North American Auto Industry In High Gear TPP Raises Concerns, But Trade Flows Highlight NAFTA s Competitiveness

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1 Carlos Gomes North American Auto Industry In High Gear TPP Raises Concerns, But Trade Flows Highlight NAFTA s Competitiveness Recent Global Sales Development Global car sales regained momentum in September, climbing 3% above a year ago the strongest performance since March. The improvement was led by double-digit year-over-year advances in North America and Western Europe, as well as a rebound in China after three consecutive months of declining volumes. In contrast, activity continues to weaken in Brazil and Russia, undercut by deteriorating economic conditions. However, excluding Russia, vehicle sales in Central and Eastern Europe have gained momentum since the spring, and advanced % y/y in September alongside solid employment growth. More recent data for North America indicate a further acceleration during October. Purchases in the United States jumped 1% y/y last month to a higher-than-expected annual rate of 1.1 million units the second consecutive month above 1 million units. The September/October results represent the best back-to-back monthly performance since early, when the global economy was still in the midst of the tech boom. Crossover utility vehicles led the way, surging 3% above a year earlier and garnering a record 31% of the U.S. passenger vehicle market. In Canada, purchases climbed to an all-time high of.1 million units in October, up from an average of 1. million through September. Imported brands led the way, with crossover volumes surging % y/y. This robust performance prompted us to increase our full-year Canadian sales forecast to 1. million units. North American Auto Industry Outperforms The North American auto industry is a key driver of economic activity. It is a bright star in the current sluggish overall economic environment, and is outperforming other industrial sectors. Vehicle sales and production are at record highs across North America. Auto sector employment growth has accelerated to the fastest pace in nearly a decade, and exports have gained market share across the globe. However, while stronger economic conditions should continue to buoy industry volumes over the next several years, significant concerns have arisen over the potential dislocation of sourcing patterns for vehicles and parts once the Trans-Pacific Partnership (TPP) is implemented. The TPP provides the North American auto industry with preferential access to the rapidly growing markets of Asia and South America. However, it reduces the rules of origin requirement for vehicles and parts that have been in place under NAFTA. This has become a significant concern in Canada, as the industry remains almost exclusively focused on North America. More than 9% of Canadian parts exports are destined to its NAFTA partners. However, the strength of the North American auto industry is that it has become more innovative in recent years, and has responded to the pressures triggered by globalization. North American auto industry exports are outpacing the increase in overall global automotive exports. The industry is in a much stronger competitive position than during the previous decade when it consistently lagged its global peers. As a 1 North American Auto Industry Gains Market Share y/y % change % Global Auto Industry Exports North American Share of Global Auto Industry Exports North American Auto Industry Exports 1 19 Used Vehicle Sales Outperform Exports from Asia Total to EU to NAFTA 1/.1.. Total from EU from NAFTA 1/ Source: ITC. Automotive Parts Trade Flows (annual per cent change ) Imports by Non-NAFTA TPP countries Scotiabank Economics Scotia Plaza King Street West, 3rd Floor Toronto, Ontario Canada MH 1H1 Tel: 1..3 Fax: scotia.economics@scotiabank.com This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents. TM Trademark of The Bank of Nova Scotia. Used under license, where applicable. is available on scotiabank.com, Bloomberg at SCOT and Reuters at SM1C

2 result, auto sector employment across the entire NAFTA region has increased by % over the past year. Mexico is leading the way, but payroll growth has also exceeded % y/y in both Canada and the United States in recent months. In fact, the pace of job growth in the Canadian industry is the highest since the new millennium, with hiring buoyed by double-digit export gains. Under the TPP, the local content requirement for vehicles will drop from the current.% North American content to % from anywhere within the TPP region. In addition, for auto parts the local content required will fall from the current % North American constraint to roughly % from anywhere within the TPP region. Furthermore, some products such as metal stampings and engines are required to have only 3% TPP content. These reductions in local content requirements have raised concerns of significant job losses at both vehicle assembly facilities and auto parts plants across North America, if there is a shift in production to low-cost jurisdictions. However, the performance trend has actually been moving in the opposite direction in recent years, with North America becoming a preferred location to assemble vehicles for the local market, and increasingly for export as well. Automakers have added more than 1. million units of new capacity in North America since 7, with these facilities geared for sales within North America, as well as for export. In fact, vehicle exports from North America to the rest of the world have increased by 1% per annum over the past decade, more than quadruple the advance in cross-border shipments within the NAFTA region. Importantly, the North American auto industry has the most highly integrated supply chain network. More than 7% of all motor vehicle parts used in the region are sourced within NAFTA a much higher level than the current % requirement. In fact, the North American auto industry s supply chain network has maintained a relatively stable sourcing pattern, despite the emergence of Asia especially China as a large global auto parts exporter. For example, Asian auto parts exports destined to North America have increased at an % annual rate over the past decade, significantly lower than the double-digit increase in overall auto parts exports from Asia. In addition, auto parts from Asia have made fewer inroads into North America than into the European Union a region perceived as the leader in engineering and technological efficiency and innovation. As a result, North American countries have experienced a minimal loss in market share for domesticallysourced automotive parts. With North American vehicle sales and production at record highs and ownership rates among the highest in the world, the industry needs enhanced access to new growth markets, such as Asia and Latin America. North American producers have already made significant inroads into jurisdictions with high tariffs Vietnam has an MFN tariff on imported vehicles of 7%, while Malaysia has a 3% tariff on vehicles imported from outside the ASEAN region. Auto and parts exports from NAFTA to the Trans-Pacific Partnership members have increased by % per annum over the past five years, roughly double the pace of volume growth in the mature North American market. Furthermore, NAFTA s export growth to its TPP partners is nearly five times larger than the advance in auto parts shipments from the European Union to the TPP members in Asia and Latin America. International Car Sales Outlook (millions of units) f TOTAL SALES North America* Canada United States Mexico Western Europe Germany Eastern Europe Rus s ia Asia China** India South America Brazil *Includes light trucks. **Includes crossover utility vehicles from.

