Automotive Industry Overview 1

Running Head: AUTOMOTIVE INDUSTRY OVERVIEW

Automotive Industry Overview

Fatuma Hassan, Heather Taylor-Nanan, Cathy Wilson

Meritus University

Date: December 6, 2010

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Automotive Industry Overview

The automotive industry is an important part of the Canadian economy

employing many people directly and many more as a result of spin-off

industries that support the automotive industry. The health of the sector

impacts many domestic jobs, especially in central Canada (Stewart, 2008).

History of the Automotive Industry

The automotive industry in North America has gone through different

stages in the past to obtain its present form. Initially, automobiles to be only

considered as a novelty and were used for sports. As time went on, it

became clear that the automobile would play a significant role as a means of

transportation (Berger, 2001). By the early twentieth century the demand

for the automobiles was increasing significantly. Automobile companies like

General Motors, Chrysler and Ford are some of the US companies that

emerged as big players in the industry. Many other smaller companies did

not survive. These three companies became known as the “Big Three” of

the North American auto industry. They also expanded into foreign markets

around the world (Berger, 2001).

Business Cycle of Automotive Industry

The automotive industry has gone through different business cycles

after its inception. The industry is known for being cyclical in nature

(Ballew, 1994). In the 1970s the industry experienced growth and expansion

as a result of demand for automobiles. Since then the industry has gone
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through other ups and downs as a result of general economic conditions. In

addition the industry was hit by external factors including the oil shock, the

growth of foreign competition and changes in technology. The industry is

now a fraction of the size it once was (McAlinden, 2003).

Recently consumers would have seen the devastating impact the

economic recession has had on the automotive industry. The industry hit a

new low in this business cycle and had to rely on government support to

remain solvent. One industry analyst stated in an article in the Globe and

Mail that “after every decline since the end of the Second World War, the

auto industry has bounced back, in some cases from declines of 25 per cent

of more” (Keenan, 2010). He went on to explain that in the current situation

“The bad news, however, is that about 38,000 jobs in vehicle assembly and

parts manufacturing disappeared between the end of 2007 and December,

2009, when the auto industry experienced the worst crisis it has faced since

the Great Depression of the 1930s “ (Keenan, 2010). The automobile

industry has shown great resilience in responding to downturns (McAlinden,

2010).

Automotive Industry and its effect on the Gross Domestic Product

The automotive industry makes an important contribution to the Gross

Domestic Product (GDP) of Canada and the United States. Although it only

contributes about 4 percent of GDP overall on a quarterly basis it can

contribute up to 40 percent in the change in GDP (Cargroup, 2010). The

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automotive industry is one of the major industries in the United States and

Canada impacting GDP.

Automotive Industry and its effect on Unemployment Rate

Again similarly as the automotive industry affects the GDP of the

country, it also impacts the unemployment rate. The automotive industry’s

production and sales levels also contribute heavily to the level of

unemployment rate. An analysis by a Canadian Autoworkers economist

suggested that a twenty-five percent decline in automotive exports would

result in the elimination of twenty-five thousand jobs and six billion per year

in taxes in Canada (Stewart, 2008). One of the major impacts on

employment is the impact on other employment within the supply chain. For

example, an industry analyst provided the following assessment on the state

of Canadian employment in 2010, “At the end of last year, parts makers

employed 26,148 people, compared with 87,341 at the end of 2007, when

the industry was already being battered by the beginning of the downturn”

(Keenan, 2010). Overall during the period of 1970-2010, the production

and sales level in the automotive industry has fluctuated heavily from up’s to

down’s and from down to up’s that in a similar manner has also affected the

unemployment rates in the country. The unemployment rate in the economy

also soared up to higher levels since the automotive industry which is a

major employer of the country was also facing the downturn in the sales and

production levels (Weintraub & Sands, 1998).

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Automotive Industry and the Inflation Rate

One of the economic indicators that reflect the economic performance

of the country is the inflation rate. Inflation rates also have an impact on the

automotive sector of the country. The movement of the automotive industry

is also affected by the changes in the inflation rates and the level of inflation

prevailing in the economy. Inflation rates behave oppositely from

unemployment rates that means when inflation increases in the economy

the unemployment decreases in the economy and vice-versa. The

automotive industry has faced the recession phase which also caused by

lower levels of inflation. The inflation rate has become a major economic

indicator of the economy and also found that inflation rate has affected the

automotive industry as a whole (Baumohl, 2008).

