on the plant). So the Unions are not lying when they make this statement but they ignore a number of other things that add significant labour cost to a vehicle. In actual fact labour costs represent between 40 and 60 percent of the cost of a vehicle in your driveway depending on the type and source of manufacture. And indeed this is no different than most other manufactured goods.

So where is the difference between what the unions say and the actual truth? Well first of all the unions only refer to 'assembly' wages. They ignore the wages embedded in the automotive parts used to make vehicles which adds and addition 15 to 25 percent to the equation. They ignore the wages embedded in raw materials which adds additional labour content. They ignore the wages paid by the vehicle distributors to market and sell vehicles and get them to the vehicle dealers across North America. They ignore the wages paid by every vehicle dealer to market, sell and keep their dealerships open. Add up all the 'wages' paid from the beginning of the value chain to the final selling price of a vehicle and they would represent at least 30 percent of the final transaction price and as high as 50 percent of the transaction price.

But this ignores another cost related to labour. This is only 'wage' cost. These workers also have significant benefit costs with one of the richest pensions in society, high healthcare costs and other benefits which can cost a lot of money. And union workers have a significantly higher benefit cost than non-union members.

Add wages together with benefits and the costs related to "compensation" embedded in a vehicle can easily be between 40 percent and 60 percent of the final transaction cost of a vehicle.

But labour costs do not stop there. There is also a massive fixed cost to bring a new vehicle into fruition related to research, design, development and testing of vehicles. An all new global platform can cost between $1.5 and $2.5 billion in fixed costs that also are embedded in the transaction price of a vehicle. And the labour content of these costs are very high since it is professionals who account for most of the work.... designers, engineers, scientists and other highly skilled workers and thus highly paid workers like those in the tool, mould and die sector. These are all very high paid help and their compensation adds significantly to the price of a new vehicle. The exact amount is dependent on the volume of each platform, the length of time it is in the market and other factors so can be relative low... perhaps another 5 to 8 percent of a price of a vehicle but could also be quite high ... maybe as much as 15 percent of the price of a vehicle.

Add it all up and the labour content of a typical vehicle in North America is at least 40 percent of its final transaction price and in some cases as high as 60 percent.

And the unionized labour contracts negotiated with the CAW and UAW are at the centre of this rubrics cube. Assembly worker wages are obvious but a significant portion of automotive components are also sourced inside any OEM and with the unionized OEMs all these workers are also covered by the master contract negotiated with the unions. And everyone gets the same or nearly the same benefit package and it doesn't matter where you are situated in one of these OEMs. The white collar and pink collar jobs in unionized OEMs are also often unionized but even if they are not unionized they benchmark their compensation (particularly benefits) off the negotiated Labour Agreements. And most of the fixed costs with bringing a vehicle to market are 'in-house' and these also are benchmarked to the negotiated Labour Agreements.

The parts that are supplied from independent suppliers have more non-union than union content in them but to the degree that suppliers are unionized they also benchmark their compensation to the negotiated Labour Agreements. And even the non-union suppliers have to be competitive on labour rates in their geography in order to attract workers so if union wages escalate some of this morphs over to non-union plants as well.

The average transaction price of a vehicle in Canada last year was over $35,000. We don't know exactly but at least $15,000 and as much as $25,000 of this cost is directly related to labour costs both wages and benefits.

So don't for a Nano-second believe that labour costs don't matter since only “Wages only represent 7 percent of the cost of a vehicle but get 99 percent of the attention". Holding the line on labour costs is absolutely critical for any OEM and especially so for the unionized OEMs in Canada this year ... GM, Ford and Chrysler.

Each of these companies have to make an important decision on investing in one of their Canadian plants this year ... GM at their plant in Ingersoll, Chrysler at their plant in Brampton and Ford at their plant in Oakville. And unfortunate for Canada their current ‘all-in’ compensation is already higher than the recently negotiated ‘all-in’ compensation of their brothers in the UAW. There is also nothing that prevents any OEM from moving their production to lower cost facilities in the US and or Mexico and in selected cases to plants overseas.

Canada no longer has an exchange rate advantage and indeed it recently has been an exchange rate disadvantage. We no longer have an advantage related to the structure of our healthcare costs. We no longer have an advantage related to the cost of energy. So, more the most part, whether these companies choose to renew their investments in Canada, or not, will come down to the Labour Negotiations with the CAW later this year.

The CAW is going to be in a very difficult situation and I’m optimistic that they GET IT. The recent battle at a plant in London, Ontario does not bode well for the automotive sector. In that situation the CAW was not willing to even consider a two tier wage system where wages of existing workers were protected but new hires were to start at 50 percent the existing wage. The plant was closed by the owners.

I’ll be watching very closely since the future of vehicle and parts manufacturing in Canada could be determined by the outcome.

More information and commentary can be found in the DesRosiers Automotive Reports published by DesRosiers Automotive Consultants Inc. To ensure continued analysis directly from Dennis DesRosiers please ensure to subscribe to the DesRosiers Automotive Reports. For more information on these reports please contact Albena Saltcheva at (905)881-0400 x18 or albena@desrosiers.ca.

Thursday, January 19, 2012

Can the Japanese Recover Lost Market Share

Our first question is how much share did the Japanese lose as a result of their mistakes, Tsunami/floods and competitive pressures from other OEMs? …. Final data is available for 2011 and this analysis is based on quarterly sales numbers to lesson month to month fluctuations.

Well how much share did they lose? … Peak ( 3’rd Quarter 2008 ) to Trough ( 2’nd Quarter 2011 ) the Japanese lost 10.6 points of market share in Canada which is massive given that OEMs fight over tenths of points of market share.

