After a year in which U.S. demand for light vehicles plummeted to levels not seen since 1962, a return to profitability is on the horizon for Canada’s automotive sector, according to a new report by the Conference Board of Canada.

The latest Canadian Industrial Outlook: Canada’s Motor Vehicle Manufacturing Industry says the industry will finish 2009 with a pre-tax loss of $2.3 billion, but is expected to post a profit of $263 million in 2010.

This return to profit will not come easily, according to the report’s author, economist Sabrina Browarski. She said good news will trickle into the motor vehicle industry gradually as the U.S. economy stabilizes and jobs are created through 2010.

“The Canadian auto industry appears to have turned a corner in the second half of 2009 and is expected to return to profitability in 2010,” said Browarski. “However, production will remain below historical levels. Manufacturers will have to make concerted and ongoing efforts to streamline product line-ups, control costs, and innovate to maintain profitability.”

U.S. vehicle sales are expected to edge up to 11.6 million units in 2010, still well below their historic levels, but enough for industry revenues to rise by nearly 38%.

Cost-cutting efforts will be a key contributor to the manufacturers’ return to profitability, according to the Conference Board.

In both Canada and the U.S., the Conference Board expects lower employment, reduced wealth, and tighter credit conditions to result in slower domestic sales of new motor vehicles this year. A widespread recovery in employment and wages is not expected until mid-2010, resulting in a continuation of this trend into next year. In the U.S., real consumption is expected to grow by just 1% in 2010, as households devote an increasing share of income to savings.

Canadian auto production virtually came to a halt at the beginning of 2009, operating at just 26% of capacity in January. Although it has since begun to improve, for the year as whole, production will be barely half of what it was in 2007, the report says.

It notes that Canadian vehicle manufacturers benefited strongly from the U.S. “cash for clunkers” buyer incentive program. The most popular new vehicles purchased were the Ford Focus, Toyota Corolla, and Honda Civic, of which the Corolla and the Civic are produced in Canada.

Production is expected to steadily improve as U.S. car sales recover, but will remain below its historic high in the medium term.

The report notes that in recent months, good news has begun to emerge from major manufacturers. In November, GM pledged $90 million to bring back the third shift of laid-off workers at the jointly owned GM-Suzuki CAMI plant in Ingersoll, as demand rose 17% in November for the Chevrolet Equinox and Pontiac Torrent. Earlier this month, GM announced that it had bought out Suzuki’s 50% share in the former joint-venture, a move which could potentially add 600 jobs to the sector as production ramps up.

General Motors has also pledged to start paying back its loans to Canadian and American governments immediately.

The Chrysler group, meanwhile, announced in early November that it expects to break even in 2010, turn a small profit in 2011, and post a $5-billion operating profit by 2014.

In addition, the Conference Board expects Chrysler to benefit from its merge with Fiat, particularly from an efficiency perspective. Chrysler will be allowed to use Fiat platforms and engine technology in the North America, and will also gain access to Fiat’s distribution network outside North America.

“This could present growth opportunities in areas where Fiat’s presence is especially strong, notably in Europe, Brazil, and throughout Latin America,” the report says.

IE