BIG PICTURE

The Canadian auto industry is in big trouble and it doesn’t look like that’s going to change anytime soon.

Automakers are tapping the brakes amid a worldwide slowdown in sales, pushing Canadian light-vehicle production during the first two quarters of the year under one million units for the first time in a decade. The industry’s rubber has “hit the road” for a slew of issues hitting Canada the hardest, says Bank of Montreal economist Alex Koustas.

Canadian vehicle assembly plants built 985,501 units in the first half of 2019, down 7.8% from 1.07 million in the same period last year. The decline in the United States wasn’t as severe, dipping 3.9% to 5.4 million vehicles. Meanwhile, the number of Mexican-built vehicles increased slightly by 0.8% to almost two million.

The good news is that industry watchers haven’t publicly ruled out a return to growth. The bad news is that the long-term picture for Canadian vehicle manufacturing appears uglier than anyone wants to admit, and not just because the rubber has hit the road over current issues. In the foreseeable future, a lot of rubber appears destined to literally come off the road.

As things stand, the Canadian auto sector — which employs more than 125,000 people directly and another 500,000 indirectly — has plenty of immediate problems, including the record levels of household debt. Nobody expects vehicle output to return to peak levels of 1999, when more than three million units were built. Toyota Canada Inc. may produce a top-selling SUV at its plant in Ontario, but a lot of the country’s capacity is dedicated to building sedans, which are no longer in high demand. Canadian plants have had a hard time attracting new models as automakers invest more in southern U.S. states and Mexico.

Furthermore, since most Canadian-built vehicles are exported, assembly operations are fuelled by foreign demand, where, according to Moody’s Investors Service, a slump in auto sales will continue after falling an estimated 3.8% this year because of weakening global economic growth, rising political risk, rapid technological changes and more stringent environmental regulations.

Future demand is further threatened by demographic trends. Driven by the baby boomer love affair with cars, North American vehicle sales reached 17.4 million in 2000. But members of the Uber generation are less attracted to buying and maintaining cars, and the demand for personal ownership could further weaken with the commercialization of autonomous vehicles, which can be shared by multiple consumers.

As self-driving technology alters personal transport, automakers will need to develop alternative revenue streams. In Canada, the challenge will be to take advantage of new opportunities while managing the decline in traditional vehicle manufacturing, which currently adds $18 billion a year to GDP.

How bad could it get? Koustas points out that fully connected autonomous vehicles could actually increase demand by drawing consumers away from public transit. But, according to a worst-case scenario published by WardsAuto Intelligence in 2016, they could also erode new-car sales in the U.S. by 40%. Back then, of course, nobody had anticipated the impact of autonomous air taxis such as the ones now being tested by China’s Ehang passenger drones, which could even displace autonomous cars with a business model based upon a mashup of ride-hailing and drone technologies.