Auto industry of Canada

Industry landscape and Outlook

Canada is more famous for its auto assembling and manufacturing instead of having its own auto brands. It produces cars along with hundreds of parts mostly for automakers headquartered in United States and Japan. According to Industry Canada, Ford, GM, Chrysler and Toyota are a few of the top brands currently made in Canada. A more comprehensive list is shown below.

Vehicles made in Canada 2014

2014 was a wonderful year for auto companies that have a presence in Canada. According to Statistics Canada and RBC, domestic new vehicle sales were projected to have a record of 1.86 million units in 2014 (1.78 million units in 2013). This is a huge improvement compared to 1.48 million in 2009 as a result of the financial recession. Looking ahead to 2015, consensus is that Canadian sales are still likely to grow at a moderated rate. This positive outlook comes from:

  • Interest rates are still historically low after central bank surprisingly cut the rate at the beginning of this year. And there is possibility that the central bank will do the same thing again at any point of this year if economics condition is not promising.
  • Moreover, even though people are spending more on autos, auto purchases over total household incomes are still below pre-recession levels. We expect to see conversion in the future.
  • Labor markets have shown signs of strengthening recently suggesting that an underlying improving trend into 2015. As a result, on the demand side, we are opportunistic.

Markets competitors

Tata’s main competition comes from the big three, including GM, Ford and Chrysler, which in total has approximately 23% share and the Japanese companies have a 43% share in 2014 according to Scotiabank report below.

Risk and threats

Earning volatility – Earnings in the industry has been seasonally unstable, in line with fluctuations in of economic growth. Automakers have high fixed costs and operating leverage, with earnings therefore being particularly sensitive to macroeconomics which includes GDP, inflation, trade data and interest rate.

Slowdown in developed markets – While the global auto industry is still growing, majority of the growth is projected from emerging markets based on their increasing GDP and lower car to person ratio.

Insurance expense – Insurance expense has been kept extremely high in Canada, particularly in BC and ON, where people are paying averagely four times as they were in US. Policy regarding this matter seems uncertain, if it is still on the trend of increasing, the auto industry could be negatively impact as a result.

Lending cost – Consistently low rate boost the consumer lending activities, but whether central bank will raise or cut further remains unclear, as a result, cost of lending should be considered before market entry.

FX – Canadian dollars has been depreciating for a while and it is continuing to going down due to the rate cut and other macro reasons, for companies would like to sell vehicles in Canada, a fluctuating currency is a risk.

Regulation – Regulation across the industry is significant and is typically focused on product safety, although regulation linked with emissions standards is becoming more prominent.

Opportunity

For Tata, opportunity resides in commercial and high end lines. Tata will have a hard time promoting budget cars as the competition is intense here in Canada with Japanese automakers, which has slightly more expensive products with much better reliability and brand image. On the high end side, the Germany auto makers along with luxury lines of Honda and Toyota still dominate the market, therefore stealing share from big players proves to be difficult, but not impossible with well management of Jaguar and Land Rover.

Tata has been doing reasonably well in its comprehensive commercial lines and already has a proven record internationally and a sound global recognition in light trucks and buses, especially in US, UK and European car markets.

Porters Diamond model

Firm Strategy and Rivalry

Tata’s main strategies are internationalization, cost efficiency and distributional focus. As a part of the company’s new internationalization strategy, the company has decided to focus on China, UK, Australia and Brazil. In these countries, Tata Motors already started rolling out manufacturing facilities, marketing and sales teams. Further, Tata has been a longtime fan of budget cars, and we expect the company to continue this focus in a long run. Moreover Tata gets along well with dealers and we expect further support will focus on customer experience and staff training.

Demand Conditions

Domestically, Tata Motors has a great success in competing against other companies on products across different lines.

Related and Supporting Industries

The related and supported industries, including the suppliers and business partners are mainly domestic entities but capable of supporting business oversea. However, after the company acquired JLR, it has been expanding its investments globally and forming international partnership.

Factor Conditions

Tata Motor has seasoned HR team. As a public company, they have significant experience dealing with employee and the company knows well the relevant laws and environment across different countries.

Government

Tata has full support from Indian government and is getting more and more benefits from collaborating and building plants in other countries as it brings revenue and tax, as well as providing more affordable products.

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