Canadian Auto Parts Makers Poised to Benefit from U.S. Move toward High-Efficiency Vehicles

With the automotive industry emerging from a year of economic turmoil, Canadian auto parts makers are well positioned to increase their market share as U.S. automakers’ move toward producing more fuel-efficient vehicles.

For domestic automakers, the choice appears simple: adapt to the new paradigm or perish. For the most part, Asian and European manufacturer who specialize in smaller, more fuel-efficient cars are expanding their territories and forcing U.S. automakers to innovate in order to compete.

For Canadian parts manufacturers like Magna International Incorporated, Martinrea International and Linamar Corporation, that’s good news. Industry analysts say that each of these companies stands to benefit from their expertise in advanced powertrain manufacturing and vehicle weight reduction.

Michael Willemse is an analyst for Toronto-based CIBC Capital Markets. He says Canadian parts suppliers are very well positioned because their larger customers, particularly General Motors, Ford and Chrysler, have had no money to put into research and development for the last few years, so they have been relying on the auto parts makers to invest in research and development on their behalf.”

Since last March, shares of Linamar have increased in value by 700%. Martinrea has seen the value of its stock increase by over 500% while Magna has seen a doubling in its stock price.

Of the three Canadian parts makers, Magna has been especially aggressive in developing new green technologies including electric vehicles.

Analyst David Tyerman of Toronto-based Genuity Capital Markets says, “I would regard Magna as extremely strongly positioned because of its technical capabilities. Magna reportedly has almost $1 billion in net cash to invest in operation and R&D.

Tyerman says that Magna also has the advantage of the complete engineering and development capabilities afforded by its Magna Steyr facilities located in Austria. The facilities produce vehicles for German automakers BMW AG and Mercedes-Benz as well as lithium-ion batteries for industrial fleet vehicles made by Swedish automaker, Volvo.

The company is also working with Ford Motor Company to develop a lithium-ion battery-powered vehicle for the U.S.

Last Friday, Magna announced a new partnership with the Canadian government that will result in a new research facility dedicated to developing advanced thermoplastic composites. The goal is to develop lighter, less expensive materials for use in the production of structural auto parts.

In March, Magna formed a joint venture with Brusa Elektronik of Switzerland to develop new applications designed for hybrid electric and plug-in hybrid vehicles.

Magna’s co-CEO Don Walker says, “It is absolutely critical that every vehicle part and/or system be focused on making a contribution to lower emissions and better fuel economy.”

Martinrea, based in Ontario, currently employs a hydroforming technique to produce lower-cost, lightweight, structurally sound automotive parts. The company also uses a hot stamping process to make lightweight auto parts that increase fuel-efficiency.

Most analysts agree, however, that Linamar may benefit the most from the new direction being taken by U.S. automakers as a result of its focus on advanced powertrain technologies. Instead of focusing on electric and hybrid vehicles, Linamar has concentrated its efforts in making more fuel-efficient internal combustion engines which many expect will remain the dominant powertrain system for the next two decades.

Tyerman says, “Linamar may be the largest beneficiary, proportionally, of all this over the next five, 10, 20 years. They are less diversified, so what they do is directly driven by fuel efficiency, and because they are a big player, they are benefiting from the rush to new engines and transmissions.”

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