Second, were their other market share losers besides the Japanese during the last three years?

Yes GM also lost 6.9 points of market share in the identical timeframe as the Japanese lost share. Most of this was due to closing of brands but GM also lost share in their remaining core brands .. not much mind you but any loss of share in their core brands must be a concern since the whole idea of eliminating their non-core brands … Pontiac, Saturn, Saab, Isuzu, Hummer in 2009 and Oldsmobile in 2004 … was to allow them to concentrate on their core brands, since they also lost share in their core brands this strategy has not played out as planned, at least not in Canada). So collectively GM and the Japanese lost 17.5 points of market share between the 3’rd Quarter of 2008 and the 2’nd quarter of 2011. GM has obviously lost a lot more market share over time.

Third, who got it?

NOT GM obviously but virtually everyone else. Ford was the big winner gaining 5.8 points of share, the Koreans picked up 5.3 points of share, Chrysler gained 3.4 points of share and the Europeans picked up 2.9 points of share.

Fourth, can the Japanese get some of their lost market share back?

Well in the last two quarters of 2011 they recovered 6.2 points of share so the answer is yes … absolutely. And this is with Honda, in particular, but also Acura, Infiniti and Lexus still largely on the sidelines …. If Honda comes back this year as well as the premium brands it is possible that the Japanese could recover all their lost market share and indeed you could speculate that they have a possibility of exceeding their previous peak share in Canada. Maybe not in 2012 but it is certainly a possibility in 2013 especially since they have an unprecedented product offensive heading to North America … you might call it a Tsunami of a different sort.

The assumption by most analysts and industry executives is that the Japanese could pick up the share they lost due to the Tsunami and floods but most also thought it was going to very difficult for them to pick up the share they lost due to mistakes ( recalls and some specific products ), allowing their vehicles to age and due to competitive responses from other OEMs. They are belying this point of view and have very quickly gained back about sixty percent of their lost market share and are poised to pick up most if not all of the remaining lost share in the next 18 months. This will be the one metric analysts like myself will be watching carefully.

Doing this will be difficult and is perhaps reflects a too optimistic projection but the Japanese have certainly come back stronger and quicker than any analyst predicted. The conclusion … don’t count the Japanese out in Canada … they are very capable companies able to fully recover from any issue that arises.

Fifth can GM take back market share? … the answer to date is no. They only lost 0.1 points of share in the last period but holding share is also quite an accomplishment in the face of the Japanese picking up so much share. Can they continue to hold share as the Japanese and Europeans gain share? That is the $64K question since they are indeed vulnerable but you have to give them a lot of credit so far and they did perform better in the last two quarters than anyone predicted.

Sixth, if it wasn’t GM who lost share then who did the Japanese take their current share gains from? … Number one was the Koreans who lost 2.5 points which is a surprise since most believe that the Koreans would aggressively price to at least hold share and they have had some very successful products this year like the Elantra. This obviously wasn’t enough for them to hold market share. A close number two was Ford who lost 2.1 points of market share and have the oldest engineering in dealerships today at least of the full line vehicle companies.

This isn’t a surprise in that we know that Ford had a weak 4’th quarter but Ford is also the strongest of the Detroit Three so, if they choose, they could halt this market share slide and they are quickly addressing the age of the products in Dealer's showroom with a new Focus last fall and a number of new products this year.

Chrysler also lost 1.9 points of market share which is a bit of a surprise since they have done so well all year and were not noticeably down in the last quarter. They also have the most current engineering of the Detroit Three. Chrysler was hurt by dismal performance on the passenger car side of the industry though and this is their weak spot.

GM also partially was a surprised in that they held share with only 0.1 points of lost share but GM also lost 6.9 points of share as the Japanese tumbled so it isn’t exactly a stellar performance if the timeframe one examines is expanded.

Seventh, can the Europeans continue to gain share?

The answer is definitely yes as the move to European luxury brands continues ( they picked up about 20 points of luxury market share over the last few years) with these brands continuing to take share even though the Japanese have returned. At a slower pace of growth than when the Japanese were losing share but growing none the less. Indeed, it doesn’t appear that the Europeans are vulnerable at all in that their luxury brands dominate and don’t overlap the Japanese to a great deal ( Lexus the exception ). In addition , VW is moving down market and have tremendous strength in their diesel product so should be able to pick up share.

Eight, if the Japanese and Europeans reach their potential share gains which appears to be an additional 4 to 6 points of share gain over the next 18 months then who do they take it from?

Age of engineering provides some insights with Ford the most vulnerable with the oldest showroom age in Canada amongst major brands and the oldest age of engineering on a sales weighted basis. The average platform age in the total market is only 5.3 years. The Koreans age of engineering is the youngest in the market ( 3.2 years ) but is aging quickly so they might have some issues as they wait for new product, especially volume products. Chrysler lost some share but has relatively young engineering ( 4.4 years ) and is moving to even younger engineering as they enter some volume segments in Canada where they have been weak ( compact cars with the Dodge Dart is best example ). So Chrysler may hold share and could actually pick up share albeit with a weaker mix of vehicles from a profit perspective. GM is the wild card and the kindest thing to say is that GM IS T.B.D. GM’s dealer body is still reeling from restructuring and they have relatively older engineering at 5.7 years.

Tables and charts that go with this analysis are available as well as a number of regular analysis of trends in the automotive sector but only to subscribers of our newsletter ... DesRosiers Automotive Reports. To subscribe contact Albena@desrosiers.ca. It isn't expensive and is a steal at twice the price. Subscribe and you WILL NOT BE DISAPPOINTED.

Dennis DesRosiers

President

DesRosiers Automotive Consultants Inc.

www.desrosiers.ca