Global Economic Research

June 26, 2012

Global Auto Report

Carlos Gomes (416) 866-4735 carlos.gomes@scotiabank.com

North American Output Downshifts Over The Summer Slowdown Reflects Inventory Normalization, But Pick Up Likely Before Year-end
lobal vehicle sales rebounded in May, with the advance accelerating to 11% y/y, the strongest gain in more than two years and double the increase reported from January to May. North America and Asia led the way last month, with sales in China advancing 20% y/y, as recent government policies have started to buoy gains. In contrast, activity shows no signs of hitting bottom in Western Europe and remains soft in Latin America. In the United States, purchases of cars and light trucks jumped 26% above a year earlier, but the annualized sales pace eased below 14.0 million units for the first time since December, and was down from an average of 14.5 million between January and April. The moderation likely reflects the latest soft patch in the U.S. labour market and prompted automakers to boost incentives. Japanese brands posted the strongest gains in May, but luxury automakers lagged. In fact, the share of the luxury car market fell below 7% of overall U.S. sales last month for only the second time since the global economic recovery began in mid-2009. The latest slowdown in luxury volumes likely reflects the hefty slide in global equity markets in April and May, which has dented vehicle-buying confidence. Sales in Canada were stronger than expected in May, climbing back above an annualized 1.70 million units, a rebound from a sluggish performance in April. The improvement was broad based, with both fleet and household purchases posting solid double-digit gains, as Canadians took advantage of enhanced incentives. Western Canada continued to lead the way. However, in contrast to recent months when activity was strongest on the Prairies, British Columbia set the pace in May, with volumes soaring nearly 30% above a year earlier, alongside an improving labour market. Preliminary data for June point to another solid performance, as several automakers have boosted incentives further. U.S. AUTO PRODUCTION SET TO SOFTEN IN THE THIRD QUARTER The auto industry has been a growth leader across North America in the first half of 2012, with strongerthan-expected car and light truck sales and the restocking of depleted inventories by Japanese automakers buoying production gains. However, with inventories back at normal levels around 60 days supply vehicle assemblies are set to soften between July and September. This slowdown will add further downward pressure to economic activity, especially in the United States, which is already buckling under the weight of the re-emergence of the European debt crisis on front page headlines, ongoing fiscal and political uncertainty and a slowdown in global manufacturing orders. Vehicle production in North America jumped 23% y/y in the five months through May, led by a 27% surge in the United States. In fact, U.S. vehicle production climbed to an annualized 10.3 million units in the opening Scotia Economics
Scotia Plaza 40 King Street West, 63rd Floor Toronto, Ontario Canada M5H 1H1 Tel: (416) 866-6253 Fax: (416) 866-2829 Email: scotia.economics@scotiabank.com
This report has been prepared by Scotia 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

U.S. Vehicle Production Downshifts

3.0 millions of units millions of units 12

2.5

Canada

10

2.0 United States 1.5

1.0 08 09 10 11 12

Leading Indicators Point To Continued Sales Gains

20 18 16 14 12 10 8 6 4 2 02 04 06 08 10 12 Scotia Leading Indicator of U.S. Sales U.S. Sales index millions of units 20 18 16 14 12 10 8 6 4 2

Trademark of The Bank of Nova Scotia. Used under license, where applicable.

Global Auto Report is available on: www.scotiabank.com, Bloomberg at SCOE and Reuters at SM1C

