National Post (National Edition)
Challenge 2017: Cooler heads will prevail on NAFTA, predicts auto executive.
AN END TO THE TRADE DEAL WOULD CRUSH THE AUTO SECTOR BUT LINAMAR CEO THINKS COOLER HEADS WILL PREVAIL
An oft-quoted statistic is that the average North American auto part crosses a NAFTA border seven times before the finished vehicle is ready for sale. As a result, if the free-trade agreement is ever renegotiated or scrapped altogether, the imposition of new tariffs could mean huge costs for automakers and their suppliers.
Reopening the 22-year-old North American Free Trade Agreement is precisely what U.S. president-elect Donald Trump has threatened to do. But the chief executive of one of Canada’s biggest auto suppliers said the “billions of dollars” such a decision would cost the auto industry makes it likely that cooler heads will prevail in 2017.
“The industry has become incredibly interwoven between the three countries, and the thought of trying to pull that apart would result in literally billions of dollars of investment and costs,” Linamar Corp.’s Linda Hasenfratz said. “That, ultimately, is only going to hurt the U.S. consumer and North American competitiveness and, in my opinion, those facts will ultimately drive a decision that we don’t want to disrupt something that’s working really well.”
Although Trump’s rhetoric around NAFTA was clearly geared towards Mexico, any changes to the agreement could also have major implications for Canada and its auto industry, which has been dependent on free trade since the 1965 Canada-U.S. Auto Pact removed tariffs on vehicles and vehicle parts.
NAFTA, which came into force in 1994, added Mexico to the freetrade region and that country has grabbed the lion’s share of new automotive investment in recent years, one of Trump’s top reasons for attacking the agreement and companies such as Ford Motor Co., which drew fire for its plan to shift production of the Focus compact car to Mexico from Michigan.
Mexico has captured nine of the last 11 new North American assembly plants announced since 2011, according to the Center for Automotive Research. Its share of North American light-vehicle production is expected to hit 25 per cent in 2018, up from five per cent in 1989, Wards Automotive reports.
Canada, by contrast, is forecast to build 12 per cent of North America’s light vehicles in 2018, down from 15 per cent in 1989. But 85 per cent of the vehicles built in Canada are exported, with the vast majority of those going to NAFTA countries and the industry is so integrated today that untangling it would do more harm than good, Hasenfratz said.
Guelph, Ont-based Linamar has 23 plants in Canada, five in the U.S. and five in Mexico while Aurora, Ont.-based competitor Magna International Inc. has 50 plants in Canada, 54 in the U.S. and 30 in Mexico. Linamar doesn’t break out its sales by country, but 62 per cent of its third-quarter automotive sales came from North America.
“We achieve so much more when we’re working together than when we’re trying to split apart the capabilities and strengths of each country. It just doesn’t make sense,” Hasenfratz said. “I don’t believe it’s in anyone’s best interests to do it and therefore I refuse to believe that NAFTA’s going to get ripped up. I honestly don’t believe that will be the outcome.”
Instead of worrying about Trump’s plans for NAFTA, Hasenfratz is focused on the “enormous” amount of new business that Linamar is launching in 2017.
The company has 191 programs in the launch phase, representing nearly $3.9 billion of annual sales at their peak. Launches next year will amount to $600 million to $700 million, Hasenfratz told analysts in November.
Most industry watchers expect North American vehicle sales to plateau in 2017, but “even in a flat vehicle market, we still have growth on the books for next year,” she said.
Investors, however, seem to be focused on the biggerpicture outlook for North American vehicle sales, which could also take a hit from rising interest rates in 2017. This expectation has weighed on all automotive stocks, including Linamar’s, which is trading at a priceto-earnings ratio of approximately 6.5.
“That’s insane,” Hasenfratz said. “We’re a growth company, we’ve got significant business launching that’s going to drive continued growth over the next four or five years, even in a flat market, so it’s crazy for us to be trading at such a low multiple.”
Despite the unknowns around NAFTA, most auto stocks have actually rebounded since Trump’s election, rising on optimism that he’ll ease fuel-economy standards and cut taxes.
Linamar’s shares are up approximately 15 per cent since the Nov. 8 election and Hasenfratz said she’s hopeful that signals the beginning of a change in sentiment.”