Global Economic Research

July 31, 2009

Carlos Gomes (416) 866-4735 carlos_gomes@scotiacapital.com

Global Auto Industry Revives
— China Leads the Way, But an Upturn has Begun in Most Regions

A

cyclical recovery is underway in the global auto industry. Sales in June posted their best performance since last July, after bottoming earlier this year. Purchases have started to improve in most regions, led by China in the developing markets and Germany in mature markets. Vehicle production has also started to rebound, enabling the auto sector to help drive the global economy towards recovery.

Car Sales in Developing Nations Remain in the Fast Lane
50000 45000 40000 35000 30000 25000 20000 15000 10000
Brazil Korea real US$ GDP per capita* Germany Japan US Canada

Global car sales climbed to an estimated 48.0 million units (annualized) in the second quarter, up from an eight-year low of 43.0 million in the opening months of 2009. Global economic conditions have begun to stabilize, with consumers becoming more confident and taking advantage of low borrowings costs and competitive pricing. Over the past three economic cycles, car sales bottomed at least one quarter prior to an improvement in the global economy.

China is spearheading the recovery in both the auto market and the global 5000 China vehicles per thousand people economy. Car sales in China accelerated to a 48% y/y surge in June, lifting purchases above 0 India an annualized 7.0 million units for the first time on record, and well above the 5.9 million 0 200 400 600 800 1000 unit peak reached in March 2008 prior to the sharp global economic downturn. Noteworthy, *Logarithmic trendline our data only include cars. If trucks and buses are included, vehicle purchases in China are on the way to exceed 10.5 million units this year and surpass the United States as the world’s largest vehicle market. Government stimulus and tax incentives are spurring the revival in China. Economic activity advanced by 7.9% y/y in the second quarter, up sharply from a low of 6.1% in the opening months of 2009. Automakers boosted vehicle assemblies by 38% y/y in June after a stronger-than-expected surge in sales in response to cuts in retail taxes and increased vehicle subsidies in rural areas. Auto sales in China have been increasing rapidly since 2001, and this pace is expected to continue well into the next decade. China’s real per capita income is now approaching US$4,000 — a level normally associated with accelerating growth in vehicle sales. For example, incomes in China are now roughly the same as Korea’s in the mid-1980s. In the subsequent decade, car sales in Korea surged by nearly 30% annually — nearly 3 times faster than income growth. Similar accelerations in vehicle sales occurred in Japan and Canada through the early 1970s, and a decade earlier in the United States. Much of the growth in China has been concentrated in compact cars with engine size of 1.6 litres or smaller. This segment now accounts for more than 70% of the market, and will dominate going forward. More than 60% of households are middle-income earners or lower, and the government will continue to pursue policies that focus on fuel efficiency. The recent tax cut from 10% to 5% on the purchase of cars with engines smaller than 1.6 litres is an example. General Motors — the top-selling brand in China — padded its lead this year, with first-half sales soaring 38% to 814,000 units — a level fast approaching the 948,000 vehicles it sold in the United States. As recently as 2004, GM sold roughly 10 vehicles in the United States for each model sold in China. Highlighting the importance of China in GM’s revival strategy, the company expects to double its sales to 2 million units over the next five years, and plans to launch more than 30 new models in the country. Other automakers, including Nissan and Honda, also continue to expand their assembly facilities in China.

OTHER EMERGING MARKETS ARE ALSO REBOUNDING
With the exception of Russia, where purchases remain in hibernation, car sales have recently climbed to record highs in the other key emerging markets of Brazil and India. In Brazil, a combination of tax breaks, lower prices and improved confidence lifted sales to a record annual rate of 3.1 million units in June — 21% above a year earlier, and the third

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This Report is prepared by Scotia Economics as a resource for the clients of Scotiabank and Scotia Capital. While the information is from sources believed reliable, neither the information nor the forecast shall be taken as a representation for which The Bank of Nova Scotia or Scotia Capital Inc. or any of their employees incur any responsibility.