Global Economic Research

June 26, 2012

Global Auto Report

months of 2012 the highest level since late 2007. This sharp increase enabled the auto sector to account for more than twothirds of the 1.9% increase in U.S. economic growth in the first quarter. The sector has also made an outsized contribution in Canada. Further production gains have occurred in the second quarter, lifting assemblies across North America (Canada, U.S. and Mexico) to an annualized 15.9 million units, up from a fullyear 2011 total of 13.3 million. However, despite recent announcements of reduced summer downtime by several automakers due to strong demand, assemblies across North America are scheduled to ease to 15.6 million in the third quarter, temporarily halting the industrys robust contribution to economic growth. In fact, we estimate that the summer lull in vehicle assemblies will have the largest negative impact on U.S. economic activity since early 2009, when the global economy was still in freefall. The thirdquarter decline in vehicle production will be more modest in Canada, cushioned by rising output of the Honda CR-V in Alliston, Ontario. In contrast, assemblies in Mexico are scheduled to advance further, as Japanese automakers continue to expand their facilities in the most southern NAFTA member. Vehicle output is traditionally lower between July and September than in the April-June period, as assembly plants close for several weeks of vacation and model changeovers. However, taking into account the summer downtime, planned third-quarter production is set to average 64,955 cars and trucks per day across North America, down nearly 2% from a daily average of 65,916 in the second quarter. Despite the industrys temporary setback, fundamentals remain supportive of further advances in both vehicle sales and production. In particular, leading indicators of the U.S. auto sector point to ongoing gains for an extended period. While the Scotiabank Leading Indicator of U.S. Vehicle Sales has edged down from its peak in mid-2011, the index remains at one of the highest levels on record, pointing to further improvement ahead. In addition, auto affordability remains very high by historical standards, with low interest rates and moderate price increases, as well as ongoing employment gains contributing to the upward trend. Replacement demand will continue to be the key driver, as the average age of the U.S. fleet is a record 11 years. In addition, given the recent moderation in global economic activity and the uncertain environment, automakers have increased incentives in both Canada and the United States. In Canada, estimates from Statistics Canada indicate that new vehicle prices fell nearly 1% in May, a development helping to drive the rebound in passenger vehicle sales, following Aprils weak performance. Further price declines are likely over the summer, as several automakers re-introduced employee pricing in June, raising discounts up to $14,000 through the end of August. While hefty incentives have been the norm in the Canadian market in recent years, the escalation in new vehicle discounts has been extended to the United States this summer a sharp reversal from the trend prevailing since 2009, when several automakers came out of bankruptcy and focused on improving margins and profitability. Japanese automakers are leading the incentive parade in the United States, as they attempt to re-capture market share lost in the aftermath of the earthquake and tsunami. However, the Detroit Three and European manufacturers have also boosted discounts, lifting the average inducement for new vehicles in the United States to 9% of average transactions prices, up from less than 8% a year ago. In fact, this years near-percentage point increase in discounts is the largest jump in three years, and highlights that the industry is likely becoming more concerned about the prevailing headwinds.

International Car Sales Outlook

1990-99 2000-08 2009 (millions of units) 50.42 12.61 1.46 10.40 0.75 13.62 3.81 2.58 1.47 17.68 7.32 1.43 3.93 2.53 2010 2011 2012f

TOTAL SALES North America* Canada United States Mexico Western Europe Germany Eastern Europe Russia Asia China India South America Brazil
*Includes light trucks.

39.20 16.36 1.27 14.55 0.54 13.11 3.57 1.18 0.78 6.91 0.43 0.31 1.64 0.94

49.55 19.01 1.60 16.39 1.02 14.48 3.28 2.73 1.54 10.97 3.14 0.83 2.36 1.46

56.82 13.96 1.56 11.55 0.85 12.98 2.92 3.14 1.91 22.47 9.41 1.87 4.27 2.69

58.89 15.22 1.59 12.73 0.90 12.80 3.17 3.90 2.65 22.50 10.04 1.95 4.47 2.64

62.27 16.63 1.64 14.00 0.99 12.16 3.24 4.33 3.05 24.58 10.94 2.09 4.57 2.64

Global Economic Research

June 26, 2012

Global Auto Report

Canada/U.S. Motor Vehicle Sales Outlook
1991-05 Average 2006-09 2010 2011 2012 Jan-Apr ** Annual f 1,680 776 492 296 284 904 14.5 7.6 6.9 1,640 720 445 270 275 920 14.0 6.8 7.2

CANADA Cars Domestic Transplants Imports Light Trucks UNITED STATES Cars Light Trucks NORTH AMERICAN PRODUCTION* CANADA UNITED STATES MEXICO

