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Does Canada’s auto industry have a future?

Does Canada’s auto industry have a future?

Canada’s automobile industry may be on a long, slow slide to oblivion.

The federal budget Tuesday included a $100-million fund aimed at innovation in the auto-parts industry over five years, but no substantive strategy to keep Canada’s biggest single manufacturing sector from long-term decline.

Automakers have warned that without a coherent strategy, Canada will continue to lose new production capacity to Mexico and southern U.S., where wages are lower and governments offer fat financial incentives and streamlined bureaucracy for new investments.

There is a lot at stake. According to Ottawa’s figures, the industry, centred in Ontario, was worth almost $85 billion in annual revenue in 2013 and employed 117,000 people, roughly a third of them directly in building passenger and commercial vehicles.

It isn’t going to disappear tomorrow but there’s increasing evidence it faces shrinkage.

General Motors of Canada announced earlier this year it was closing one of its two Oshawa, Ont., plants. A second plant is under threat because there’s no new model designated for it once production of the Camaro sports coupe shifts to a U.S. GM plant.

Unifor national president Jerry Dias, whose union represents about 40,000 auto workers, said in an interview if GM opts to close its remaining Oshawa plant next year, the impact would be catastrophic, driving Ontario into an economic depression.

“There’s an immediate hit of $5 billion a year to the GDP,” he said, citing a consultant’s report prepared for Unifor and released last month. “There’s 33,000 lost jobs.”

Dias said he is also nervous about the future of the FCA Canada (formerly Chrysler) plant at Brampton, Ont., which produces the Chrysler 300 large sedan and Dodge Charger and Challenger models and needs a new paint shop.

Toyota last week announced it was moving production of its popular Corolla compact sedan from its Cambridge, Ont. plant to a new US$1-billion facility being built in Guanajuato, Mexico.

The Cambridge plant would be used to produce larger, “higher-value” vehicles with bigger profit margins than the Corolla.

Related stories:

Toyota moving Corolla production to Mexico from Ontario

GM Oshawa plant closures would have sweeping economic impact: Unifor

Loss of Corolla doesn’t have to be lethal blow for Canadian auto production

The company says this isn’t about Corolla’s profitability. It’s part of a continent-wide “realignment” of production that will see small cars built in Mexico and Mississippi, mid-sized models in Canada and the U.S. Midwest and trucks in Texas and California, said Greig Mordue, general manager of Toyota Motor Manufacturing of Canada.

“It’s less about chasing a low-cost location, if you will,” he said in an interview. “It’s much more about realigning our mandates.”

It isn’t a judgment on Canada’s long-term viability as an auto producer, said Mordue.

“It’s possible to be profitable making small cars in Canada,” he said, pointing to rival Honda’s decision to keep production of the Civic, a Corolla competitor, at its Alliston, Ont., plant. “Canada’s still a good place to build cars.”

Strategy for maintaining auto production: Build bigger

But the bottom line was a factor in transferring the Corolla out of Canada by 2019, top automotive analyst Dennis DesRosiers told Yahoo Canada News.

“You’re taking a vehicle out of Canada that we ultimately won’t be competitive producing,” he said. “In fact it’s on the bubble now.”

It’s a strategy other automakers have adopted to some extent to maintain production in Canada, where costs are higher than Mexico and the southern U.S.

But DesRosiers doubts it’s a long-term recipe for survival.

“One of the reasons Canadian assemblers are staying in is because the North American market is booming and is expected to continue to grow for another two or three years,” he said.

Ford of Canada, for instance, is adding up to a thousand employees at its Oakville, Ont., operation to build the new generation of its mid-size Edge SUV. But DesRosiers points out Ford opted to build a new engine plant in Mexico after negotiations with the Ontario government fell through.

Automakers are spending millions to retool older plants because sales currently are booming, he said. But they’re not investing in any new Canadian production capacity. It has shrunk from its historic highs in the late 1990s, which makes aging Canadian plants vulnerable in the inevitable next downturn, DesRosiers said.