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

Global Economic Research

July 31, 2009

increase in the past four months. Year-to-date sales have advanced 4% in Brazil, led by a 28% surge at Ford — the fourth-largest automaker in Brazil, behind Fiat, Volkswagen and General Motors. Ford’s sharp gain reflects the popularity of its new Fiesta. The Fiesta is slated for North America next year, and will be produced in Mexico starting in the first half of 2010. Unemployment has begun to recede in Brazil, falling to 8.1% in June, supporting the consumer-led recovery. Demand is being underpinned by record-low borrowing costs, lower taxes and increased government spending. Policymakers lowered the key lending rate by an additional 50 bps in July and a full 500 bps so far this year. Real wages are also increasing 3% y/y, boosting confidence and helping to sustain domestic demand. Conditions are also stabilizing in India, with the decline in business sentiment starting to be reversed alongside significant monetary stimulus. Car sales have climbed by 9% so far this year and will be bolstered in coming months by the recent launch of the low-cost Tata Nano (US$2,500). In Western Europe, government scrappage programs have led to stronger-than-expected car sales in the first half of 2009. However, the improvement in other indicators has lagged. In particular, unemployment continues to move higher and further labour market adjustment lies ahead. As a result, we expect car sales in Western Europe to soften next year, as the boost from the scrappage programs fades. Germany is the main beneficiary of vehicle scrappage. A statebacked rebate of 2,500 euros (US$3,500) per trade in for models older than nine years has boosted first-half volumes by 26%. Fullyear sales will probably total 3.7 million, up from 3.1 million in 2008 and an average of 3.3 million over the past decade. However, the program is scheduled to expire at the end of 2009.

NORTH AMERICA PASSES THE INFLECTION POINT
Sales in North America bottomed in the opening months of 2009, and will be buoyed in coming months by the recently implemented “cash-for-clunkers” program in the United States. The legislation provides consumers with trade-in vouchers up to $4,500 to buy a new vehicle, provided that the their new car gets 10 miles-per-gallon (mpg) better gas mileage than the trade-in model. For light trucks, the improvement must be 5 mpg better than the replacement model. Vehicles being replaced must have been built in 1984 or later, and the price of the new model must not exceed $45,000. Other leading indicators of auto sales, such as used car prices and consumer sentiment are also on the mend in both the United States and Canada, pointing to stronger sales ahead. In the United States, used car prices have increased year-over-year for two consecutive months for the first time since October 2007, just before the advent of the latest U.S. recession. In Canada, used car prices are now roughly unchanged from a year earlier — the best performance since mid-2006, and a significant improvement from nearly a double-digit decline last summer. Consumer confidence is also rebounding in both countries. In particular, the number of households indicating that it is a good time to undertake a major purchase, such as a vehicle is at one of the highest levels since early 2008. In addition, as we pointed out last month, credit availability and approval rates are on the rise in both countries. Economic activity is poised to get a much-needed shot in the arm from the auto industry revival. With sales on the upswing and inventories back down to normal levels, the re-start of idled auto assembly plants will boost third-quarter economic activity across North America by roughly two percentage points. This represents a sharp reversal from the past nine months, when the economic downturn was intensified by significant auto industry cutbacks.

International Car Sales Outlook
1990-99 2000 2001-06 (millions of units) 48.63 19.45 1.60 16.81 1.04 14.54 3.32 2.36 1.25 10.23 2.26 0.75 2.05 1.30 2007 2008 2009f

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 0.33 0.31 1.64 0.94

46.64 19.77 1.55 17.35 0.87 14.75 3.38 2.38 1.03 7.85 0.61 0.60 1.89 1.17

54.92 18.83 1.65 16.09 1.09 14.75 3.15 3.58 2.31 14.42 5.15 1.18 3.34 1.98

52.17 15.85 1.64 13.19 1.02 13.54 3.09 4.01 2.73 15.07 5.04 1.20 3.70 2.19

48.19 12.44 1.42 10.20 0.82 12.93 3.71 3.41 2.18 15.78 6.30 1.32 3.63 2.30

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Global Economic Research

July 31, 2009

Canada/U.S. Motor Vehicle Sales Outlook
1991-05 Average 2006 2007 2008 2009 Annual f Jan-May **

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

1,398 797 583 178 214 601 15.5 8.3 7.2

(thousands of units, annualized) 1,614 1,654 1,642 863 858 898 573 549 558 271 291 305 290 309 340 751 796 744 (millions of units, annualized) 16.5 16.1 13.2 7.8 7.6 6.8 8.7 8.5 6.4 (millions of units, annualized) 15.86 2.57 11.24 2.05 15.42 2.59 10.74 2.09 12.90 2.08 8.68 2.14

1,395 725 413 258 312 670 9.5 4.8 4.7

1,420 750 440 290 310 670 10.2 5.2 5.0

15.58 2.50 11.67 1.41

7.05 1.18 4.63 1.24

8.40 1.40 5.50 1.50

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

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.
800 thousands of units
250

