This article was originally published in Maclean's Magazine on September 23, 2002
Canada's Auto Industry Struggling
FOR THE FIRST TIME in his life, Buzz Hargrove didn't buy a new car last year after trading in his '99 Chrysler LHS. Instead, he got himself a Jeep, a luxurious 2002 Grand Cherokee. Now he admits he doesn't care much for it, that he's not one for an SUV. "I've always had a car," says the president of the Canadian Auto Workers. "I've always been a car person."
Discontented, perhaps, and arguably a latecomer to the SUV craze, Hargrove is nonetheless part of a broad shift in the AUTO INDUSTRY. The massive consumer embrace of minivans and sport utility vehicles is just one trend shaking up the once-predictable business. Another - more significant, for Canada - is the move by foreign automakers to set up factories in North America. Lured to the U.S. South by fat subsidies and to Mexico by cheap labour, these new operations are pulling the industry's centre of gravity southward - and away from its traditional Michigan home base. While car lovers will tell you there's good reason the Japanese and Germans are elbowing Detroit's automakers - General Motors Corp., Ford Motor Co. and DaimlerChrysler AG - out of U.S. car lots, the impact is being felt in the Canadian factories, where the Big Three dominate. "For the first time in at least two decades," says the industry's über-analyst, Dennis DesRosiers, "there are no prospects for growth in auto manufacturing in Canada."
Hargrove, who this month is in contract talks with GM - backed by a strike mandate from an overwhelming 97 per cent of members - has been thundering all year about the dire prospects for the Canadian auto industry. Since 1990, 16 new facilities have been built or promised in North America. Just one, Hargrove points out - a second Honda plant in Alliston, Ont. - is based in Canada. Four are in traditional northern U.S. auto country. Of the rest, six are in southern U.S. states and five in Mexico. With GM's plant in Ste-Thérèse, Que., already shut down, and two others, a Ford truck facility and a DaimlerChrysler factory, slated to close, job security is high on the CAW's list of priorities. In the last three years, 15,000 jobs in the auto sector have evaporated. "We estimate we'll lose 20,000 jobs by 2005," Hargrove says. "There's this naive belief that somehow if we just ignore these new trends that are out there, we'll be just fine."
Some say the auto industry is like baseball: it's a game where what really counts are the stats. And just like the ball game, there are lots of stats. Through the '90s, unlike much of the rest of the economy, the auto industry expanded in Canada - so much so that it buoyed employment levels and international trade ratios. By 1999, Canada was the world's fourth biggest auto manufacturer, and was regularly lauded by independent agencies for the high quality and top productivity levels of its auto plants. Since then, the country has lost ground. By the end of last year, Canada was down to No. 7.
It's not all bad news - at least not yet. GM and Japan's Suzuki Motor Corp. are together investing $500 million to produce the Equinox, an all-new Chevrolet SUV, in a deal that throws a lifeline to their joint-venture factory in Ingersoll, Ont. And North America has been on a car-buying spree, pushing auto sales to all-time highs. Last year, Canadians bought 1.6 million new vehicles - the most ever - and this year are on track to beat that record. In the U.S., where 85 per cent of the vehicles assembled in Canada are sold, sales zoomed in 2000 to a peak of 17.8 million and, fuelled by those irresistible zero-per-cent financing incentives, continue to breeze along above the 17-million mark. The hitch for manufacturers is that the U.S. market is saturated - and a meltdown could happen any day. DesRosiers estimates that auto ownership has reached an astonishing 99.8 per cent in the U.S. - that as many cars are on the road, including commercial fleets and extra cars in the driveway, as there are Americans old enough to drive. (In Canada, the ownership rate is 68 per cent.) "It's a significant automotive bubble," DesRosiers warns. A war in the Middle East, an oil embargo, or continued problems in the stock market could easily trigger a serious decline, he says. "The U.S. market has never been more vulnerable to a downturn."
And that would be devastating for Canadian manufacturers. The industry in Canada is inseparable from the U.S. market, thanks largely to the historic Canada-U.S. Auto Pact, signed in 1965. Under the deal, U.S. carmakers, in exchange for tariff-free access, had to assemble in Canada at least one vehicle for every one sold in the country. By 1999, at 3.1 million vehicles, the industry had a two-to-one ratio - unmatched in the developed world. That same year, the World Trade Organization struck down the Auto Pact, which in the era of free trade and NAFTA was no longer valid. And unnecessary, many thought, given the industry's incredible output. Since then, production has been scaled back, and this year, the ratio will be about 1.5 to one.
