Toronto, Ontario – Reduced capacity by the Detroit Three will bring production levels below that needed to restore profitability, according to a report released by Scotia Economics. Nearly six million units of unused capacity will remain as automakers continue to aggressively cut production across North America this year, representing one-third of all vehicle assembly capability in the region.
“Our estimates are based on a full-year 2009 U.S. sales forecast of 11.5 million units, and vehicle production across North America of just under 11 million units, down sharply from an average of 16.1 million over the past decade,” said senior economist Carlos Gomes. “We continue to believe that a moderate sales improvement will emerge later this year, as the U.S. and global economies begin to respond to the unprecedented amount of monetary and fiscal stimulus put in place since last September. These measures should begin to resuscitate economic activity during the strongest months for vehicle sales.”
After the latest round of announced capacity reductions, the Detroit Three will still have the capability to produce roughly 10 million vehicles in North America, well above their output of 7.2 million units in 2008. Production will fall by more than 20 per cent this year to less than six million units, pulling their full-year operating rate below 55 per cent for all of 2009. Even with an expected moderate sales gain in 2010, operating rates for the Detroit Three will remain at about 60 per cent, substantially lower than the 85 per cent generally required to restore profitability.
“The sharp appreciation of the Japanese yen in recent months has eroded the profitability of vehicles exported from Japan, and may benefit North American facilities if production of some vehicles shifts to North America,” Gomes said. “One automaker has indicated that it will move assemblies of some small cars from Japan to Mexico, because of the surging yen.”
Any production shift to North America would help plants and suppliers, but Mexico seems better positioned to benefit more from this shift than Canada or the United States. European and Asian manufacturers account for 45 per cent of Mexico’s overall assembly capacity, compared with 42 per cent in the U.S. and 38 per cent in Canada. These “new domestics” have the capacity to produce 1.3 million cars and light trucks in Mexico, compared with 1.1 million units in Canada.