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THE ONTARIO AUTOMOTIVE PARTS INDUSTRY

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THE ONTARIO AUTOMOTIVE PARTS INDUSTRY Powered By Docstoc
					       THE ONTARIO AUTOMOTIVE
           PARTS INDUSTRY
                               Susan Fitzgibbon
                                  John Holmes
                            Department of Geography
                               Queen’s University


                                             with
                                      Pradeep Kumar
                                School of Industrial Relations
                                    Queen’s University

                                      Tod Rutherford
                                     Maxwell School
                                    Syracuse University


ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Presentation Outline

• Introduction: The Auto Parts Industry
• Industry Performance Since 1990
          • Overall Performance: Output, Trade, Employment, Productivity
          • Canada – United States Competitiveness
• Changing Structure of the Industry
          • Modernization
          • Rationalization and Consolidation
          • ‘Canadianization’
• Challenges Facing the Industry
• Restructuring the Supply Chain
• Summary and Research Challenges
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
The Geography of the Auto Parts
Industry: A ‘Cluster’ at What Scale?
• Canadian industry is part of the Great Lakes/mid-
  West regional auto concentration
• close to 90 percent of all plants and employment in
  the Canadian industry are located in southern Ontario
• within Ontario there are a number of sub-regional
  clusters:
    –   the GTA
    –   Windsor
    –   K-W, Cambridge, Guelph
    –   Niagara Peninsula
    –   London


ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
The Geography of the Automotive
Industry in Canada and the U.S.




ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003   Source: Thomas Klier (2003)
The Great Lakes Auto Cluster




ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003   Source: Thomas Klier (2003)
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
 Performance of the Automotive Parts
 Industry in Canada 1990-2002
• southern Ontario’s prosperity in the 1990s owed more to
  the automotive industry than to the rise of the ‘New
  Economy’

• along with the vehicle assembly industry, the automotive
  parts industry in Canada prospered

• the impressive performance of the industry is reflected in
  almost all key economic indicators


  ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Performance of the Automotive Parts
Industry in Canada 1990-2002

“For two decades, the bland landscape between
Toronto and Windsor has been home to a great
wealth-creation machine: Canada’s auto players
…. An industry that looks grubby and quaintly old-
fashioned from the outside has in reality been a
hotbed of job growth, innovation, and capital
spending. Its success has allowed Canada to
skirt recession as other industries implode.”
                               Eric Reguly, ROB Magazine, May 2003
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                                    Value of Shipments, GDP (Value Added) and Domestic Market, Automotive Parts Industry,
                                                                     Canada, 1990-2002

                              $70,000,000



                              $60,000,000



                              $50,000,000
       CDN dollars (x 1000)




                              $40,000,000



                              $30,000,000



                              $20,000,000



                              $10,000,000



                                      $0
                                            1990   1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002
                                                                                      Year

                                                                   Value of Shipments (current dollars)
                                                                   Domestic Market (shipments+imports-exports)
Source: Statistics Canada                                          GDP (constant 1997$)


            ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                     Export Intensity (exports/shipments) and Import Penetration (imports/domestic market),
                                          Automotive Parts Industry, Canada, 1990-2002

           100.00%

           90.00%

           80.00%

           70.00%

           60.00%
 Percent




           50.00%

           40.00%

           30.00%

           20.00%

           10.00%

             0.00%
                     1990      1991       1992   1993   1994   1995    1996   1997   1998   1999    2000   2001   2002
                                                                       Year
Source: Statistics Canada, special tabulation           Export intensity       Import penetration

              ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                                                                     Total Employment, Average Hourly Wage, and Labour Productivity,
                                                                                Automotive Parts Industry, Canada, 1990-99

                                                                                                                                                 120000
                                                $120

                                                $110
                                                                                                                                                 100000
   Labour Productivity (x1000 constant 1992$)




                                                $100

                                                $90
       Average Hourly Real Wage and




                                                                                                                                                 80000
                                                $80




                                                                                                                                                          Number employed
                                                $70
                                                                                                                                                 60000
                                                $60

                                                $50

                                                $40                                                                                              40000

                                                $30

                                                $20                                                                                              20000

