2022 Sector Snapshot: Canadian Automotive

The sector’s full recovery is an essential component of Canada’s global competitiveness and future prosperity. Automotive plays a vital role in the Canadian economy, contributing about $19 billion in GDP as our second largest export that directly employs more than 125,000 Canadians and another 400,000 indirect employees in aftermarket services and dealership networks.ⁱ

Following a global decline in light vehicle manufacturing of at least 20% in early 2020 – according to Matti Suomalainen, Sector Head, Automotive for HSBC, a full sector recovery could take another three to four years – most key global manufacturing regions have reopened or returned to pre-pandemic production levels. In Canada, new motor vehicle sales have slowed from 1.7 million in mid-2021 to around 1.5 million in mid-2022 and are well below 12-month total sales of more than 1.9 million in 2019. Canadian automotive’s recovery is stalling as consumer spending on new vehicles remains well below pre-pandemic levels.

Amid persistent supply chain disruptions, high gas prices and rising labour costs that continue to batter the sector, an innovation opportunity is emerging – and being incentivized and invested in by automakers and governments alike – to make Canadian automotive a global leader.

As one of the world’s top 12 producers of light vehicles – 1.4 million vehicles are assembled at the Canadian plants of Stellantis, Ford, GM, Honda, and Toyota each year, supplied by nearly 700 parts suppliers – Canada’s automotive sector is heavily reliant on global supply chains.

Following significant losses borne by the global automotive industry in the wake of border closures, factory lockdowns and semiconductor chip shortages during the COVID-19 pandemic, Canada’s sector has been especially vulnerable to supply chain constraints. Automakers have been driven to pursue leaner and more creative risk mitigation and cost-efficient strategies to bypass further disruption, including strengthening relationships or dual sourcing with suppliers to increase supply chain flexibility, diversifying markets, and building inventory.

“In addition to mitigating risk through inventory increases, we expect Canadian automakers to seek out more local suppliers to lower the risks and costs of global shipping,” says James Stuart, Team Lead, International Subsidiary Banking at HSBC. “This will be an ongoing process that may take years, as Canada’s auto sector requires a high quality and consistency of standards in its supply chain as compared to other consumer products.”

Ultimately, many of the strategies require reduced production targets which, combined with slowing auto sales and rising labour costs, gas prices and interest rates, have resulted in labour shortages, layoffs and worker recruitment, retention and renumeration volatility.

These twin challenges – supply chain uncertainty and labour shortages – have placed Canadian automotive at a tipping point, in need of support and guidance to ensure future-focused investment, innovation and sustainability in the sector to ensure it remains a globally competitive leader.

The transition to net zero and the accelerating shift to electric vehicles (EVs) offers Canadian automakers and suppliers an unparalleled opportunity to increase flexibility and automation of new production lines, lower manual labour costs and upskill their workforce for the future.

A confluence of consumer demand, market forces and significant government investment is taking place right now.

EV production in Canada has been launched into high gear with the federal government’s commitment to a mandatory 100% zero-emission vehicle (ZEV) sales target for all new light-duty vehicles by 2035. 2022 saw significant EV investments from all five major OEMs with active production facilities in Canada, which include:

• Stellantis contributing $3.6 billion towards retooling lines at plants in Brampton and Windsor, Ontario, including the creation of 640 new jobs, North America’s first EV battery testing lab and EV research and development “centre of excellence”
• A $2 billion commitment from GM Canada towards refurbishing facilities in Ingersoll and Oshawa, Ontario, creating 2,600 jobs
• Ford announcing a $1.95 billion investment in its Ontario plants
• A $1.4 billion investment over six years by Honda to prepare its Alliston, Ontario plant to become North America’s leading plant for its hybrid-electric models
• A future commitment from Toyota to optimize its Canadian plants in Woodstock and Cambridge Ontario to produce more EVs than any other automaker in the country once it reaches its goal of offering EVs by 2035

Along with incentivizing commitments from both the federal and provincial governments, these investments total a further $13 billion on top of a previously committed $3 billion – nearly equivalent to the sector’s contribution to Canada’s GDP.

And according to the latest EY Mobility Consumer Index, nearly half of Canadians (46%) plan on buying an EV, up 11% from 2021 and reaching its highest level to date, indicating that rising consumer demand is matching the drive to increase production and supply.ⁱⁱ

While Canadian automakers and technology companies are making significant inroads into autonomous vehicle (AV) research and development, the near-term opportunities for Canada’s automotive sector to take the lead on AV production are currently fewer than with the shift to EVs.

This is mainly due to Canada’s shift to AVs still being in nascent stages. A knowledge gap among consumers and regulatory hesitancy on the part of government are providing persistent barriers to full-scale AV adoption. Currently, Ontario is the only province to allow driverless vehicles on the roads as a result of the ten-year Automated Vehicle Pilot Program launched in 2016 and updated in 2019 to include the testing of driverless automated vehicles and cooperative truck platoons under certain conditions.ⁱⁱⁱ And a recent study by J.D. Power revealed Canadians’ understanding of autonomous technology and overall consumer readiness for self-driving vehicles is quite low, with 67% of respondents having inaccurate knowledge of AVs.

While there’s plenty of room for Canadians’ perception and acceptance of self-driving vehicles to grow, the country’s deepening pool of top AI and engineering talent offers a unique opportunity for the automotive sector to accelerate into the future of autonomous transportation.

“Canada has the opportunity to play a leading role in the development of the global AV market supported by our world-class, high-tech hub in Kitchener-Waterloo which has on of the highest concentrations of tech talent in North America,” says Stuart. “The hub benefits from an incredible computer science graduate output through the University of Waterloo, with more than 10,000 engineering students and about 4,000 computer science students, the top-rated Waterloo Artificial Intelligence Institute (Waterloo.ai) and Canada’s largest university-based automotive research group at the Waterloo Centre for Automotive Research (WatCAR).”

Tech companies like Waabi, founded in Canada by AI pioneer Raquel Urtasun, and Waymo, and automakers including Tesla, Ford and General Motor’s Cruise Division, are investing exclusively in the mass production of AVs.

Whether Canadians and the federal government, which has the final say on how AVs will be deployed on the country’s roads, embrace a driverless future is dependent on how effective automakers and tech companies educate and mitigate the public’s concerns about issues like the safety of driverless vehicles and their impact on the driving labour force.

“While the automotive industry has weathered unprecedented challenges over the last few years, Canada has all the right ingredients to seize the emerging EV/AV opportunity, making the sector a global production powerhouse while ensuring our country leads the way on sustainable technology and manufacturing,” says Stuart. “The key to our success will be in ensuring we stay the course on leveraging our significant national resources – from the lithium reserves needed to make batteries to our enormous human capital and talent need to research and commercialize emerging technologies.”