Good morning, committee chair and honourable members. I'm pleased to join you today. I would like to thank you for this opportunity to share with you our views and perspectives on the effect of oil price fluctuation and the consequent foreign exchange rate on the automotive parts manufacturing sector.
To start, please allow me to introduce the Automotive Parts Manufacturers' Association. The APMA is Canada's national association representing OEM producers of parts, equipment, tools, supplies, and services for the worldwide automotive industry. The association was founded in 1952, and its members account for 90% of independent parts production in Canada. In 2013 automotive parts shipments were over $25 billion, and the industry employment level was over 80,000 people.
Much has been made about the material decline in the spot value of oil in recent months and its consequent effect on the value of Canadian currency, especially against its American equivalent. While creating a disadvantage for anyone importing American finished goods, the common position is that Canadian exporters have accrued an advantage over the immediate short term. The biggest export in the Canadian manufacturing sector is automotive, and the most diverse job-intensive subsector of that business is automotive parts manufacturing. Approximately 500 independent companies in Canada manufacture parts for original equipment manufacturers' assembly operations at home and abroad.
Parts manufacturers deal with currency risk management and manipulation, and export finished goods as a matter of course. We're here today to contribute to your committee's analysis because we believe the benefits accruing from the currently advantageous Canada-U.S. foreign exchange rate is neither permanent nor structural in the automotive parts manufacturing sector. Furthermore, from a long-term planning perspective, the longer the currency valuation outlook remains pessimistic, the more likely that OEM forecasting modellers will be planning to benefit from Canadian purchasing while ignoring escalating U.S. dollar-based input costs that develop at the same time.
Most parts manufacturers fall into a similar band, with EBITDA margins running from 8% to 12% and gross margins in the 15% to 20% range. The major inputs to a typical systems supplier or heavy manufacturing North American plant would be raw materials such as steel or resin, components from the lower tiers of suppliers, direct labour, and plant overhead.
While raw materials and lower-tier components as a percentage of sales can vary depending on the nature of the product being produced, one can generalize that they likely represent in the range of 50% of the cost of sales. For most suppliers, the underlying currency of these key input costs is predominantly the U.S. dollar. While the drop in oil prices has reduced the input costs of some non-specialized resin supply in the market, complex resins used in higher value-added applications remain relatively unaffected.
Direct labour, of course, for a Canadian supplier operating in Canada is clearly denominated in Canadian currency. In the automotive parts sector, that typically constitutes about 10% of sales costs, a relatively smaller cost compared with raw materials, and I should note, a lower percentage of costs than final assemblers.
Plant overhead is a mix of Canadian foreign currency-based exposure. Canadian-based costs include electricity, indirect labour, and local services. However, virtually all specialized and heavy machinery and ancillary equipment is based in U.S. or Euro currency costs. These costs typically run in the 15% to 20% of sales costs, with approximately half of that being in Canadian currency.
If we take these figures together as a typical volume-based auto parts supplier's cost breakdown, a supplier would have U.S. dollar content in the 50% to 65% range of costs of sales. On the revenue side of the ledger, the transacting currency typically differs by OEM, but most manufacturers would see a majority of the percentage of sales in U.S. dollars. However, increasingly during the recent term of Canadian currency overvaluation of the last five to ten years, many OEMs have begun the practice of pricing directly in Canadian dollars at the time of sourcing. Those plants do not benefit at all from the Canadian dollar devaluation.
While programs priced in U.S. dollars are benefiting in the short to mid term, they would typically see some of these gains retracted through the business planning process and purchasing repricing from their OEM customers. Many suppliers with multiple operations and OEM customers have adopted hedging programs to reduce their exposure, but the success of those mechanisms is difficult to forecast because cashflows from any given product program are based on future volume estimates. History has shown that they fluctuate materially.
I'll save you the rest on multi-jurisdictional exposure. I'll say only that a lot of Canadian companies have U.S. plants as well, and they operate Mexican plants.
Canadian-based plants in those portfolios are doing well against their American plants, but of course, as we've been competing with the Mexican operations, the Canadian dollar and the peso have kept pace and there are a lot of other dynamics that come into play. Foreign exchange isn't one of them.