                                                $10

                                                  $0                                                                                             0
                                                       1990   1991      1992     1993      1994          1995   1996     1997      1998   1999
                                                                                                  Year
                                                                            Average Hourly Wage (constant 1992$)
Source: Statistics Canada
                                                                            Value added/Prod. Worker Canada (x1000 constant 1992 CAN$)
                                                                            Total Employment

                                                 ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Performance by Sub-industry in the
1990s

• Plants: plastic parts, engines and engine parts, and
  metal stampings account for over 50% of the total
  number of plants

• Employment: strong growth in employment in the
  metal stamping, plastic parts, and seating/interior trim




ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
One Industry or Eight? Plants and
Employment in 1999
  Sub-industry                       NAICS            Number of     Total
                                     Code              Plants     Employment
  Engine and Parts                     33631             89         10,707
  Electrical/Electronic                33632             50          6,811
  Equipment
  Steering and Suspension              33633             25          5,530
  Components
  Brake Systems                        33634             47          7,512
  Transmission and Power               33635             53         12,554
  Train
  Seating and Interior Trim            33636             56         12,760
  Automotive Metal                     33637             87         18,166
  Stamping
  Other                                33639             137        22,119
  Plastic Parts                       326193              93        17,753
  TOTAL                               3363 +             637        113,912
                                      326193

ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Performance by Sub-industry in the 1990s


• Output: largest increases in value of shipments
  occurred in the engines/engine parts, seating/interior
  trim, transmission and power train, and plastic parts s

• Labour Productivity: largest increases recorded by
  the engines/engine parts, seating/interior trim, and
  transmission and power train sub- industries.




ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                                            Value of Shipments by NAICS SubIndustry, Automotive Parts Industry, Canada, 1992-2002


                               $7,000,000



                               $6,000,000
                                                                                                                           Engine and engine parts

                                                                                                                           Electrical and electronic
                               $5,000,000
 Value of Shipments (x 1000)




                                                                                                                           Steering and suspension

                               $4,000,000                                                                                  Brake system

                                                                                                                           Transmission and power
                               $3,000,000                                                                                  train
                                                                                                                           Seating and interior trim


                               $2,000,000                                                                                  Metal stamping

                                                                                                                           Plastic parts
                               $1,000,000



                                      $0
                                              1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002
                                                                                 Year

Source: Statistics Canada, special tabulation


                                 ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Canada-United States
Competitiveness

• Labour Productivity:
          •  productivity growth in the Canadian parts industry kept pace
            with that in the United States during the 1990s
          • but the gap in labour productivity between the two persisted
          • need to better understand the factors that produce this
            ‘productivity gap’




ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                                    Value Added per Hour by NAICS Subindustry, Automotive Parts Industry, Canada, 1990-99


                       160


                                                                                                                            Engine and engine
                       140
                                                                                                                            parts
                                                                                                                            Electrical and
                       120                                                                                                  electronic
                                                                                                                            Steering and
Value added per hour




                       100                                                                                                  suspension
                                                                                                                            Brake system
                       80
                                                                                                                            Transmission and
                                                                                                                            power train
                       60                                                                                                   Seating and interior
                                                                                                                            trim
                       40                                                                                                   Metal stamping

                                                                                                                            Plastic parts
                       20



                        0
                             1990     1991    1992     1993    1994          1995   1996   1997   1998   1999
                                                                                                                Source: Statistics Canada (CANSIM II)
                                                                      Year



  ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Canada-United States
Competitiveness

• Labour Productivity:
          •  productivity growth in the Canadian parts industry kept pace
            with that in the United States during the 1990s
          • but the gap in labour productivity between the two persisted
          • need to better understand the factors that produce this
            ‘productivity gap’


• Labour Costs:
          • average hourly wage in the automotive parts industry rose
            faster in Canada than in the United States
          • but due to the falling value of the Canadian dollar Canada
            continued to enjoy a labour cost advantage of approximately
            20-25%
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
  The Source of Growth: Low Value of
  the Dollar or Restructuring?

