The automotive industry includes the production of cars and car parts. Since the early 20th century, it has been one of Canada’s most significant manufacturing industries, as well as a key driver of Canada’s manufactured imports and exports, employment and overall industrial production. Though dominated by foreign firms (largely American), Canada boasts a strong domestic parts manufacturing sector that emerged in the last part of the 20th century. Concentrated in Southern Ontario, Canada’s auto sector evolved as a consequence of industrial policies such as protectionism and free trade. (See also Industry.)

Europe: Industry Begins

The early development of automotive technology occurred in Europe in the late 1700s and 1800s; even the name automobile is French. In 1770, a French army captain, Nicolas Cugnot, built a steam-artillery tractor, the first self-propelled land vehicle; a Belgian, Jean-Joseph-Étienne Lenoir, first used a gas engine in a vehicle to drive on a highway in 1859.

While steam and electric vehicles offered many advantages, the internal-combustion engine dominated. In 1876, Nicolaus A. Otto, a German engineer, produced the most important of these: his four-stroke engine became the foundation of the industry. Two other Germans, Gottlieb Daimler and Wilhelm Maybach, worked together at the end of the 19th century to produce a smaller, higher speed version of Otto’s engine. By 1891 French engineer Emile Levassor had conceived the modern car’s central frame structure — one suitable to carrying an engine. By adding pneumatic tires, most of the obstacles to the beginning of motoring had at this point been removed.

America: Mass Production

Despite the rapid advances in automobile technology made by European engineers, cars were still a luxury item at the turn of the 20th century. It was the master mechanics of Detroit in the United States who turned the automobile into a mass-produced, low-priced, reliable convenience for common use. In the early 1900s, Ransom E. Olds was the first successful American mass producer with his curved-dash Oldsmobile. Important contributions were also made by Henry Ford, Charles and Frank Duryea, Henry Leland, Walter Chrysler, Charles Nash and Charles "Boss" Kettering — the latter of whom invented the self-starter, making motoring less dangerous and more reliable (cars had previously required a hand-crank).

Canadian Industry: Confederation to the Second World War

In Canada, Henry Seth Taylor built the first horseless carriage in 1867 in Stanstead, Québec. Taylor's steam pleasure carriage was considered a novelty, but other Canadian pioneers built steam, electric and gasoline powered cars in the late 19th and early 20th centuries. These included the LeRoy, the popular Russell, the Tudhope, the Galt and many others. Despite many attempts to develop a viable car, no independent Canadian automobile company survived; Canada lacked the population, financial capacity and technological wherewithal to sustain a domestic industry.

However, a vibrant motor vehicle industry did emerge after the First World War, for a few reasons. Most importantly, the Canadian sector quickly became dominated by branch plants of American firms. These firms had the ability to build huge numbers of vehicles in order to keep costs low, as well as the technological advancements needed to succeed in an industry that saw thousands of entrants, and failures, before 1914. Location also helped: Detroit, just across the Detroit River from Windsor, became the world centre for automotive production at the beginning of the century. The reasons for Detroit's predominance were based on its well-established carriage, bicycle and boat-engine industries, the excellent road system in the surrounding region, and the entrepreneurship and innovation of some of its earliest automotive pioneers.

Helped along by this proximity, Windsor — and Southern Ontario more generally — became the Canadian extension of Detroit with the help of two policies. First, there was a 35 per cent National Policy tariff on cars entering Canada. This protectionist tax was designed to encourage Canadian production by making Canadian goods less expensive than their foreign (mostly American-sourced) competitors. Second, since Canada was part of the British Empire, Canadian-made goods could be shipped to many countries in the Empire (later, the British Commonwealth) at a lower tariff rate than other countries, namely the United States.

These policies, however, resulted not in the creation of Canadian assemblers, but the domination of US makers as the smaller Canadian operations were forced out of business by the huge financial demands and technological innovations required by the fast-developing industry. American firms bypassed the National Policy tariff by creating US-owned Canadian branch plants, which then also took advantage of the British preferential system to export from Canada to other countries at a lower tariff rate, since the goods they built were made in Canada.

As a result, the modern automotive industry began in Canada when Gordon M. McGregor of Windsor formed the Ford Motor Company of Canada, Ltd. (1904), by striking a deal with Henry Ford, the promoter and inventor, only a year after the latter had begun production in Detroit. Canadian Fords were assembled at the Walkerville Wagon Works, as parts were ferried by wagonload across the Detroit River. Canadian Fords were soon being shipped to most regions in the far-flung British Empire. Eventually, the firm would prosper with the introduction of the famous Model-T — the first truly successful mass production vehicle and the car that put the world on wheels. Ford of Canada became hugely successful overseas as well as at home.

Meanwhile, in Oshawa, Ontario, Colonel R.S. McLaughlin, another Canadian pioneer in the industry, converted the family's thriving carriage and sleigh production to the new horseless carriage with its noisy internal-combustion engine. In 1908 McLaughlin arranged with William C. Durant, the financial wizard who formed General Motors, to use American inventor David Buick's engines. Buick engines with McLaughlin-designed bodies gained world renown. Later, Durant offered McLaughlin the Canadian rights to the Chevrolet "Classic Six" — a five-passenger touring car designed by race car driver Louis Chevrolet. General Motors of Canada Ltd. was formed in 1918, under the presidency of McLaughlin, when McLaughlin Motor Co Ltd. and Chevrolet Motor Co of Canada Ltd. merged.