The implications reach far beyond the auto industry itself: for every job in auto assembly and parts manufacturing, 6.5 others are created in related sectors, such as the steel and plastics industries, business services and transportation. All told, more than a million jobs in Canada - 11 per cent of the nation's full-time workforce - spring from automobiles. The industry also has a huge impact on the trade balance, influencing the value of the Canadian dollar. In 2001, it accounted for more than a quarter of Canada's exports.
"GLEAMING" is the word that comes to mind at the Toyota Motor Manufacturing Canada Inc. plant in Cambridge, Ont., 80 km southwest of Toronto. At 160 ha, the site is bigger than the core of many small Canadian towns. Inside the horseshoe-shaped plant, it's clean, bright and shiny. Finished vehicles stream through a final hands-on inspection under lights bright enough for a nighttime football field, creating surprisingly beautiful reflections on the cars' perfect paint. Roughly 220,000 vehicles - the Solara, the Matrix and the enormously popular Corolla - will be produced here this year. All the Corollas sold in Canada are made to Canadian specs at the Cambridge plant. In 2003, the Solara assembly will move to Kentucky, but one wing of the plant is already being refitted to accommodate production of the Lexus RX300. Opened in 1988 with the goal of producing 50,000 cars, the plant is a success story in Canada.
Toyota's Cambridge factory is one of two non-unionized assembly facilities in Canada - the other, also a growing concern, is Honda Canada Inc.'s operation in Alliston. This is another trend in the industry. Across North America, roughly one in three jobs in auto manufacturing is not unionized, DesRosiers estimates. Within five years, he expects it will be nearly one in two. While the industry is in decline, DesRosiers says, "it's doom and gloom if you're sitting in a union job."
The success of Honda and Toyota, which pay union-level rates, is not enough to offset troubles in the rest of the industry in Canada, says the CAW. Nor, it argues, do they contribute as much to the economic well-being of the country as their unionized counterparts. The two Japanese manufacturers import more parts into Canada than the Big Three and they produce smaller vehicles, requiring less content than the Big Three's larger minivans and small trucks typically produced in Canada. This means that less work and fewer man-hours go into producing the Japanese models. The CAW calculates that for every 1,000 vehicles sold in Canada, the Big Three create 52 direct auto production jobs. By comparison, Toyota and Honda create 22 jobs. "That," says Jim Stanford, the CAW's economist, "is not enough."
FEW DISAGREE that the auto industry, Honda and Toyota notwithstanding, is in decline in Canada. Where the debate opens up is in what to do about it. For Hargrove, the answer is easy: the government must step in. He's appalled that Ottawa hasn't replaced the Auto Pact with a coherent auto policy - "what is so wrong with us?" If Canada wants to stay on the leading edge, he says, the country needs a carrot-and-stick approach. Companies that sell cars in Canada, he argues, must be required to invest in production in the country. One proposal is a tax on vehicles sold in Canada that would be scaled back in proportion to the amount invested in domestic assembly plants - a plan, the union says, that would not contravene WTO rules. Protectionist or not, Hargrove adds, such measures have been readily employed by the Americans when they see their interests threatened on steel or softwood lumber. "But we don't do anything. We just accept and we roll over and play dead."
DesRosiers, who admits to struggling with the issue of public-sector intervention, says the government is caught in a politically sensitive situation. To match the incentives offered to manufacturers by southern U.S. states, some worth hundreds of millions of dollars, would require Ottawa to put outright gifts on the table. Still, he says, "it's questionable if incentive money can bring the new plants into Canada." And, he asks, "once you turn the tap on, how do you turn it off?"
Governments, both federal and in Ontario, where the bulk of the industry is located, have so far stayed on the sidelines, offering little but platitudes. Conferences have been held, speeches given and a council created, pulling together senior people from government, industry and labour. "Innovative approaches" are needed, says federal Industry Minister Allan Rock. His Ontario counterpart, Enterprise Minister Jim Flaherty, eschews handouts, saying his government tries to make Ontario a place "where business wants to do business." He underscores lowered taxes and provincially-backed skills training. The goal now, he says, is for all parties - labour, management and government - to develop a vision for moving forward. But there is no word, really, on what that vision looks like.
In two or three years, when he trades in his Jeep, Hargrove says he's likely to switch back to a car, perhaps even another luxury Chrysler sedan. But for the industry, going back will be much tougher.
THE BIG 10
Car and truck production, 2001
Country Millions of vehicles % change over 2000
1. United States 11.5 -10.2%
2. Japan 9.8 -3.4
3. Germany 5.7 +3.0
4. France 3.6 +7.3
5. South Korea 3.0 -5.0
6. Spain 2.8 -6.4
7. Canada 2.5 -14.1
8. China 2.3 +8.7
9. Mexico 1.8 -3.3
10. Brazil 1.8 +7.0
Source: Automotive News
Maclean's September 23, 2002