(thousands of units, annualized) 1,398 1,592 1,557 797 841 711 583 527 394 178 278 235 214 314 317 601 751 846 (millions of units, annualized) 15.5 14.0 11.6 8.3 6.9 5.7 7.2 7.1 5.9 (millions of units, annualized) 15.58 2.50 11.67 1.41 13.25 2.18 9.10 1.97 12.15 2.07 7.74 2.34

1,589 691 433 257 258 898 12.7 6.1 6.6

13.43 2.13 8.61 2.69

15.88 2.59 10.43 2.86

15.50 2.60 10.00 2.90

*Includes transplants; light, medium and heavy trucks. **U.S. sales and North American production to May.

Vehicle Sales Outlook By Province*

(thousands of units, annual rates) 1994-05 Average CANADA ATLANTIC CENTRAL Quebec Ontario WEST Manitoba Saskatchewan Alberta British Columbia
*Includes cars and light trucks.
275 thousands of units 250 250 275 70 thousands of units 70

2006-09

2010

2011 Jan-Apr

2012 Annual f 1,640 121 1,025 418 607 494 49 52 229 164

1,446 102 936 366 570 408 42 36 166 164

1,592 117 983 406 577 492 44 44 225 179

1,557 122 990 414 576 445 44 46 200 155

1,589 119 997 408 589 473 47 50 218 158

1,680 121 1,051 420 631 508 51 56 239 162

800 thousands of units 700

800 700

Alberta
225 200 175 225 200

60

60

Ontario
600 500 600 500

Manitoba
50 50

British Columbia

175 150 40 40 125 100 30 30

150 125 100

Quebec
400 300 200 80 84 88 92 96 00 04 08 12 400 300
75

Atlantic
80 84 88 92 96 00 04 08 12

75 50 20 80 84 88 92

Saskatchewan
20 96 00 04 08 12

200

50

Includes cars and trucks (light, medium and heavy). Shaded bars indicate U.S. recession periods.

Global Economic Research

June 26, 2012

Global Auto Report

Auto Market Share By Manufacturer Canada*
(thousands of units, not seasonally adjusted) 2011 Jan to May Units % of Total TOTAL Big Three General Motors Ford Chrysler Japanese Honda Toyota Nissan Mazda Mitsubishi Subaru Hyundai Volkswagen Kia BMW Mercedes-Benz Other 285.4 75.2 33.7 26.7 14.8 114.3 28.4 34.7 18.5 23.3 2.8 5.1 37.8 18.3 16.9 8.0 8.2 6.7 100.0 26.4 11.8 9.4 5.2 40.0 10.0 12.2 6.5 8.2 1.0 1.8 13.3 6.4 5.9 2.8 2.9 2.3 2012 Jan to May Units % of Total 321.0 80.3 31.0 29.1 20.2 132.9 33.4 45.7 19.8 22.9 3.4 6.3 42.2 20.0 22.7 7.9 7.8 7.2 100.0 25.1 9.7 9.1 6.3 41.4 10.4 14.2 6.2 7.1 1.1 2.0 13.1 6.2 7.1 2.5 2.4 2.2 2011 May Units % of Total 69.2 20.2 8.1 7.5 4.6 24.2 6.0 6.5 4.0 5.5 0.7 1.1 9.4 4.8 4.9 2.0 2.2 1.5 100.0 29.2 11.7 10.9 6.6 34.9 8.7 9.3 5.8 8.0 1.0 1.6 13.6 7.0 7.1 2.9 3.1 2.2 2012 May Units % of Total 84.0 23.4 7.9 9.8 5.7 32.7 8.0 11.6 5.1 5.4 0.9 1.4 10.6 5.3 6.4 2.0 2.0 1.6 100.0 27.9 9.5 11.7 6.7 38.9 9.5 13.8 6.0 6.5 1.1 1.7 12.6 6.3 7.6 2.4 2.4 1.9

*Source: Dealer sales from the Association of International Automobile Manufacturers of Canada.