• some suggest that the growth was due to the decline in the
  value of the Canadian Dollar

• but empirical evidence suggests that the growth was linked
  at least as much to the restructuring of the industry

• restructuring involved modernization, rationalization and
  consolidation as well as the continued ‘Canadianization’ of
  the industry


  ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Restructuring of the Industry:
Modernization


• there was a significant wave of new capital
  investment into the industry in the mid 1990s




ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                                                        Capital Expenditures, Automotive Parts Industry, Canada, 1991-2002

                        $2,000,000


                        $1,800,000


                        $1,600,000


                        $1,400,000
CDN Dollars (x 1000)




                        $1,200,000


                        $1,000,000


                          $800,000


                          $600,000


                          $400,000


                          $200,000


                                  $0
                                           1991         1992    1993    1994    1995    1996          1997   1998   1999   2000   2001   2002
                                                                                               Year
                                                                          Capital expenditures, machinery & equipment
                       Source: Statistics Canada, CANSIM II               Capital Expenditures, Construction


                              ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Restructuring of the Industry:
Modernization


• there was a significant wave of new capital
  investment into the industry in the mid 1990s

• the 1998 advanced manufacturing technology
  diffusion survey conducted by Statistics Canada
  revealed a significant take-up of new technology
  within the automotive parts industry



ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
  Characteristics of Plants Using
  Advanced Technologies

• analysis of the differential take-up of new technology by
  established plants vs. new entrant plants and its impact
  on productivity growth reveals:
        • Plant age: plants ‘born’ in the 1990s were more likely to use new
          technologies
        • Plant size: larger plants use new technologies more often
        • Firm Structure: plants owned by multi-plant enterprises are more
          likely to use new technologies than single plant firms
        • Location: plants located on the edge of metropolitan areas use
          new technology more than others
        • Ownership: the degree of technology diffusion is similar between
          Canadian- and foreign-owned plants

  ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Restructuring of the Industry:
Rationalization and Consolidation

• number and proportion of large plants (>200 employees)
  increased significantly during the 1990s

• sharpest decline in the number of plants employing less
  than 100 workers

• by 2000, large plants (>200 employees) still accounted
  for less than 30% of total plants but over 85% of
  shipments and value-added and over 75% of the
  employment
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Distribution of Plants by Size, Auto Parts Industry
(NAICS 3363), Canada: 1990, 1994, 1999


  Size Range of           No. of Plants         No. of Plants           No. of Plants
      Plants                  1990                  1994                    1999


         0-49                    326                  253                       243

        50-99                     98                  87                         61

       100-199                    92                  104                        89

        200 +                     84                  100                       151

        Total                    600                  544                       544

ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003   Source: Statistics Canada: Special Tabulation
                               Percent of Total Value of Shipments by Size of Establishment,
                                        Automotive Parts Industry, Canada, 1990-99

          100.00%

           90.00%

           80.00%

           70.00%

           60.00%
Percent




           50.00%

           40.00%

           30.00%

           20.00%

           10.00%

            0.00%
                     1990          1991          1992      1993   1994          1995       1996   1997    1998   1999
                                                                         Year


  Source: Statistics Canada Special Tabulation          0-49      50-99                100-199     200+


             ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Restructuring of the Industry:
Rationalization and Consolidation

• largest plants had the highest, and fastest growing,
  rates of labour productivity and also the highest average
  hourly earnings

• a marked increase in the proportion of plants owned by
  multi-plant firms

• largest growth in employment and value of shipments
  during the 1990s occurred in plants belonging to multi-
  plant firms
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                      Proportion of Single Plant and Multi Plant Firms, SIC 325,
                                          Canada, 1980-99
             100%



             80%



             60%
Proportion




             40%



             20%



              0%
                1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
                                                               Year

                                              % SINGLE                % MULTI

             ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
  Restructuring of the Industry:
  ‘Canadianization’

• Canadian-owned plants increased in significance with
  regard their share of number of plants, employment, and
  value of shipments

• most of the employment growth in the industry post-1990
  came from Canadian-owned plants




   ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                                 Total Employment, Automotive Parts Industry, Canada, 1980-99

                       100%

                       80%

   Percent             60%
                                                                                                                                                                                                       % Foreign-owned Plants
                                                                                                                                                                                                       % Canadian-owned Plants
                       40%

