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The Auto Industry
and the Future of the
Ontario Economy
Submission to the Ontario Pre-Budget Hearings
Toronto, February 27 2002
by Basil “Buzz” Hargrove, President
and Jim Stanford, Economist
Introduction: A Turning Point
Few would deny that the auto industry is the most important sector of Ontario’s economy.
During the 1990s, as the auto industry enjoyed several years of unprecedented success and prosperity,
Ontario’s economy expanded in step. Thanks to a string of major new investments in the 1990s in both
auto assembly and parts (most of which were announced long before the Conservative provincial
government began cutting taxes and gutting provincial social programs), Canada vaulted into a role of
global leadership–as arguably the world’s most successful auto producer. About 35,000 new jobs
were added in the industry in the 1990s, many plants were bursting at the seams, the quality of our
production was second-to-none, and our exports were selling like hotcakes (especially in the U.S.
market). The 1990s were a tough decade for Canada’s economy as a whole, but the auto industry
provided a rare and much-appreciated bright light. The spin-off benefits of the auto industry’s
expansion trickled down throughout the provincial economy–boosting our productivity, our trade
balance, and our standard of
living. From Bad to Worse
In 1999, the Canadian Extinct
auto industry assembled a
Jan. 2001 Daimler-Chrysler restructures, announces lay-off
record 3.1 million new vehicles, of third shift at Bramalea, second shift at Pillete
auto employment (assembly and Road, and line-speed reduction at Windsor; 3000
parts) reached a record 150,000 Canadian jobs lost.
workers, and our auto trade Jan. 2001 Alloy Wheels of Barrie goes bankrupt; 500 jobs
lost.
surplus with the U.S. swelled to Sept. 2001 GM announces planned closure of Boisbriand
a stunning $28 billion. Well over plant in Quebec, Sept. 2002; 1500 job lost.
95% of this industrial success Oct. 2001 A.G. Simpson files for bankruptcy protection;
story is based in Ontario. This 2000 jobs at risk.
Dec. 2001 Johnson Controls closes Stratford plant; 500
growth translated into concrete
jobs lost.
gains for auto workers and their Jan. 2002 Ford Canada announces plan to close Ontario
communities. For example, in truck plant, reduce line speed at Oakville minivan
the autumn of 1999 the CAW plant; over 1500 jobs lost.
Feb. 2002 GM announces 900 more layoffs from St.
signed a three-year pattern
Catharines parts complex; active employment
agreement with the Big Three falls to 2800 from 9000 in 1990.
automakers in Canada. This
agreement was probably the Endangered
best major labour contract
C Daimler-Chrysler Pillete Rd. van plant has no product
negotiated in Canada in a after 2003 model year; 1200 jobs at risk.
generation: containing significant C Budd Canada frame plant in Kitchener faces severe
real wage gains, very important financial difficulty; 1600 jobs at risk.
improvements in pension C Many other independent parts producers face closure or
bankruptcy.
benefits, and innovative progress
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in other benefit programs (such as child care and family college tuition rebates). It seemed as if things
couldn’t get any better for this industry.
But in retrospect, 1999 was a historical turning point for Ontario’s auto industry–and
unfortunately it’s been pretty much all downhill since then. A combination of factors has contributed to
this sudden reversal of fortune. The North American economy began to slow down noticeably in 2000,
due to rising interest rates and the collapse of high-technology stock markets. This weakened the
demand for new vehicles. As it turned out, automakers were able to maintain sales levels despite the
economic slowdown, but only by offering unprecedented consumer incentives–like the 0% financing
schemes which were in place in late 2001 and early 2002. The economy was further unsettled by the
fall-out from the September 11 terrorist attacks, which spooked consumers and caused temporary
disruption in auto production in many locations (due to delays at the Canada-U.S. border and other
logistical problems). Although not especially severe compared to previous recessions, the economic
slowdown of 2001-2002 was enough to highlight underlying financial difficulties at several
companies–including the Big Three assemblers, and numerous independent auto parts producers.
Daimler-Chrysler announced a major continent-wide restructuring plan in January 2001, resulting in
tens of thousands of layoffs, followed by Ford with a similar announcement a year later. Some
independent parts producers have already collapsed, others are in bankruptcy protection, and many
others are facing do-or-die financial pressures. Ontario’s heavy truck industry, which had shared in the
success of the broader automotive sector in the 1990s, faced an even worse crisis; up to one-half of the
industry has been shut down.
