Global Economic Research November 26, 2010

Carlos Gomes (416) 866-4735

carlos_gomes@scotiacapital.com

Canadians Truck Into A New Decade

— Incentive-Driven Light Trucks Speed Past Car Sales

T he improvement in global car sales moderated in October,

undercut by the expiry of government incentives in Japan.
However, excluding Japan and the ongoing weakness in Western
1000
Trading Places
thousands of units
1000

Europe, purchases continued to post strong double-digit year-over- 900

Canadian Car Sales
900
year increases. In the United States, passenger vehicle sales were higher
than expected in October, climbing to an annualized 12.3 million units,
800 800
from an average of 11.3 million during the previous nine months. The
improvement reflects a strengthening in both retail and fleet purchases. In
particular, U.S. retail volumes climbed above an annualized 10.0 million 700 700
Canadian Light Truck Sales
units for the first time since September 2008 — excluding last year’s ‘cash-
for-clunkers’ — prior to the sharp fall-off in global economic activity.
600 600
The improvement in retail activity is positive for the sales outlook and, 00 01 02 03 04 05 06 07 08 09 10

indicates that consumers are increasingly willing to replace their aging

vehicles, even as incentives in the United States continue to move lower. Industry data indicate that the average
age of the U.S. vehicle fleet currently exceeds 10 years, providing significant replacement demand going forward.
In Canada, passenger vehicle sales remained above a year earlier, as generous incentives lifted purchases to an
annualized 1.61 million units in October, from 1.58 million in September and an average of 1.56 million during
the previous nine months. Light trucks continued to lead the way, climbing to a record high for the month of
October, as both the minivan and SUV segments posted year-over-year gains of more than 35%. Highlighting the
ongoing improvement in the Canadian new vehicle market, last month was the best October since the annual sales
peak in 2002. In fact, several automakers reported record monthly results for October.

INCENTIVES DRIVE SHIFT TO LIGHT TRUCKS

The Canadian auto market has been stronger than expected in 2010, buoyed by a robust job market,
enhanced incentives — especially for pickup trucks and minivans — and a return of fleet buyers after a
four-year hiatus. Light trucks have been the main beneficiaries of the improvement. Stable energy prices have
helped boost truck demand not only in Canada, but across North America. In the United States, light truck sales
have jumped by 17% so far this year, nearly four times the increase in car sales, and roughly in line with the
incentive-induced light truck surge in Canada.
The Canadian auto market is being underpinned by a recovery of all the jobs lost during the global economic
downturn of 2008 and early 2009. Canada and Germany are the only G7 nations where employment levels
have surpassed the 2008 peak, enabling households to boost big-ticket purchases, such as a new car or light
truck. In contrast in the United States, there are still 7.5 million fewer jobs than in early 2008.
The Canadian market is also being buoyed by an apparent drive for market share — especially for light trucks
— which prompted a summer escalation in incentives. Rebates have roughly doubled over the past year, climbing
to nearly 30% of MSRP for pickup trucks, and a weighted average of about 15% of MSRP for all new vehicles.
This represents a sharp reversal from developments in other major auto markets, where incentives have been
trending lower in 2010, as automakers attempt to gain pricing power. For example, in the United States, the

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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 November 26, 2010

average new vehicle inducement has fallen by 3% this year to
10% of MSRP. In Germany, Europe’s largest auto market,
incentives have dropped to 11% of MSRP, down from 12% in
late 2008 during the height of the global economic downturn.
Pickup trucks and minivans have been the main
recipients of incentive funding this year, leading to a 38%
surge in minivan sales and a 22% increase in pickup truck
volumes. In contrast, the small car segment — traditionally the
volume leader in Canada — has seen the lowest incentives
relative to transaction prices. This has led to a dramatic shift in
vehicle buying patterns away from cars. Light trucks
captured a record 54% share of the Canadian new vehicle
market this year, up from less than 49% in 2009. This year’s
five percentage point share swing is nearly four times the
average annual shift in the Canadian market, and is roughly
double the swing that occurred in 2008 and 2009 alongside the
dramatic surge and eventual collapse in energy prices.
While Canada’s enhanced incentives have been successful
at attracting households to dealerships, it has also led to the
return of fleet buyers in recent months. We estimate that
stronger economic activity, especially in the construction
sector, combined with the introduction of ‘employee
pricing’ in June, has boosted fleet purchases by 14% year-
over-year compared with only a 4% improvement in sales
to households. In particular, fleet purchases of pickup trucks
have soared by 33% so far this year, outpacing a 20% increase
in sales to households. In fact, pickups have accounted for a
record 25% up overall fleet volumes this year, up from less
than 20% over the past decade. This suggest that this year’s
shift in fleet purchases of pickup trucks was largely incentive-
driven, and volumes are likely to moderate going forward.
For retail buyers, discounting has been most effective in
enhancing the appeal of minivans. Household minivan
purchases have surged by nearly 50% so far this year,
increasing the segment’s share of the Canadian market
for the first time since 1999. However, demographics have
also become more positive for the segment. The number of
Canadians in the thirty-to-forty year old age group is expected
to increase by 65,000 annually over the next five years — a
sharp reversal from more than a decade of decline.
Going forward, light truck sales will be driven by growing
demand for fuel-efficient and practical crossover utility vehicles
(CUVs). Even during the economic and sales downturn of 2008-
09, CUV sales posted single-digit increases in Canada. The gains
have accelerated to 20% this year, with annual volumes on target
to surpass 410,000 units — less than 50,000 units fewer than the
industry-leading small car segment, which will fall short of
500,000 units for the second consecutive year.
Faced with faltering sales, small car manufacturers
boosted incentives in October, leading to share gains within
the car sector. However, going forward it is unlikely that big
incentives will be maintained. In fact, our sense is that
automakers have started to scale back incentives from levels
prevailing during the summer. For example, rebates for the
2011 model year pickup trucks have been reduced to about
20% of MSRP, in line with those available at the start of the
2010 model year, and a significant reduction from the near-
30% discount available since July. In fact, the summer
incentive escalation has started to pressure used vehicle prices
in Canada — an unwelcome development for an industry that
experienced significant losses in residual values during the
latest economic downturn.

International Car Sales Outlook

1990-99 2000 2001-07 2008 2009 2010f
(millions of units)

TOTAL SALES 39.20 46.64 49.53 52.17 50.91 56.78

North America* 16.36 19.77 19.36 15.85 12.68 13.94
Canada 1.27 1.55 1.61 1.64 1.46 1.57
United States 14.55 17.35 16.71 13.19 10.40 11.50
Mexico 0.54 0.87 1.04 1.02 0.82 0.87

Western Europe 13.11 14.75 14.57 13.54 13.62 12.65

Germany 3.57 3.38 3.29 3.09 3.81 2.88

Eastern Europe 1.18 2.38 2.54 4.01 3.01 3.45

Russia 0.78 1.03 1.42 2.73 1.47 1.83

Asia 6.91 7.85 10.82 15.07 17.68 22.47

China 0.33 0.61 2.56 5.04 7.31 9.32
India 0.31 0.60 0.81 1.20 1.46 1.82

South America 1.64 1.89 2.24 3.70 3.92 4.27

Brazil 0.94 1.17 1.40 2.23 2.48 2.60

*Includes light trucks.