2006

2007

2008 Jan-May

2009 Annual f 1,420 111 885 372 513 424 41 46 190 147

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

1,614 110 997 396 601 507 44 38 236 189

1654 118 1001 408 593 535 45 44 249 197

1,642 127 1,010 430 580 505 46 48 232 179

1,395 106 873 373 500 416 43 45 184 144

800 700

275 thousands of units

275 250 225 200

70 thousands of units 60

70

700

Ontario
600 500 600 500

225 200 175 150

60

Manitoba
50 50

British Columbia

175 150 40 40 125

Quebec
400 300 200 79 82 84 86 88 90 92 94 96 98 00 02 04 06 08 80 400 300
75 125

Alberta
100 100 30 30

Atlantic

75 50 20

Saskatchewan
20 77 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

200

50 77 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

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

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Global Economic Research

July 31, 2009

Auto Market Share By Manufacturer — Canada*
(thousands of units, not seasonally adjusted) 2008 Jan to June Units % of Total TOTAL Big Three General Motors Ford Chrysler Japanese Honda Toyota Nissan Mazda Suzuki Subaru Volkswagen Hyundai BMW Mercedes-Benz Other 493.5 162.3 98.5 28.9 34.9 242.1 68.9 87.1 30.0 38.4 4.9 6.3 18.3 29.5 11.0 10.1 20.2 100.0 32.9 19.9 5.9 7.1 49.1 14.0 17.6 6.1 7.8 1.0 1.3 3.7 6.0 2.2 2.0 4.1 2009 Jan to June Units % of Total 375.4 93.6 51.8 25.9 15.9 185.6 48.1 61.2 28.1 33.2 3.7 5.7 15.6 37.0 10.6 9.7 23.3 100.0 24.9 13.8 6.9 4.2 49.4 12.8 16.3 7.5 8.8 1.0 1.5 4.2 9.9 2.8 2.6 6.2 2008 June Units % of Total 95.9 31.5 18.1 6.8 6.6 45.8 12.7 17.0 5.2 7.5 0.9 1.0 3.6 6.0 3.0 2.0 4.0 100.0 32.8 18.9 7.0 6.9 47.7 13.3 17.7 5.4 7.9 1.0 1.0 3.8 6.3 3.1 2.2 4.1 2009 June Units % of Total 74.0 19.0 10.9 6.6 1.5 34.0 9.1 11.3 5.4 5.8 0.6 0.9 3.6 7.1 2.9 1.9 5.5 100.0 25.7 14.7 9.0 2.0 46.0 12.3 15.2 7.3 7.9 0.9 1.2 4.8 9.6 3.9 2.6 7.4

*Source: Dealer sales from Motor Vehicle Manufacturers’ Association; latest data from The Globe and Mail.

Truck Market Share By Manufacturer — Canada*
(thousands of units, not seasonally adjusted) 2008 Jan to June Units % of Total TOTAL Big Three General Motors Ford Chrysler Other Domestic Japanese Honda Toyota Nissan Mazda Suzuki Subaru Hyundai Other Imports LIGHT TRUCKS 409.9 271.1 92.6 84.5 94.0 19.8 87.7 25.5 34.1 14.5 8.5 1.7 2.5 13.7 17.6 390.3 100.0 66.3 22.6 20.7 23.0 4.6 21.5 6.2 8.3 3.6 2.1 0.4 0.8 3.3 4.3 95.4 2009 Jan to June Units % of Total 356.4 226.5 82.9 82.1 61.5 9.4 81.4 21.7 36.2 11.4 5.6 1.4 3.5 15.4 23.7 345.8 100.0 63.6 23.3 23.0 17.3 2.6 22.8 6.1 10.2 3.2 1.6 0.6 1.2 4.3 6.7 97.0 2008 June Units % ot Total 66.9 45.1 14.2 15.3 15.6 3.1 13.4 3.8 5.4 2.0 1.0 0.3 0.9 2.0 3.3 63.8 100.0 67.3 21.3 22.8 23.2 4.7 20.0 5.7 8.1 3.0 1.5 0.5 1.3 3.0 5.0 95.3 2009 June Units % of Total 66.3 40.0 11.5 20.8 7.7 1.6 16.5 4.7 7.3 2.1 0.9 0.6 0.9 3.0 5.2 64.4 100.0 60.3 17.3 31.3 11.7 2.4 24.9 7.1 11.1 3.1 1.4 0.9 1.4 4.6 7.8 97.1

*Source: Dealer sales from Motor Vehicle Manufacturers’ Association; latest data from The Globe and Mail.