Through it all, government officials have seemed passive and confused, not knowing what if
anything they can do to protect jobs and nurture the industry’s long-term recovery. The federal
government has watched from a distance, repeating the hopeful refrain that since Canada’s economic
fundamentals are strong, the industry will eventually recover. Both the past and the current federal
Industry Ministers were clearly distracted by their own personal political ambitions, from the immediate
task of shepherding one of Canada’s most important industries. At the provincial level, meanwhile, the
present Ontario government has elevated inaction into a matter of principle. The only role for
government, the Conservative government claims, is to get the economic conditions right (with balanced
budgets, lower taxes, and anti-union labour laws). Everything else should then be left up to private
corporations.
Sadly, things are almost certainly going to get worse before they get better, and this government
inaction isn’t helping matters. By 2003, based on current trends and announcements that have already
been made by major companies, industry will have contracted by up to one-third. It is likely that
Canada could lose five complete shifts of vehicle assembly production (see box: From Bad to Worse),
on top of production slowdowns and layoffs at other facilities. Employment in the assembly sector is
already off by several thousand from its 1999 peak, and several thousand more jobs could disappear in
the next two years with scheduled closures and line speed reductions. Most independent auto parts
producers are facing acute financial distress, and the layoffs in the parts sector could ultimately be even
worse than in the assembly sector. Total vehicle assembly in Canada fell to just over 2.5 million units in
2001–a 17% decline from the record level of 1999. It could decline by another 400,000 units (or 15
percent) by 2003. In the late 1990s, the Canadian industry routinely produced over twice as many
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assembled vehicles as were sold here (for an assembly-to-sales ratio of 2). That ratio fell to 1.6 in
2001, and will fall further to 1.4 by 2003. Meanwhile, Mexico’s rapidly-growing auto industry is likely
to surpass Canada’s in total output within five years. As recently as 1995, Canada assembled 2.5
times as many finished vehicles as Mexico.
Perhaps the good times which the industry enjoyed in the 1990s promoted a sense of
complacency on the part of industry, government, and community leaders. We had the Auto Pact,
which had played so important a role in allowing the Canadian industry to reach a critical mass (but
which was increasingly irrelevant to the incremental investment decisions of automakers). The industry
was growing by leaps and bounds. If it ain’t broke, why fix it? Unfortunately, any industry that is
wholly dependent on maintaining the favour of private (mostly foreign) corporations, will never provide
a secure or reliable foundation for the families and communities which depend on it. When private
investment is firing on all cylinders, as was the case in Canada’s auto industry over the past decade, it
may seem safe to turn over all decision-making authority to private investors. But inevitably the mood
of the private sector changes, and then it becomes clear that a nation can’t put all its eggs in the
business basket. We need other economic tools to stimulate, direct, and supplement the actions of
private corporations.
Our auto industry is now facing one of those moments. In just a couple of painful years, the
impressive gains of the 1990s will have been largely wiped out. In retrospect, it is amazing how quickly
the economic tides turned against Canada’s once-world-beating auto industry–and equally amazing
how little our virtuous competitiveness (low costs, high productivity, falling taxes) protected us when the
chips came tumbling down. Thus the current crisis of the industry presents an opportunity, along with
the obvious and daunting challenges: we have an opportunity to develop and implement a new policy
framework, to replace our long-standing reliance on the Auto Pact, and to guide our industry into an
uncertain future.
Part I: How Low Can it Go?
The current downturn in Canada’s auto industry is without doubt its most severe in the past two
decades–and its full effect will not be felt for at least another year or two. By the end of 2001, auto
industry employment (including both assembly and parts production) was down by over 12,000 jobs
from the peak levels experienced in 1999-2000. The lay-off of four full shifts of assembly production
has already been implemented or announced: the third shift at Daimler-Chrysler’s Bramalea car plant,
the second shift at its Pillette Road maxivan plant (both of which went into effect in June 2001), the
closure of General Motors’ Boisbriand plant in Quebec (scheduled for September 2002), and the
planned closure of Ford’s Ontario truck plant in Oakville (at an indeterminate date). The last shift at
the Pillette Road plant will also be laid-off if no new product is located in the plant after 2003.
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Counting the Losses
Auto industry employment peaked in the late
1990s, at about 150,000 workers (55,000 in
assembly, and 95,000 in parts– including the in-
house parts operations of the Big Three). By
the end of 2001, auto employment had already
declined by about 12,000 jobs (half in assembly,
and half in parts).
Unfortunately, the worst is yet to come–because
many of the layoffs and plant closures
announced in recent months have not yet taken
effect.
