CAMBRIDGE, Ont. -- From a vantage point on the roof of the Toyota Motor Mfg. Canada Inc. plant, you can see the future of Canadian auto production taking shape.

By the end of 1997, the construction going on below is expected to add capacity for 120,000 vehicles a year to the sprawling complex near Kitchener -- one of several assembly plant expansions under way this summer in Canada.

On the other side of the plywood construction wall in Cambridge, workers continue to churn out about 90,000 Corollas a year -- nearly double the capacity expected when the plant started production in 1988.

But the sticker on the first model this visitor sees rolling off the line is marked for sale in the United States -- like so many of the 1.7 million autos already built this year north of the U.S. border.

That's because looking into Canadian auto showrooms can be a dismal assessment.

Sales in Canada are limping along. High unemployment and low consumer confidence have dampened the country's domestic market. Car sales fell off 10.9% in 1995 from 1994 and trucks were down nearly 3%. And 1996 sales areonly about even with 1995.

"But if you stand on the edge of Canada and look into our plants, you see something else," says Dennis DesRosiers, presidentof DesRosiers Automotive Consultants.

He sees the Canadian auto industry poised to have somewhere in the range of 2.6 million to 2.7 million units of production capacity within a year or two - most of it for export. Current capacity approaches 2.5 million.

Chrysler Canada Ltd. is expanding its Bramalea plant. The Toyota plant will more than double capacity at Cambridge. Honda Canada Mfg. Inc. is adding capacity for a full-size van, and Ford Motor Co. just completed a substantial upgrade in Oakville.

But industry leaders are realistic about their domestic economy, says Yves Landry, Chrysler Canada president and chief operating officer since 1990.

"The industry has been pretty disappointing in Canada. We never had the up-cycle that the States has benefited from the last three or four years. In fact, it remained relatively flat in Canada -- sales around 1.2 million units," he says. "This year Chrysler is forecasting 1,170,000 car and truck sales -- at peak times it's 1.5 million."

But some of the news is good, and Canada's gross domestic product is on track to increase 2.5% this year compared with earlier projections of 1.7%, Mr. Landry says.

"So we're encouraged by this," he says, adding that Chrysler will sell 236,000 cars and trucks this year, "plus or minus a few."

That includes an expected 82,000 minivans, a record for Chrysler in Canada.

Although Mr. Landry says it's too early to predict 1997, he's estimating that with conditions continuing as they are, Canada should see sales of 1.2 million units next year.

Chrysler also has reason to celebrate after negotiations with the Canadian Auto Workers went down to the wire before a three-year settlement was hammered out. While the Chrysler deal may work for Ford in Canada, it's likely General Motors of Canada Ltd. will not be able to swallow portions that require replacement of jobs lost to outsourcing.

If the CAW does strike GM, as union leaders have predicted, it could have an impact on the expected domestic recovery. But the CAW also predicted a strike against Chrysler and was able to get a deal.

With one of every seven Canadian jobs in the auto sector, the strength of the industry is important to fueling an increase in disposable income.

More car jobs, however, haven't translated into a hike in new-car sales yet.

By some estimates, the average age of Canadian cars is about 7.8 or 7.9 years, and Canadians are driving those aged vehicles a record number of kilometers, Mr. DesRosiers says.

The used-vehicle fleet is up to about 2.8 million, from 2.3 million just a few years ago, he says. Vehicles in the 1- to 5-year range are in severe shortage, he adds.

James Miller, Honda Canada senior vice president of auto marketing and sales, agrees the retail auto market should improve simply because of the age of the fleet. Any change will help the Japanese automaker, which relies more heavily on retail sales than its competitors. Honda remains about 7,000 units behind Chrysler in sales, holding about 9% of the Canadian market.

"We'd like to get back to 10 to 11.5%," Mr. Miller says.

In the meantime, Canadian Auto Workers President Basil (Buzz) Hargrove is looking nervously at Asia-especially South Korea -- as the next big challenge to Canadian automaking.

"South Korea is building factories right on the coast. They are going to send vehicles over in waves," he says. Hyundai Motor Co. Ltd. recently shipped equipment from a closed Bromont, Que., plant for use in new plants in India and South Korea.

While transplants like Honda and Toyota aren't union shops, they do provide Canadian jobs and put money into the Canadian economy. A new threat from Korea would be another blow to the 215,000-member union, which includes 85,000 members in auto-related jobs, he says.

But Mr. DesRosiers says South Korea is only one member of the global cast that Canada will have to face in the next decade.

"The real challenge will be how to make sure we continue this very positive factory-floor situation in the next decade. The next three of four years are nailed. `Will we become complacent?' is a very serious issue. What do we need to do to make sure that our guys are ready for the next go `round in the competition? Those are the real issues -- not whether we outsource or not," he says.