Truck Market Share By Manufacturer Canada*

(thousands of units, not seasonally adjusted) 2011 Jan to May 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 369.1 226.8 63.3 80.2 83.3 12.6 79.4 20.7 32.9 13.8 4.5 5.6 6.6 17.5 9.1 23.7 358.1 100.0 61.5 17.2 21.7 22.6 3.4 21.5 5.6 8.9 3.7 1.2 1.5 1.8 4.7 2.5 6.4 97.0 2012 Jan to May Units % of Total 390.1 232.2 63.3 82.5 86.4 17.0 89.5 24.9 33.2 17.4 7.5 4.8 5.8 15.6 8.8 27.0 374.4 100.0 59.5 16.2 21.2 22.1 4.4 22.9 6.4 8.5 4.5 1.9 1.2 1.5 4.0 2.3 6.9 96.0 2011 May Units % ot Total 82.5 52.6 14.9 17.9 19.8 3.0 14.7 3.8 5.6 2.7 1.1 1.0 1.5 4.6 2.0 5.6 79.8 100.0 63.7 18.0 21.7 24.0 3.7 17.8 4.6 6.7 3.2 1.3 1.2 1.8 5.5 2.5 6.8 96.7 2012 May Units % of Total 94.9 58.4 15.3 22.5 20.6 2.9 21.2 5.7 8.2 4.1 1.7 1.0 1.4 3.7 2.1 6.6 81.6 100.0 61.6 16.2 23.7 21.7 3.0 22.4 6.0 8.7 4.4 1.7 1.0 1.5 3.9 2.2 6.9 96.3

*Source: Dealer sales from the Association of International Automobile Manufacturers of Canada.

Global Economic Research

June 26, 2012

Global Auto Report

Auto Sales By Province
(thousands of units, not seasonally adjusted) 2011 Jan to Mar CANADA ATLANTIC Newfoundland Nova Scotia New Brunswick Prince Edward Island CENTRAL Quebec Ontario WEST Manitoba Saskatchewan Alberta British Columbia 141.0 11.1 2.5 4.7 3.4 0.5 99.5 46.5 53.0 30.4 3.1 2.3 10.8 14.2 2012 Jan to Mar 160.4 12.1 2.6 5.2 3.7 0.6 113.4 50.3 63.1 34.9 3.4 2.7 13.1 15.7 2011 Mar 69.2 5.7 1.2 2.4 1.8 0.3 50.2 24.4 25.8 13.3 1.5 1.1 4.8 5.9 2012 Mar 73.7 5.8 1.3 2.4 1.8 0.3 53.0 23.9 29.1 14.9 1.6 1.1 5.6 6.6

Truck Sales By Province*

(thousands of units, not seasonally adjusted) 2011 Jan to Mar CANADA ATLANTIC Newfoundland Nova Scotia New Brunswick Prince Edward Island CENTRAL Quebec Ontario WEST Manitoba Saskatchewan Alberta British Columbia
*Light, medium and heavy trucks.

