Woe, Canada: USA's economic chill spreads north

WATERLOO, Ontario -- It didn't take long for fallout from the United States' deteriorating economy to reach this frozen industrial heartland.

At Maxtech Manufacturing, which produces precision parts for vehicles made by Detroit's Big Three automakers, sales fell 10% in 2007 and appear headed for at least that big a drop this year. Profits, meanwhile, have melted like ice on a summer's day.

"Our volumes are dropping dramatically. … We're fortunate we're still in business," says CEO K.C. Vasudeva.

Maxtech's woes illustrate how the financial turmoil that began in an obscure corner of the U.S. mortgage market is spreading real economic pain beyond U.S. borders. Among the first to feel the effects is the USA's neighbor and chief trading partner, Canada.

More than three-quarters of Canada's exports — including oil, minerals, lumber and passenger vehicles — are sold to Americans. The U.S. housing collapse already has slashed sales of Canadian lumber. Now, as a historic decline in home values causes American consumers to retrench, U.S. auto sales this year are headed to a 10-year low, according to TD Bank Financial Group in Toronto.

"The U.S. is buying less of our stuff. This is going to be a major problem for the Canadian economy," says Michael Gregory, senior economist at BMO Capital Markets in Toronto.

The big hit from the U.S. slump is expected to fall on smaller Canadian auto parts makers, many of whom are almost wholly dependent upon the American market. Earlier this month, tiny Cambridge Stampings, a nearby metalworking firm, announced it would shut down in April, idling about 70 workers. That was at least the fourth local supplier in this area, about an hour's drive west of Toronto, to close or announce job cuts in recent weeks. It won't be the last.

"The U.S. slowdown is certainly going to have a major impact on the Canadian parts sector. … There's a ton of parts companies in Ontario that are 100% dependent on GM, Ford and Chrysler," says Anthony Faria, director of the office of automotive research at the University of Windsor.

More Canadian-made parts are used in cars produced in the USA than in vehicles assembled in Canada.

Last year, Canada shipped $18.1 billion worth of parts to auto plants in the USA, 10.1% fewer than the previous year, according to the U.S. Commerce Department. Though monthly figures are notoriously volatile, December numbers — down 17.5% from the same month in 2006 — suggested the downturn is accelerating.