INDU Committee Report
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A STUDY OF THE CRISIS IN This report is not intended nor was the Committee given the responsibility for recommending whether or not the Government of Canada advance loans to the automotive industry in Canada. It was instructed to review the current state of the industry and make recommendations. An Integrated Continental Motor Vehicle Manufacturing Industry The Auto Pact and Continental Integration The North American automobile industry is particularly illustrative of the economic implications of regional integration. Before 1965, relatively large tariffs on imported automobiles engendered separate Canadian and U.S. automotive industries. In the relatively smaller Canadian auto industry,[1] production runs were shorter and the models manufactured and sold were less varied, resulting in relatively higher prices and less product selection for Canadians. The 1965 Canada-U.S. Auto Pact significantly changed this duplicative structure and allowed the three major U.S. automobile firms – the so-called “Detroit Three” – to rationalize their production along North American lines. Later, Japanese automobile companies set up production facilities across North America, further broadening and expanding the industry; they have subsequently been dubbed the “New Domestics”. Canada today boasts six foreign automobile manufacturers (i.e., Chrysler, Ford, General Motors, Honda, Suzuki and Toyota) with production facilities that include 12 assembly plants, mostly clustered in southern Ontario, producing for the North American market. At the same time, Canadians import a significant number of vehicles to meet their diverse automotive needs. Although not part of a comprehensive industrial strategy, federal and provincial governments have funded some of the more recent investments in automotive assembly plant and equipment. Federal government funds, amounting to $434 million and taking the form of a repayable contribution through the former Technology Partnerships Canada (TPC) program, were provided in 2004 and 2005. Non-repayable provincial financial support of $513.8 million was also provided to these projects. Additionally, in 2008, the Government of Canada created a new Automotive Innovation Fund (AIF) to provide automotive firms $250 million over five years to support strategic, large-scale research and development (R&D) projects to build innovative, greener, more fuel-efficient vehicles. Later in the same year, the Government of Canada announced that it would invest up to $80 million in the Ford Motor Company of Canada’s Renaissance Project, a $730 million initiative that will establish a state-of-the-art flexible engine assembly plant in Windsor, Ontario, and replace and expand the company’s Powertrain Engineering Research and Development Centre. In 2007, two-way automotive trade between Canada and the rest of the world totalled $152 billion, leaving Canada in a $5.9 billion deficit position. Canada, nevertheless, recorded an automotive trade surplus with the United States of about $12.0 billion, with Canadian exports valued at $70.4 billion and Canadian imports valued at $58.4 billion in 2007. These aggregate trade data, however, mask important intricacies of this integrated industry. As the Conference Board of Canada points out, the Canadian content of a Canadian-made car can be as low as 35%, meaning that some automobiles rolling off Canadian assembly lines rely more on foreign inputs, mostly from the United States, than on Canadian inputs.[2] The integration of the Canadian auto sector, most notably with that of the United States and Mexico but also with that of Japan, has led to a number of milestones that a separate Canadian auto sector probably would not have achieved. For Canada, since 1965 the benefits include a significant international presence as an auto producer and exporter and a high level of productivity, with the latter being a force for higher wages and benefits across the sector’s workforce. From the testimony and information gathered at subcommittee meetings, it was opined that Canadian autoworkers are the most productive in the world. But most of all, Canadians and Americans enjoy lower prices, higher quality products and greater product selection than they otherwise would. The North American Market at a Glance The growth in the North American market for cars and trucks was rather flat in the first half of the 2000s, with sales peaking at 20.2 million vehicles in 2005 (see Table 1). This peak was very close to the market’s previous, all-time peak of 20.3 million units reached in 2000. Unfortunately, sales turned negative in the second half the 2000s. The slide in sales was at first modest. North American sales declined by about 940,000 units by 2007, representing less than 5% of total sales in 2005. In 2008, however, motor vehicle sales plummeted, falling by 3.1 million units to 16.2 million units or by about 16% in just one year. By 2008, the cumulative decline in sales since 2005 was more than 4 million units or 19.8%, and most industry observers are of the opinion that the sales figures for North America have not yet bottomed out. The sales data clearly show that falling North American demand for motor vehicles originates in the United States. Indeed, motor vehicle sales in Canada and Mexico held up rather well in 2008; they were down only marginally from 2007. But an integrated North American automotive industry means that both Canadian and Mexican motor vehicle production will be tied to North American sales developments and, thus, both industries cannot avoid the consequences of declining sales in the U.S. market, by far the dominant North American market. Table 1
Table 2
North American motor vehicle production peaked coincidentally with North American motor vehicle sales in 2000 and 2005 (see Table 2). But after reaching a peak of 16.3 million units in 2005, North American motor vehicle production fell by 3.4 million to 12.9 million units in 2008, representing a fall of 20.9%. The decline was greatest in the United States (-27.5%), followed by Canada (-22.6%), but Mexico actually increased its production by 28.9% between 2005 and 2008. Finally, the data show that, on an annual basis, North Americans import from offshore sources between 2.5 and 4.0 million more motor vehicles than the rest of the world imports from North America. Canada and Mexico are net exporter countries within North America. Canadian production accounts for about 16% of North American production, while Canadian sales represent only about 8% of North American sales. Additionally, Canadian motor vehicle production as a percentage of total Canada-U.S. production has trended upward from about 17% towards 20% between 2000 and 2008.