                       20%

                        0%
                              1980
                                     1981
                                             1982
                                                     1983
                                                              1984
                                                                       1985
                                                                                1986
                                                                                          1987
                                                                                                 1988
                                                                                                            1989
                                                                                                                      1990
                                                                                                                                1991
                                                                                                                                         1992
                                                                                                                                                  1993
                                                                                                                                                          1994
                                                                                                                                                                  1995
                                                                                                                                                                         1996
                                                                                                                                                                                1997
                                                                                                                                                                                       1998
                                                                                                                                                                                                1999
                                                                                                                                                                                              Source: Statistics Canada, Micro-
                                                                                                            Year
                                                                                                                                                                                              economic Analysis Division


                          Total Value of Shipments, Automotive Parts Industry, Canada, 1980-99
                         100%

                          80%
             Percent




                          60%
                                                                                                                                                                                                        Foreign-owned Plants

                          40%                                                                                                                                                                           Canadian-owned Plants


                          20%

                              0%
                                     1980
                                            1981
                                                    1982
                                                            1983
                                                                     1984
                                                                              1985
                                                                                       1986
                                                                                              1987
                                                                                                     1988
                                                                                                               1989
                                                                                                                         1990
                                                                                                                                  1991
                                                                                                                                           1992
                                                                                                                                                   1993
                                                                                                                                                           1994
                                                                                                                                                                  1995
                                                                                                                                                                         1996
                                                                                                                                                                                1997
                                                                                                                                                                                       1998
                                                                                                                                                                                               1999
                                                                                                                                                                                                 Source: Statistics Canada, Micro-
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                                        Year
                                                                                                                                                                                                 economic Analysis Division
  Restructuring of the Industry:
  ‘Canadianization’

• compared to Canadian-owned plants, on average foreign-
  owned plants:

       •   have significantly larger workforces
       •   are much more likely to belong to a multi-plant firm
       •   have higher levels of labour productivity
       •   have higher wage rates
       •   have lower wage:total cost ratios




  ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Segmented Structure of the Industry

Globally Competitive Canadian Companies - account for
about one-third of total employment and output

Plants Owned by Foreign Globally Competitive
Component Manufacturers - account for approximately
50 percent of employment and output

The Rest - the remaining 20 percent of employment and
output is accounted for by a large number of small
Canadian owned plants and a small number of foreign
owned plants in transition
                                                      Source: Pilorusso (2002)
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Challenges

• While the Canadian parts industry did well through
  the 1990s, it currently faces these challenges:

    –   the demise of the Auto Pact
    –   the need to increase its share of transplant OEM market
    –   the shifting pattern of assembly investment in North America
    –   the competitive pressures generated by OEM focus on
        streamlining the supply chain




ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Restructuring the Supply Chain

• In the 1990s, lean production focused on
  reducing costs within plants
    – work reorganization
    – increased out-sourcing
• By the late 1990s, focus had shifted to
  achieving cost reductions across the supply
  chain
    – culling suppliers
    – cutting time and cost of managing the supply
      chain
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Restructuring & Consolidating the
Supplier Base
• OEM criteria for retaining Tier 1 status
    –   price
    –   quality
    –   ability to deliver
    –   technological capability
    –   geographical reach
    –   ability to manage Tier 2 suppliers
• reduction in number of Tier 2 suppliers
• increased modular production
• continued pressure to cut component cost
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Restructuring the Supplier Base (cont.)

• Tier 1 cull of lower tier suppliers following
  criteria similar to those by OEMs
• significant merger and acquisition activity
• limits to culling
    – OEM demands for price reductions
    – minimum number of suppliers surviving
• streamlining and expanding supply chain
  interactions


ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
E-Business and the Supply Chain

• electronic data interchange

• online reverse auctions

• management portals for OEMs

• paperless communication/real time tracking


ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Supplier Portal - Covisint

Mission statement:
“Covisint is the vehicle to connect the
  automotive industry in a virtual environment
  to bring speed to decision-making, eliminate
  waste and reduce costs while supporting
  common business processes between
  manufacturers and their supply chain.”
                                           Covisint Corporate Backgrounder
                                           www.covisint.com


ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Supplier portal - Covisint

Vision statement:
“ Covisint is building an online environment enabling
   individual enterprises and the automotive industry to
   achieve the following goals:
•   12-18 month vehicle development cycle
•   Compressed order-to-delivery cycles
•   Greater asset efficiency and utilization
•   Higher profitability with direct impact to the bottom line
•   More integrated supply chain planning
•   Reduced business process variability”
                                     Covisint Corporate Backgrounder
                                     www.covisint.com
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Supplier portals - adoption and
impacts
• network externalities
• rapid adoption
• improved competitiveness for firms that can
  adapt
• further culling of suppliers unable/unwilling to
  adopt this system of supply chain
  management



ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Summary

• parts industry prospered in the 1990s
• remained competitive relative to the U.S.
• rationalization and consolidation had major
  impact on structure of the industry
• significant growth of Canadian owned plants
• shift in cost cutting from within firms to supply
  chain
• continued pressure to cut costs having major
  impact on lower tier suppliers
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
Research Challenges

• the size and heterogeneity of the industry
  pose a challenge for interviewing

• what to focus on? – sub-industry or sub-
  region?

• focus will be on two sub-regional “clusters”
          • Windsor
          • either Kitchener-Waterloo-Guelph or GTA
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
    Acknowledgments:
               Funding for some of the research reported in this
               presentation was provided by:

                    Centre for Automotive Materials and Manufacturing
                    (CAMM)

                    NCE Auto21 (Network of Centres of Excellence for
                    the Automobile of the 21st. Century).


               Thanks to Dr. John Baldwin (Director, Micro-economic
               Analysis Division, Statistics Canada) for help with some of
               the data analysis.
ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                                Comparison of Labour Productivity, Automotive Parts Industry, Canada and United States: 1990-1999
                          140                                                                                                           2



                          120




                                                                                                                                              Ratio Canada/U.S. Labour Productivity
                                                                                                                                        1.5
                          100
 (x1000 constant 1992$)
Value Added Per Worker




                                                                                                                                                           (Adjusted)
                          80

                                                                                                                                        1

                          60



                          40
                                                                                                                                        0.5


                          20



                           0                                                                                                            0
                                1990       1991      1992        1993        1994          1995        1996        1997   1998   1999
                                                                                    Year
                                                         Value added/Prod. Worker Canada (x1000 constant 1992 CAN$)
                                                         Value added/Prod. Worker U.S. (x1000 constant 1992 US$)
                                                         Ratio Canada/U.S. Labour Productivity (Adjusted)



                          ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                                        Average Hourly Earnings, Automotive Parts Industry, Canada and United States, 1990-2001


                              25




                              20
Average Hourly Earnings ($)




                              15




                              10




                              5




                              0
                                     1990      1991      1992      1993     1994      1995          1996   1997     1998      1999      2000
                                                                                             Year
                                        US Average Hourly Wage in US$     Canada Average Hourly Wage in CAN$      Canada Average Hourly Wage in US$


                                   ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                              Canadian/U.S. Dollar Exchange Rate and Value of Shipments, Automotive Parts Industry,
                                                               Canada, 1990-2002


                 1                                                                                                  $35,000,000


                0.9
                                                                                                                    $30,000,000
                0.8




                                                                                                                                  Value of shipments (x 1000) constant CDN
                0.7                                                                                                 $25,000,000


                0.6
Exchange rate




                                                                                                                    $20,000,000

                0.5




                                                                                                                                                   1992$
                                                                                                                    $15,000,000
                0.4

                0.3                                                                                                 $10,000,000

                0.2
                                                                                                                    $5,000,000
                0.1

                 0                                                                                                  $0
                       1990     1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001   2002
                                                                   Year
                                                        Exchange Rate - Can to US Dollar
        Source: Statistics Canada                       Value of Shipments (constant 1992$)

                      ISRN Annual Meeting, Ottawa, April 30 - May 2, 2003
                                                 Hourly Wage -"Profit" Trends, Automotive Parts Industry, Canada, 1990-99
                                                      (Wages + "Profits" = Value Added per Hour in Constant 1992$)
                        $70.00



                        $60.00



                        $50.00
CDN $ (constant 1992)




                        $40.00



                        $30.00



                        $20.00



                        $10.00



                         $0.00
                                 1990     1991         1992        1993         1994          1995         1996         1997   1998   1999
                                                                                       Year
                                                              "Profits" (Value Added per Hour - Average Hourly Real Wage)
                                                         April Real May 2, 2003
                            ISRN Annual Meeting, Ottawa,Average30 - Hourly Wage

				
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