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(Reuters) - Canada's auto industry, which accounts for about 10 percent of the country's manufacturing output, is in danger of losing market share in North America as investment dollars flow to Mexico, an economist warned on Tuesday.
Canada accounts for about 16 percent of North American vehicle assembly but that could shrink if recent big investments in Mexico's auto sector continue, Scotiabank economist Carlos Gomes said.
Mexico overtook Canada in 2008 as the second biggest assembler of vehicles in North America after the United States, and now accounts for about 20 percent of the continent's output.
"Recent announcements of new products and hires for Canada by two large automakers are encouraging," Gomes wrote in a research note.
"However, these announcements pale in comparison with the news coming from Mexico - the auto industry's North American growth leader," he said.
In the past six months, Mexico's auto industry has announced nearly $3 billion in investments to expand plants or build new facilities.
Gomes said Mexico, with its lower labor and other operating costs, is an especially attractive investment destination for Japanese automakers, which have been squeezed by the appreciation of the yen.
Investment in Canada's auto industry will drop 18 percent this year to C$1.2 billion ($1.2 billion) - the lowest level since the mid-1980s and about 62 percent below the C$3.1 billion annual average of the past decade, Gomes said.
The Canadian auto industry, however, continues to recover from the global economic downturn, as well as from this year's supply disruptions caused by natural disasters in Japan and Thailand.
This year Canadian vehicle production will exceed 2.1 million units for the first time since 2007. Employment in the sector has increased 2 percent over the past year and is up nearly 10 percent from its mid-2009 trough.
In August, General Motors Co (GM.N) said it will invest $117 million to ready its assembly plant in Oshawa, Ontario, to build the new Cadillac XTS luxury sedan, securing 400 jobs at a factory that had been hard-hit by layoffs.
A month before, Toyota Motor Corp (7203.T), along with the governments of Canada and the province of Ontario, said they would invest C$545 million to upgrade Toyota's assembly plants in Ontario.
Investment is strengthening in the United States this year, in part because during the latest contract negotiations with the Detroit Three, the United Auto Workers was able to secure additional investment for U.S. plants.
Reporting by Nicole Mordant; editing by Peter Galloway