Japanese motor vehicle manufacturing companies began investing in manufacturing plants in North America as early as in the 1970s; other overseas automobile manufacturers followed but would eventually withdraw from North America. Nevertheless, ever since the 1970s, these foreign-owned automobile companies have taken away market share from the “Detroit Three”, but this loss had always been slow, gradual and not unexpected. Beginning in 2003, however, the “New Domestics” have not only taken away market share from the “Detroit Three,” they have captured so much market share that the “Detroit Three” have had to reduce its overall production (see Table 3). In only six years, the “New Domestics” have substantially improved their market share in North America from just less than 25% in 2002 to more than 42% in 2008. More importantly, in the growing North American market between 2002 and 2005, the “Detroit Three” not only saw their combined market share decline from about 74% to 64%, their combined production declined by more than 1.1 million vehicles in this period. By 2008, the “Detroit Three” held only a 56% market share of total North American motor vehicle production. Clearly, the “Detroit Three” must take bold steps to address and reverse this declining market performance for a continuation of such a huge loss in market share at such a dramatic rate may mean bankruptcy for one or all of the “Detroit Three”. Table 3
The spotlight will now be shone on the Canadian automobile industry. The Canadian automotive assembly industry can be divided into two segments: the light-duty vehicle segment and the heavy-duty vehicle segment. The light-duty vehicle segment is comprised of 12 high-volume assembly plants that produce cars, minivans and light trucks with a total production capacity of 2,770,000 units (see Table 4). The heavy-duty vehicle segment is comprised of 25 low-volume assembly plants that produce heavy-duty trucks and buses. Table 4
In 2008, the automotive assembly industry manufactured 2.1 million vehicles and employed 45,091 people. The highly regarded Harbour Report ranks four Canadian assembly plants in the top-10 across North America (see Table 4). Finally, in 2007, Canadian assembly plants have won more than one third of all J.D. Power plant quality awards for North America despite accounting for about one-sixth of North American production. Two Foreign Storms Blow Into Canada Since the turn of the second millennium, two very powerful external shocks have, one after the other, hit the Canadian economy. First, a worldwide “commodities boom” took hold in 2003 that sent many commodities prices and the Canadian dollar soaring to record levels and forced a restructuring of the Canadian economy away from manufacturing and towards primary commodities. The second external shock, a worldwide economic recession that began in late 2008, put an end to the first shock only by broadening the dampening effect on demand – both domestic and foreign – from Canadian manufactured products to include all Canadian goods and services. Matters, nevertheless, did get worse for the Canadian manufacturing sector. For example, the Canadian automotive industry is probably Canada’s most integrated manufacturing industry with the United States and has been undergoing a significant long-term transformation that requires extraordinary financial dexterity in the intervening or investment phase. To this industry, the first economic shock appeared manageable to all of its participants, but the second shock, which has severely restricted the operation of credit markets across North America, has already proven to be unmanageable for two of the “Detroit Three” (without considerable outside financial assistance). Indeed, some industry observers believe that should the recession deepen and persist much longer, it will not be long before the third company of the “Detroit Three” will submit a request for government financial assistance. Both of these economic events, as they have affected the Canadian automotive sector, are the topic of this section. The Commodities Boom and the Rise of the Canadian Dollar Beginning in 2003, rapid world economic expansion, led largely by China, India and Southeast Asia, fuelled the demand for primary commodities, most notably energy and base metals, and led to rapidly rising commodity prices. For a commodity export country like Canada – goods in which it possesses a comparative advantage – rapidly increasing and high base metal, crude oil and natural gas prices were accompanied by a large and rapid appreciation of the Canadian dollar, particularly against the U.S. dollar. In turn, an appreciating Canadian dollar, along with soaring energy costs, squeezed manufacturing profit margins and drove down the competitiveness of Canadian manufacturers relative to their foreign rivals. Canadian shipments of manufactured goods subsequently declined then floundered, and profits plunged sharply across the sector and even turned to losses for many manufacturing companies. Although it is clear that an appreciating Canadian dollar, which rose from about 62.5¢ US in January 2002 to more than US$1.09 in November 2007 before settling back in the 77-84¢ US range since November 2008, adversely impacted the sales of all manufacturers, some products proved more sensitive to changes in the value of the Canadian dollar than others (see Figure 1). The motor vehicle manufacturing industry was hit the hardest among Canada’s major manufacturing industries; its sales have declined by $11.9 billion in sales in just five years. The motor vehicle parts manufacturing industry also saw its sales decline by $2.2 billion in the past five years. Figure 1
Figure 2
The performance of the automotive industry in this period can also be measured in terms either of its contribution to Canada’s gross domestic product (GDP) or of its employment. Beginning with the motor vehicle manufacturing industry, its contribution to Canadian GDP had grown from $13.4 billion in 2002 to $15.1 billion in 2005, but it has since contracted to $11.9 billion in 2008. Employment within the industry steadily declined from 53,204 in 2002 to 45,091 in 2008. Thus, while the industry made an equivalent contribution to GDP in 2007 relative to 2002, it contracted by 8.8% in terms of employment by 2007 (see Figure 2). Clearly, the loss in competitiveness of the Canadian motor vehicle manufacturing industry as a result of the rather large and quick appreciation of the Canadian dollar had forced these manufacturers to raise their labour productivity levels principally through shedding labour. With the onslaught of the U.S. recession in 2008, however, motor vehicle production in Canada declined precipitously and more layoffs ensued – but the contraction in labour was not as dramatic as that of production in this period. In the end, whether measured in terms of contribution to GDP or employment, the motor vehicle manufacturing industry declined by about 15% between 2002 and 2008.
[1] In 1960, Canadian motor vehicle production amounted to 395,855 units and accounted for 4.7% of North American production. Source: DesRosiers Automotive Consultants Inc., Submission to House of Commons Subcommittee on Automotive Industry of the Standing Committee on Industry, Science and Technology, 12 March 2009. [2] Conference Board of Canada, Making Integrative Trade Real: Creating a Value Chain Trade Policy for North America, December 2008, p. 3. |
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