DesRosiers noted Canada permanently lost about a million units of production capacity during the global financial crisis of 2008-10, capacity that won’t return.

“We might be able for another cycle keep the plants we have, but we definitively have no possibility of getting a green-field plant,” DesRosiers said.

DesRosiers said he sees no particular threats this decade but predicts another round of permanent production cuts the next time auto sales tank, which has happened about eight times since the end of the Second World War.

“But every time there’s a downturn … we’ll lose more capacity,” he said. “I don’t see a way out.”

The history behind Canada’s auto-industry dilemma

It’s worth understanding how Canada’s auto industry got to this point after Henry Ford established his first non-U.S. operation in Windsor, Ont. in 1904.

It grew up behind tariff walls that saw U.S. automakers set up Canadian plants that assembled cars using American-made parts. The system kept the Canadian industry stunted as the economy grew after the Second World War.

The 1965 Canada-U.S. Autopact, a limited free-trade agreement, created conditions for a dramatic expansion in Canadian production, allowing Canada to become a net exporter.

Most of the Autopact’s favourable provisions carried over into the broader 1987 free trade deal with the Americans and the subsequent North American Free Trade Agreement (NAFTA), before being outlawed as discriminatory in 2001 by the World Trade Organization.

Canadian production soared, helped by a low Canadian dollar, and the auto-parts sector also grew as both foreign players and Canadian firms such as Magna, expanded their presence.

But the Autopact also entrenched the branch-plant structure of the Canadian auto sector. Canadian affiliates of the Big Three (Ford, General Motors and Chrysler) lost much of their autonomy as the Detroit-based companies rationalized production for the broader North American market.

Terms of the Autopact also made it advantageous to produce higher-value models in Canada.

“So we ended up with pickup trucks and panel vans and the bigger boats on the car side,” said DesRosiers.

Toyota and Honda set up shop in Ontario in the late 1980s in part to escape import duties and to meet flourishing Canadian demand for compact cars like Corolla and Civic (similar expansions took place in the southern U.S. for larger models).

The Japanese plants were state of the art. A couple of years after Toyota’s Cambridge, Ont., Corolla plant opened, I had the opportunity to go and see it for myself: Assembly-line work stations were optimized to reduce physical strain on the non-union workers (or team members, as Toyota calls them); they were encouraged to report any flaws, even up to stopping the line, and constantly ran white-gloved hands over the cars as they passed, looking for defects.

The Canadian operation’s reputation for high quality earned it more work as Toyota added the RAV4 compact SUV and Lexus RX luxury SUV models and expanded to three assembly plants, two at Cambridge and another at Woodstock, which last year produced a record 580,000 vehicles.

“By contrast we only sold only 200,000 units in Canada,” Mordue said. “So we’re building just about three cars in Canada for every one we sell. I think those numbers should demonstrate that our commitment to Canada is solid.”

Making small-car production viable means cost cutting, worker concessions

Honda Canada fought to retain production of the Civic, a perennial No. 1 seller in its segment, said company chief executive Jerry Chenkin. A devalued Canadian dollar gave all automakers a cost advantage that disappeared when it rose to par with the U.S. dollar earlier this decade.

“It exposed all kinds of weaknesses for not only Honda but I think many Canadian manufacturers,” Chenkin said in an interview. “In fact, at par we discovered we were several hundred dollars more expensive for the identical car that was being built either in Canada or the U.S.”

It took a concerted cost-cutting effort, including concessions from Honda’s non-union workforce, to keep Civic production in Canada, he said. They were sacrifices needed to ensure “what was in effect the survival of the factory,” he said.

“As a result of that, HCM [Honda Canada Manufacturing] was appointed as the lead factory [globally] for the next generation Civic, which is coming out towards the end of this year,” said Chenkin. “In fact, this is the first time that a non-Japanese factory has been appointed as the lead for a major model like this.”

