March 27, 2008 / 6:08 PM / 9 years ago

Canada auto parts firms must look offshore -report

3 Min Read

TORONTO, March 27 (Reuters) - Automobile production in emerging markets is set to outpace output in North America for the first time this year and the Canadian auto parts industry must adapt to the new reality, a study released by Scotia Economics on Thursday says.

Combined vehicle assembly capacity in the BRIC nations, Brazil, Russia, India and China, will climb to 20 million units this year surpassing the 17.4 million units of assembly capacity in place in North America, according to the Global Auto Report.

Despite the dwindling North American market, the Canadian auto parts sector remains almost exclusively focused on the domestic and U.S. markets, which absorb more than 95 percent of all Canadian auto parts shipments, said Carlos Gomez, senior economist at Scotiabank and author of the report.

"What we're highlighting is that by focusing exclusively on North America, we are missing out on a lot of growth opportunities that are occurring overseas," he said.

After peaking at 19.6 million units in 2002, North American capacity has fallen by roughly two million units over the past five years, reflecting plant closures in North America by the big three Detroit automakers.

In contrast, assembly capacity in emerging nations has been advancing by 15 percent a year over the past five years as automakers have been building new plants in markets that offer greater growth potential as well as a lower cost structure.

Gomez pointed to small Quebec-based company, CVTech Group CVT.TO, as one that is taking advantage of the changing times.

CVTech will supply automatic transmissions for the new low-cost vehicle that is being produced by Tata Motors (TAMO.BO) in India which is supposed to hit the market with a price tag of just $2,500.

That proves that Canadian companies can win contracts in high-growth, lower-cost areas, Gomez said.

"What it means is that you have to move up the value chain and do more high-tech type products, for example, that you can't produce elsewhere," he said.

While auto sales in Canada are booming, south of the border U.S. consumers continue to cut back on big-ticket items in light of falling home prices, slowing employment growth and high gasoline prices.

Automakers have slashed their second-quarter production plans for Canada and the United States to an annualized 12.7 million units, one of the lowest levels since the economic downturn of the early 1990s.

Gomez said Canadian manufacturers should be taking advantage of the tax incentives offered by both the federal and provincial governments to invest in new machinery needed to create high-value products that emerging markets need. (Reporting by John McCrank; Editing by Peter Galloway)

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