Another reason the early Canadian industry flourished was because of the demands of the first mechanized war, which allowed companies such as Ford of Canada to build thousands of vehicles for Canada’s First World War effort. Following the war, the economic boom of the “Roaring Twenties” pushed automotive consumption and manufacturing to new heights as the Canadian industry produced for the burgeoning Canadian market and parts of the British Empire. At this point the industry had coalesced into the “Big Three” — General Motors, Ford and Chrysler (the latter of which established Canadian operations in Windsor in the early 1920s). By the end of the 1920s, Canada was the second-largest vehicle producer in the world and a major exporter. Despite some tinkering with the tariff, the industry remained largely tied to a protectionist model, and exhibited a classic branch-plant profile.

The industry faced decline and consolidation in the 1930s because of the Great Depression. During the Second World War, the Canadian sector gave itself over to wartime production, and few non-military vehicles were produced. Indeed, Canada’s motor vehicle industry played a key role in producing hundreds of thousands of military vehicles and other equipment, and helping to win the war.

Canadian Industry: 1945 to the 1960s

Following the Second World War, the Canadian automotive industry rebounded spectacularly, as pent-up consumer demand, population growth and postwar prosperity fuelled sales, while government policies encouraged consumer spending and car-oriented suburbanization. By the mid-1950s, Canada’s industry was booming, with new plants and facilities, increased employment and a return to export sales as Canadian manufacturers took advantage of the fact that European makers were still recovering from the war.

But, by the early 1960s, the industry again faced difficulties. US-owned Canadian Big Three branch operations began importing an increasing number of cars and parts from the United States that were not made in Canada. Given the proliferation of styles and models, Canada’s plants simply could not keep up with the Canadian consumers’ demand for the latest models; they also could not keep up with the latest technological developments, such as the increasing popularity of automatic transmissions.

As a result, in the early 1960s, the federal government embarked on a number of initiatives to boost exports from Canada to the United States, and also to prompt the US car companies — and the American government — to rethink the automotive trade and production relationship between the two countries. After a series of incidents, including a confrontation over imported parts and a tense round of negotiations, what emerged was the 1965 Canada-US Automotive Products Trade Agreement, or Auto Pact.

Auto Pact

The Auto Pact was a unique trade regime managed by Canada and the United States, with the active participation of the major manufacturers. In exchange for tariff-free trade in autos and parts between the two countries, the two governments and the auto makers agreed that the Canadian branch plant operations of the Big Three would build as many cars and trucks as they sold in Canada and maintain a base level of spending in the country. In a side-deal between the companies and Ottawa, the manufacturers also agreed to increase their auto investment in Canada for three years, and spend the equivalent of 60 per cent of their sales on Canadian operations.

At the same time, 50 per cent of vehicles exported from Canada to the United States had to be built in Canada, preventing a foreign company from setting up with the sole purpose of re-exporting from Canada into the United States cars built outside North America. A hybrid form of conditional free trade, the Auto Pact created one, continental, unified auto industry. Now, Canadian Big Three plants built for all of North America and American makers could export to Canada duty-free.

The impact of the Auto Pact on the Canadian industry was immensely beneficial as production and employment increased, and Canadian parts makers benefited from being able to sell to assemblers who now produced for all of North America. By the 1970s, Canada’s share of the Canada-US industry had more than doubled from less than 5 per cent before 1965. Even as the industry weathered downturns in the early 1980s, Canada’s sector maintained a strong share, buoyed by a low Canadian dollar, better health care for auto workers and high productivity.

Canadian Industry: 1980s to Present

In the 1980s, when the North American industry was being affected by Japanese exports and the near-demise of the Chrysler Corporation, the federal government prompted the Japanese to invest in Canada by enacting a series of trade measures that slowed Japanese exports to Canada. As a result, by the late-1980s, two of Japan’s largest manufacturers, Toyota and Honda, had established assembly operations in Ontario. These investments, and the relative prosperity of the 1990s, led Canada to its most successful period in the industry, as by the early 2000s Ontario had become the largest auto-producing jurisdiction in North America, and Canada’s industry reached a height of sixth largest in the world. Canadian parts firms such as Magna, Wescast and Linamar flourished during this period as well.

Since that time, the industry has largely declined. In part, this was due to the demise of the Auto Pact, which had largely been superseded by the 1989 Canada-United States Free Trade Agreement and the 1993 North American Free Trade Agreement. These measures effectively rendered the Auto Pact requirements meaningless (the Auto Pact itself was eventually deemed illegal by the World Trade Organization in 1999 because it discriminated against the newer entrants into the Canadian industry, namely Toyota and Honda), and the entry of Mexico fully into the North American industry created a new continental competitor for auto investment dollars. Further, the downturn in the industry in 2008–10 resulted in the Canadian and Ontario governments providing billions of dollars in support for GM and Chrysler, but when those companies re-emerged from their difficulties, their footprints in Canada had shrunk. By the 2010s, Canada had lost a number of manufacturing plants; and an increasing Canadian dollar, the loss of the auto pact and the heightened competition for auto investment dollars in the southern US and Mexico put the Canadian industry in a precarious position. By then, Canada’s global rank as top -10 auto manufacturer was precarious, and the sector’s status going forward became uncertain.

Indeed, Canada’s auto sector faces severe challenges in the 21st century. It boasts five different assemblers in one jurisdiction (GM, Ford, Chrysler, Toyota and Honda in Ontario), a relatively strong domestic parts sector, an excellent workforce and access to the US market. However, the continentalization and globalization of the industry through free trade agreements and international trade arrangements threaten the future of the Canadian industry.