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Buying in U.S. Has Pitfalls: Auto deals can often be costly

By Geoffrey Scotton, Calgary Herald

With the Canadian dollar continuing to overshadow its U.S. counterpart, some analysts are warning the sky-high loonie, and buying vehicles in the U.S. to take advantage of lower prices, may not do much good for consumers -- or the economy -- in Canada.

"It's a mixed blessing," said Bank of Montreal deputy chief economist Douglas Porter. "Any industry that has to compete with imports or tries to export into other markets has probably been shell-shocked by what's unfolded in the last couple of months."

While the loonie's record level means our currency is more valuable, the speed at which it has appreciated and the distance it has climbed -- 22 cents US or 25 per cent so far in 2007 -- is having a wrenching effect on industries, from manufacturing to retail and automotive.

Although it has declined from its modern-day high of more than $1.10 US earlier this week, the loonie closed at a still export-smothering $1.0684 US on Thursday.

In Alberta, automotive retailers, like their counterparts across Canada, have seen consumers heading across the border to purchase vehicles with lower sticker prices.

However, these so-called cross-border deals are considerably less so when financing is required, and import fees and taxes are factored in.

In some cases, warranty validity can be an issue, as can the eligibility of certain vehicles to enter Canada in terms of meeting Canadian environmental and safety standards. (Information about this can be found on the website of the Alberta Motor Vehicle Industry Council at www.amvic.org.)

Some automakers have responded by banning the sale of U.S. vehicles to Canadians, unable because of market realities to raise U.S. prices or lower Canadian prices. A number of manufacturers, such as Chrysler Canada Inc. and Ford Motor Co. of Canada Ltd., are starting to lower Canadian prices or boost incentives. Manufacturers such as BMW Canada, Mercedes-Benz Canada and Porsche Cars Canada Ltd. have also sweetened their deals.

"The speed (of the dollar's rise) in the last couple of months has just been breath-taking and I give retailers credit in that they're trying to respond," said the Bank of Montreal's Porter.

Dealers, meanwhile, are put in a difficult situation.

"The reality of the situation is, one, we have no influence over currency and that's of course what started a lot of this," says Motor Dealers' Association of Alberta president Bill Watkin. "The real issue lies with the manufacturers not taking action quickly enough to protect their franchised dealers. To me, that's been the sad impact of this."

Industry insiders argue automakers are somewhat hogtied when it comes to lowering prices here in Canada due to the ripple effect on used car values -- if the value of new cars is greatly reduced, the value of millions of cars already belonging to Canadians is also reduced. And, impacting automakers to a potentially even greater extent are lease values, which the automakers guarantee. They also note many automakers, both Big Three and foreign nameplates, are net exporters from Canada and are already taking it on the chin from the soaring loonie.

The outlook for some manufacturing sectors, especially those closely linked to the weakening U.S. economy, are also cause for concern.

"Profits in Canada's auto parts manufacturing industry are expected to decline by nearly 41 per cent to slightly more than $1 billion in 2007, due to a weak performance early in the year," the Conference Board of Canada says.

"The strength of the Canadian dollar will erode profits for Canadian parts producers, as motor vehicle assemblers scale down auto exports in response to slowing U.S. demand," it said, suggesting that will be partially offset by strong domestic growth in personal incomes and corporate profits, especially in Western Canada.

Exporters have been challenged since 2002 with a climbing currency that makes their goods more expensive abroad. By now, many of them are just hanging on, having whittled their margins to zero -- and beyond. Their returns on U.S. purchases of their goods have declined 28 per cent this year alone.

"Exporters are doing it at a collapsing profit margin and as the dollar goes up, the collapse can even turn negative," says Stephen Poloz, chief economist at Export Development Canada. "It is not sustainable. If it stays up a long time, then they will have to face their choice, either they try to boost their U.S. dollar price -- and risk losing those customers -- or find other ways to restore profit margins by globalizing."

Economists emphasize that while the appreciation of the loonie is a reflection of strong Canadian fundamentals, the sharp rise and, indeed, the change in value itself is going to create dislocation as specific industries and the economy overall is forced to adjust. And a lot of that dislocation has yet to be seen, they warn. "The full implications haven't worked their way through the economy," says Warren Jestin, chief economist with the Bank of Nova Scotia.

gscotton@theherald.canwest.com