3 Canada/U.S. Motor Vehicle Sales Outlook Average Jan-Sept ** Annual f (thousands of units, annualized) CANADA 1,39 1, 1,7 1,1 1,3 1, Cars Domestic Transplants Imports Light Trucks 1 9 1,9 1,11 1,1 (millions of units, annualized) UNITED STATES Cars Light Trucks NORTH AMERICAN (millions of units, annualized) PRODUCTION* CANADA UNITED STATES MEXICO *Includes transplants; light, medium and heavy trucks. **Canadian sales are Scotiabank estimates. Vehicle Sales Outlook By Province* (thousands of units, annual rates) Average Jan-Sept ** Annual f CANADA 1, 1, 1,7 1,1 1,3 1, ATLANTIC CENTRAL ,1 1,139 1,1 1,1 Quebec Ontario WEST Manitoba Saskatchewan 3 Alberta British Columbia *Includes cars and light trucks. **Scotiabank estimates. 7 thousands of units Ontario 3 7 thousands of units Alberta 7 thousands of units Manitoba Quebec British Columbia Includes cars and trucks (light, medium and heavy). Shaded bars indicate U.S. recession periods. 7 Atlantic Saskatchewan

4 Auto Market Share By Manufacturer Canada* Jan to Oct Jan to Oct Oct Oct Units % of Total Units % of Total Units % of Total Units % of Total TOTAL Big Three General Motors Ford Chrysler Japanese Honda Toyota Nis s an Mazda Mits ubis hi Subaru Hyundai Volkswagen Kia BMW Mercedes-Benz Other *Source: Dealer sales from the Global Automakers of Canada. Truck Market Share By Manufacturer Canada* Jan to Oct Jan to Oct Oct Oct Units % of Total Units % of Total Units % ot Total Units % of Total TOTAL , Big Three General Motors Ford Chrysler Other Domestic Japanese Honda Toyota Nissan Mazda Mitsubishi Subaru Hyundai Kia Other Imports LIGHT TRUCKS , *Source: Dealer sales from the Global Automakers of Canada.

5 Auto Sales By Province Jan to Aug Jan to Aug Aug Aug CANADA ATLANTIC Newfoundland Nova Scotia New Brunswick Prince Edward Is land CENTRAL Quebec Ontario WEST Manitoba Saskatchewan Alberta British Columbia Truck Sales By Province* Jan to Aug Jan to Aug Aug Aug CANADA ATLANTIC Newfoundland Nova Scotia New Brunswick Prince Edward Is land..9.. CENTRAL Quebec Ontario WEST Manitoba Saskatchewan Alberta British Columbia *Light, medium and heavy trucks.

6 Canadian Motor Vehicle Production* Jan to Sept Jan to Sept Sept Sept TOTAL 1,7.7 1, CAR Chrysler GM Honda Toyota TRUCKS** 1, Chrysler Ford GM Honda Toyota Others *Production data from Ward s Automotive Reports. **Light, medium and heavy trucks. 3. quarterly Canada Motor Vehicle Production 3. Canada World Auto Trade Balances billions of dollars Total. 3 Assembled vehicles 3.. Total Cars Trucks* Parts Millions of units, seasonally adjusted annual rates. *Light, medium and heavy trucks. 1 data are January-September annualized.

7 New & Used Car Prices Scotiabank Car Price Indicators Canada Used* year-over-year per cent change 1 New 1 - CPI *Scotiabank estimate from Canadian Black Book data Scotiabank Car Price Indicators Canada thousands of dollars by age of car, seasonally adjusted 1 Year Year Year Scotiabank estimate from Canadian Black Book data. Scotiabank Car Price Indicators United States year-over-year per cent change 1 Used 1 CPI - New Consumer price indices for new and used cars. Shaded areas indicate recession periods. 7

8 Canadian Corporate Financial Performance Motor Vehicle Dealers and Repair Shops Net Income Pre-Tax Inventory Interest Debt/ Return on After Tax Profit Turnover Coverage Equity Shareholders ($ mil) Margin (%) Ratio Ratio Ratio Equity (%) Annual Quarterly at annual rates 1Q Q Q Q Q Average (9-1) Low (9-1) Definition of Ratios: Pre-tax Profit Margin: pre-tax income/sales Inventory Turnover Ratio: sales/inventory Interest Coverage Ratio: (pre-tax income and interest payments)/(interest payments) Debt/Equity Ratio: (short-term and long-term debt)/total equity Return of Shareholders Equity: after-tax income/total equity number of bankruptcies Retail Auto Dealer Bankruptcies Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. New car dealers only; cumulative total during the year.