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Global Economic Research

July 31, 2009

Auto Sales By Province
(thousands of units, not seasonally adjusted) 2008 Jan to May CANADA ATLANTIC Newfoundland Nova Scotia New Brunswick Prince Edward Island CENTRAL Quebec Ontario WEST Manitoba Saskatchewan Alberta British Columbia 397.8 33.7 7.6 14.8 9.8 1.5 266.5 130.5 136.0 97.6 9.3 7.2 39.3 41.8 2009 Jan to May 300.7 24.6 5.7 10.8 6.9 1.2 209.5 104.8 104.7 66.6 6.5 5.7 25.3 29.1 2008 May 109.4 10.0 2.4 4.3 2.8 0.5 72.8 36.4 36.4 26.6 2.5 1.9 10.7 11.5 2009 May 83.2 7.7 1.9 3.4 2.1 0.3 57.5 28.8 28.7 18.0 1.8 1.5 6.8 7.9

Truck Sales By Province*
(thousands of units, not seasonally adjusted) 2008 Jan to May CANADA ATLANTIC Newfoundland Nova Scotia New Brunswick Prince Edward Island CENTRAL Quebec Ontario WEST Manitoba Saskatchewan Alberta British Columbia
*Light, medium and heavy trucks.

2009 Jan to May 291.9 22.2 5.7 8.5 7.2 0.8 167.3 60.6 106.7 102.4 10.6 11.8 49.6 30.4

2008 May 78.8 5.4 1.4 2.0 1.8 0.2 44.8 17.0 27.8 28.6 2.3 2.8 14.8 8.7

2009 May 72.8 6.4 1.8 2.4 2.0 0.2 41.4 15.1 26.3 25.0 2.8 3.0 11.7 7.5

342.6 23.3 6.1 8.8 7.5 0.9 189.5 69.8 119.7 129.8 10.9 13.0 65.2 40.7

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Global Economic Research

July 31, 2009

Canadian Motor Vehicle Production*
(thousands of units, not seasonally adjusted) 2008 Jan to June TOTAL CAR Chrysler Ford GM Honda Toyota TRUCKS** CAMI (GM/Suzuki) Chrysler Ford GM Honda Toyota Others 1,144.7 614.9 118.4 68.0 171.9 146.1 110.5 529.8 83.9 152.6 116.1 65.6 53.3 42.8 15.5 2009 Jan to June 608.9 351.7 43.7 42.4 83.1 108.5 74.0 257.2 24.0 59.9 64.6 27.1 12.4 61.4 7.8 2008 June 205.7 110.5 19.7 11.8 32.9 24.3 21.8 95.2 10.9 27.9 20.3 17.9 7.5 7.8 2.9 2009 June 108.6 64.7 0.9 7.5 22.9 17.7 15.7 43.9 8.8 1.4 15.0 0.0 3.8 14.0 0.9

*Production data from Ward’s 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

0

0

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 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 2009 data are January-May annualized.

-30

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Global Economic Research

July 31, 2009

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

Used*
15

New

15

5

5

CPI
-5 -5

-15 79 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
* Scotiabank estimate from Canadian Black Book data.

-15

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
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

Used
15 15

5

New

CPI

5

-5

-5

-15 79 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Consumer price indices for new and used cars. Shaded areas indicate recession periods.

-15

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Global Economic Research

July 31, 2009

Canadian Corporate Financial Performance Motor Vehicle Dealers and Repair Shops
Net Income After Tax ($ mil) 141 256 217 487 400 521 773 594 571 799 942 1089 808 780 1152 928 372 600 524 -68 Pre-Tax Profit Margin (%) 0.63 0.80 0.76 0.82 0.75 0.75 1.02 0.91 0.69 0.93 1.20 1.38 1.10 1.13 1.36 1.24 0.63 0.94 1.01 0.10 Inventory Turnover Ratio 7.05 6.82 6.33 6.83 6.79 7.06 7.48 5.30 4.98 5.35 5.16 5.05 5.00 4.63 5.62 5.08 4.70 4.44 6.37 4.59 Interest Coverage Ratio 1.98 2.46 2.07 2.31 2.10 2.13 3.09 2.65 2.25 2.55 2.64 3.22 2.90 2.87 3.67 3.14 1.99 2.83 2.41 1.10 Debt/ Equity Ratio 1.79 1.97 2.25 2.41 2.02 1.98 2.04 2.91 3.17 2.74 2.75 2.54 2.39 2.45 2.44 2.35 2.32 2.44 2.44 3.57 Return on Shareholders Equity (%) 2.45 4.26 3.91 9.58 6.46 8.37 11.28 10.14 10.49 12.90 14.37 15.08 10.62 10.60 15.72 11.88 4.69 7.94 9.56 -1.20

Annual

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Quarterly at annual rates 2008Q1 Q2 Q3 Q4 2009Q1 Average (89-08) Low (89-08)

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 2009 20 2008 2007 15

25

20

15

10

10

5

5

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

0

New car dealers only; cumulative total during the year.

8

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