2012 Jan to Mar 211.4 14.5 3.9 5.2 4.7 0.7 115.1 41.0 74.1 81.8 7.6 9.5 41.7 23.0

2011 Mar 87.3 6.4 1.7 2.2 2.2 0.3 51.1 18.8 32.3 29.8 3.2 3.5 14.8 8.3

2012 Mar 88.0 6.0 1.6 2.1 2.0 0.3 49.5 18.4 31.1 32.5 3.3 3.7 16.5 9.0

199.8 14.0 3.7 4.9 4.8 0.6 114.2 40.7 73.5 71.6 7.0 8.2 35.6 20.8

Global Economic Research

June 26, 2012

Global Auto Report

Canadian Motor Vehicle Production*
(thousands of units, not seasonally adjusted) 2011 Jan to May TOTAL CAR Chrysler Ford GM Honda Toyota TRUCKS** CAMI (GM/Suzuki) Chrysler Ford GM Honda Toyota Others 902.6 419.4 77.0 45.2 144.4 70.6 82.2 483.2 0.0 123.5 98.5 150.0 24.5 83.7 3.0 2012 Jan to May 1,072.1 459.2 102.2 0.0 135.1 108.5 113.4 612.9 0.0 146.7 105.5 163.9 72.4 119.6 4.8 2011 May 158.3 73.9 17.8 9.4 29.8 12.2 4.7 84.4 0.0 26.4 19.7 29.7 3.2 4.9 0.5 2012 May 225.8 92.5 22.2 0.0 28.4 18.8 23.1 133.3 0.0 34.3 23.7 31.2 18.7 24.5 0.9

*Production data from Wards Automotive Reports. **Light, medium and heavy trucks.

Canada Motor Vehicle Production

3.4
quarterly

Canada World Auto Trade Balances

3.4 50
billions of dollars

50

3.0 Total 2.6

3.0

40 Assembled vehicles

40

2.6

30

30

2.2

2.2

20 Total

20

1.8 Cars 1.4

1.8

10

10

1.4

1.0 Trucks* 0.6

1.0

-10 Parts

-10

0.6

-20

-20

0.2 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Millions of units, seasonally adjsted annual rates. * Light, medium and heavy trucks.

0.2

-30

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 2012 data are January-April annualized.

-30

Global Economic Research

June 26, 2012

Global Auto Report

New & Used Car Prices
Scotiabank Car Price Indicators Canada
year-over-year per cent change 25 25

Used*
15

New

15

CPI
-5 -5

-15

79 80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

-15

* Scotiabank estimate from Canadian Black Book data.

Scotiabank Car Price Indicators Canada

20 18 16 14 12 10 8 6 4 2 79 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Scotiabank estimate from Canadian Black Book data.

thousands of dollars by age of car, seasonally adjusted

20 18 16 14

1 Year

12 10

2 Year 4 Year

8 6 4 2

Scotiabank Car Price Indicators United States

year-over-year per cent change 25 25

15

Used

15

CPI New

-5

-5

-15

79 80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

-15

Consumer price indices for new and used cars. Shaded areas indicate recession periods.

Global Economic Research

June 26, 2012

Global Auto Report

Canadian Corporate Financial Performance Motor Vehicle Dealers and Repair Shops
Net Income After Tax ($ mil) 487 400 521 773 594 571 799 942 1089 1142 1392 1645 1939 1212 1780 1816 2948 2316 686 -68 Pre-Tax Profit Margin (%) 0.82 0.75 0.75 1.02 0.91 0.69 0.93 1.20 1.41 1.43 1.84 2.05 2.21 1.62 2.04 1.89 3.20 2.70 1.14 0.10 Inventory Turnover Ratio 6.83 6.79 7.06 7.48 5.30 4.98 5.35 5.16 5.05 5.04 5.34 4.98 4.91 4.30 5.14 5.01 5.20 4.45 6.20 4.30 Interest Coverage Ratio 2.31 2.10 2.13 3.09 2.65 2.25 2.55 2.64 3.36 3.51 4.85 5.33 5.08 4.48 5.56 4.08 6.05 5.42 2.79 1.10 Debt/ Equity Ratio 2.41 2.02 1.98 2.04 2.91 3.17 2.74 2.75 2.56 2.44 2.07 2.15 1.77 1.98 1.83 1.75 1.58 1.64 2.39 3.57 Return on Shareholders Equity (%) 9.58 6.46 8.37 11.28 10.14 10.49 12.90 14.37 15.13 14.66 16.99 18.61 17.65 12.15 16.85 16.19 24.19 18.21 10.78 -1.20

Annual

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Quarterly at annual rates 2011Q1 Q2 Q3 Q4 2012Q1 Average (89-10) Low (89-10)

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

Retail Auto Dealer Bankruptcies

30
number of bankruptcies

30

25 2011 20 2010 2009 15

25

20

15

10

10

0 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

New car dealers only; cumulative total during the year.