Cost cuts to allow Canadian auto sector to report 2008 profit despite woes

24 minutes ago

OTTAWA — The beleaguered Canadian auto sector is expected to turn its first overall profit in three years in 2008 despite falling production and sales and Tuesday's latest announcement of new layoffs in Oshawa, Ont., says the Conference Board.

The think-tank's spring industrial outlook predicts the auto sector will record a modest $155 million profit this year, following losses of $430 million last year and $1.02 billion in 2006.

The Conference Board says a reduction in costs in the industry, realized through efficiencies and fewer workers, is the main reason the sector will be in the black.

And an expected turnaround in the U.S. economy and subsequent consumer demand for autos going forward will mean the sector will record profits for the next four years, the report forecasts.

"In 2007, the elimination of 8,700 vehicle assembly jobs and sustained cuts to material costs enabled vehicle producers to slash total operating costs by 5.6 per cent," the report states.

"This year, cost savings of 10.5 per cent will result primarily from lower material costs, and to a lesser extent, from employment cuts and more restrained long-term debt servicing fees."

The Conference board report comes as General Motors Corp. (NYSE:GM) announced the shutdown of four North American plants making pickup trucks and SUVs, including its pickup line in Oshawa, Ont., which currently employs 2,500.

The report predicts close to 7,000 jobs will be eliminated in the sector this year, bringing employment in the sector to 66,800.

But it says the job picture should stabilize and even begin to recover slightly next year, rising to 72,400 jobs in 2012. That is still below last year's employment in the sector of 73,400 jobs, however.

While acknowledging the industry's woes - the high Canadian dollar, lingering worries from long-term international competition and the U.S. economic slump that will cut vehicle sales there this year to the lowest level in a decade - the report sees progress beginning in 2009 and building slowly in subsequent years.

The expected U.S. recovery later this year and next will increase demand, and Canadian producers are switching to more popular lines, it notes.

The report says the upcoming releases of the Dodge Challenger, Toyota RAV4 and General Motors Camaro will generate momentum in the sector in 2009, when revenues are expected to rebound by a healthy 9.7 per cent.

The Conference Board projects that production in Canada will fall 4.6 per cent this year and revenues will fall 10 per cent to $86 billion, but both will begin to rise in 2009 and revenues are projected to slowly build to $105 billion a year by 2012.

Meanwhile, although costs are expected to climb starting next year as production and wages rise, the increased revenues will allow the sector to stay in the black. Profits are forecast to rise to $1.2 billion in 2009 and to about $1.4 billion in each of the next three years.
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