Economic Indicators

One of the major economic indicators in the automotive industry is the

auto sales indicator. This indicator reflects the fair performance of the

automotive industry that ultimately will be reflected in the GDP of the

country. In the periods like 1988 and 1999 the economy saw similar demand

that is reflected in the higher sales of the industry which ultimately reflected

in that year’s GDP of the country. The retail sales in the automotive industry

have been found as an economic indicator where when retail sales increases,

it increases the sales of the country which ultimately increases the GDP of

the country.
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Another important economic indicator for the automotive industry is

personal income. Canada has one of the highest levels of automobile

ownership in the world. This is attributed primarily to the level of personal

income and geography (Automotive Report, 2009). Approximately eighty

percent of vehicle purchases are made because of the need to replace a

vehicle. As a result if consumers don’t have adequate disposable income

they will delay the purchase or buy a less expensive used vehicle. Both of

these scenarios impact the sales of new automobiles Automotive Report,

2009). As we have discussed earlier the auto sales indicator is an important

indicator of the health of the industry.

The Canadian economy is mainly based on foreign trade and the

United States is the country’s largest trade partner. The U.S. is responsible

for approximately 45% of exports and automotive manufacturing represents

12%. The foreign exchange rate is important to exporters as this will affect

the bottom line. To be profitable the exchange rate should include cost of

goods sold so that the retailer has room to improve prices in order to gain

profits. The same methodology is applied to the automotive industry.

Foreign exchange rates affect the car industry. When exchange rates

are high car makers have to cut back on marketing programs and funding

for new innovations. One commentator characterized their behavior in the

following quote, “Don't expect the price of your Lexus to go up. Carmakers

want to sell cars. When the currency goes against them, they'll eat the
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difference, for a while”. (Gerry F, 1998) Consumers flock to the border to

get good deals on cars when the currency exchange is lower than normal.

This has a negative impact on the Canadian economy.

The automotive industry plays an important role in the Canadian

economy. It employs thousands of Canadians directly and many more are

employed by industries and companies that supply goods and services to the

industry. Although it is only responsible for approximately 4% of GDP

overall it can contribute up to 40% of the change in GDP on a quarterly

basis. The recent downturn for the automotive industry in Canada has

illustrated the significant impact of this industry on the economy. Plants

were closed, jobs were lost and sales decreased. The government provided

support to some automotive manufacturers because of the important role

they play in the economy.

Other key economic indicators for the health of the automotive

industry include the auto sales indicator, personal income and foreign

exchange rates. All of these have a significant impact on the automotive

industry. The automotive industry has a long history in Canada. Although it

does not look like it did even ten years ago this industry is still an important

contributor to the Canadian economy.

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References

Baumohl, B. (2008). The Secrets of Economic Indicators: Hidden Clues to

Future Economic Trends and Investment Opportunities. (2nd ed.).

Wharton School Publishing.

Berger, M.L. (2001). The Automobile in American History and Culture: A

Reference Guide. Greenwood Publishing Group.

Ballew P., Business Economics, The Automobile Industry and Monetary

Policy: An International Perspective. Retrieved December 5, 2010 from

http://findarticles.com.

Economic Contribution of the Automotive Industry to the U.S. Economy – An

Update. (n.d.). Retrieved December 4, 2010 from

http://www.cargroup.org/pdfs/Alliance-Final.pdf

Economist, “On the Edge”, November 13, 2008. Retrieved on November

21, 2010 from http://www.economist.com

Keenan P., 2010, “Ontario’s auto sector gets fresh boost”. Retreived

December 5, 2010 from http://theglobeandmail.com

McAlinden, P.S., Hill, K. & Bernard, S. (2003).Economic Contribution of

Automotive Industry to US Economy. Retrieved November 22, 2010 from

http://www.cargroup.org/pdfs/Alliance-Final.pdf

Jerry, F. (n.d). Car and Currencies. Forbes, 171(13), 098. Retrieved from

ProQuest: Accounting & Tax database.

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Canada Overview of economy, Information about Overview of economy in Canada

http://www.nationsencyclopedia.com/economies/Americas/Canada-OVERVIEW-OF-
ECONOMY.html#ixzz17Glu8q5X

Stewart J., “Auto Industry in Jeopardy”, November 2008. Retrieved

November 21, 2010 from http://www.caw.ca

Weintraub, S. & Sands, C. (1998). The North American Auto Industry under NAFTA.

CSIS.

(2009). Automotive report. Automotive Industry Report: Canada, 9-15.

Retrieved December 4, 2010 from Business Source Complete database.

http://www.ic.gc.ca/eic/site/auto-