Honda also recently announced it would begin producing a version of the CR-V compact SUV for export to Europe as the company moves to take advantage of the recently negotiated free-trade deal, known as CETA, with the European Union. The company will also import a hatchback version of the Civic sedan from Britain.

But the revamping of existing plants, usually with some form of Ontario and/or federal assistance, has not arrested the apparent decline in production.

Total Canadian annual car and truck production peaked in 1999 at just over three million units, stabilizing around the 2.5-million range until the 2008-09 financial crisis when it bottomed out at 1.5 million as sales crashed. It’s since climbed back to nearly 2.4 million last year, fuelled by rebounding sales.

More ominously, Canada’s share of North American production has dropped as Mexico’s burgeoning auto sector brings more plants on stream. Figures compiled by DesRosiers’ firm show Canadian plants accounted for just over 14 per cent of production last year, compared with 17 per cent five years earlier, while Mexican production made up about 18 per cent.

It’s unrealistic to expect Canadians to try and match economic conditions in Mexico, where auto workers still earn as little as $5 a day, DesRosiers said.

“We can’t ask our workers to work for Mexican wages,” he said.

As auto production declines, what’s the alternative?

If a decline in vehicle production is inevitable, should Canada be looking at attracting higher-skilled activities, such as research, design, vehicle development and testing? The industry spends about $30 billion a year on those things, said DesRosiers, “and that work is mobile.”

“The future of our auto industry is, as I say it, the six inches between our ears,” he observed. “You may end up with net fewer employees but they’ll be higher value-added employees so you’ll have as much economic activity.”

However, while some of it has been outsourced to places like India, a large-scale migration of those prestige jobs to Canada is unrealistic, he said.

So, what then?

DesRosiers said the auto-parts sector remains pretty robust and is less dependent on location to be competitive. That said, parts suppliers shed almost 40,000 jobs during the last downturn, bringing that work force down to about 72,000, and some multinationals used it as a pretext to shut their doors in Canada.

If there’s a consensus about anything, it’s the need for a more concerted effort by Queen’s Park and Ottawa to compete for new investment.

Both governments have been prepared to negotiate piecemeal agreements to help fund individual upgrades to existing plants.

“But at some point policy has to be more than cut a cheque,” said DesRosiers.

Unifor’s Dias agreed.

“What I’m most concerned about is the fact we don’t have an auto strategy here in Canada,” the union leader said. “I don’t know what the governments are waiting for.”

Does Ottawa need to be more engaged?

The Canadian Automotive Partnership Council, made up the five major automakers and major parts suppliers, issued a report a couple of years ago with a series of recommendations for both industry and government, chief among them a more co-ordinated approach to attracting investment.

Many U.S. states have a “car czar” empowered to negotiate deals with automakers and ProMexico helps streamline the process in that country and promote its advantages.

“Other jurisdictions are doing this and they are actively going after the automotive business,” said Chenkin.

By contrast Honda has to deal with three or four federal departments to do anything, he said.

“We don’t always know who to talk to,” he said.

Mordue said he detects signs of renewed interest in targeted industrial policy.

“We do see some appetite to re-engage,” the Toyota executive said. “I think they’re trying to find a way to do that in a most effective manner possible.”

The challenge is that unlike the U.S. and Mexico, Ottawa shares jurisdiction with Ontario and their objectives don’t always align. You need both, Mordue said.

“But we also recognize that having the government of Canada involved and having the brand of Canada as a part of that can be an advantage,” he said.

Government shouldn’t shrink from direct investment, either, said Dias, noting the economic returns from auto production outweigh the use of taxpayer cash. It’s common practice globally, he said, noting German-based VW Group, for instance is 20 per cent owned by the state of Lower Saxony.

Even if a solution isn’t evident now, the status quo won’t offer protection for long, said DesRosiers.

“At some point, unless something comes out of the woodwork that I haven’t thought of, Canada long-term is going to lose much of its auto sector,” he said.