Hence it is likely that by 2003 that Canada will have lost five full shifts of assembly production,
out of the 24 assembly shifts which were operating in 2000. Finished vehicle assembly declined by
17% from the record 3.1 million in 1999, to 2.5 million in 2001. It could decline further to 2.2 million
units in 2003 (based on announced closures and anticipated demand conditions)–30 percent lower than
the 1999 peak.
In short, according to both employment and final output, it is likely that Canada’s auto assembly
industry will have shrunk by up to one-third, comparing 2003 to its 1999 peak. For historical
comparison, Canadian auto assembly barely declined at all during the recession of 1991-92, by less
than 100,000 units (since growing exports to the U.S. market supported continuing production).
Output declined more sharply during the recession of 1981-82 (by about one-third between 1978 and
1982), but then fully bounced back to its pre-recession peak by 1984. The current downturn will be as
deep as the 1981-82 crisis, and will probably be much longer-lasting. At 2.2 million units, the industry
would experience its smallest assembly output since 1992. So the current contraction is likely to erase
most of the gains which the industry made during the 1990s. In the wake of the long auto expansion of
the 1990s, Ontario’s economy is more dependent on auto than it has ever been. So we are now facing
the flip side of the coin that worked to our advantage in the 1990s: a serious and lasting decline in
Ontario’s most important industry will certainly exact a serious toll on the course of economic recovery
over the next 5 years.
4
Auto parts production will decline in lock step with finished vehicle assembly. Given the
increasingly tight geographic links between parts suppliers and vehicle assemblers, the result of just-in-
time inventory control systems and other innovations, Canadian parts producers are heavily dependent
on Canadian assembly operations. Already, by the end of 2001, employment in the parts sector had
fallen by over 6,000 jobs from its 2000 peak. Numerous firms were in financial distress, and the
number of bankruptcies and plant closures is likely to increase dramatically as the slowdown in the
assembly sector persists. Here, too, the industry risks giving back much of the growth which it enjoyed
during the 1990s.
An amazing (and worrisome) aspect to the decline in Canada’s auto industry during 2001 was
that it occurred despite a historically strong level of demand for new cars and trucks in the North
American economy. Even though the continental economy slowed notably as the year went on,
experiencing a short shallow “mini-recession” in the second half of 2001, new auto sales remained very
strong. In fact, Canadian vehicle sales reached their highest level ever in 2001, 1.6 million units. U.S.
sales totaled 17.2 million units for the year, the second-best year ever. Consumers kept buying, despite
weakening economic and labour market conditions, thanks in large part to generous incentives from the
automakers (led by the Big Three, with their ambitious but expensive 0% financing program). While
these incentives were successful in maintaining sales volumes in the short run (and helped the
automakers reduce their inventories to historically low levels by the end of 2001), analysts are virtually
unanimous that they will have a significant negative effect on future industry sales. Incentive programs
boost short-term sales by encouraging consumers to accelerate new vehicle purchases that they would
otherwise make in subsequent months or years. When the incentives are removed, the industry faces
an inevitable “hangover”–with demand depressed below levels which would otherwise prevail.
The after-effects of the 2001 incentives, combined with continuing uncertainty in the broader
economy and labour market, suggest that North American new vehicle sales will fall significantly below
2001 levels over the next 2 or 3 years. Some analysts project a decline in continental sales of as much
as 15 percent (or 3 million units per year) over the next two years. That decline is equivalent to the
output of 12 standard two-shift assembly plants. So while the downturn in Canadian assembly and
employment in the past two years has undoubtedly been painful, it could have been much worse if
vehicle sales had not been so surprisingly strong, despite the North American economic slowdown.
And unfortunately, things almost certainly will get worse, once current generous incentives are pulled
back, and sales volumes begin to decline in earnest. By early 2002 it appeared as if the Canadian and
U.S. economies would be able to narrowly avoid an all-out recession in the economy, commencing
slow growth once again. But if the economy does not rebound so nicely, and enters an actual
recession, then demand conditions in the North American auto market will be even worse.
If North American vehicle sales remained so strong in 2001, why was the Canadian auto
industry suffering so badly? The answer to this question reflects the deep structural issues facing
Canada’s auto industry. Virtually all of Canada’s auto production is sold to consumers either here in
Canada (which absorbed about 15% of our output in 2001) or in the U.S. market (where we sold the
remaining 85% of our output). Canadian vehicle output can thus be described as the product of the
5
total level of sales in those two markets, and the Canadian share of sales in both markets. Since total
vehicle sales were relatively strong, it was a decline in the Canadian market share that drove the decline
in Canadian output. And that decline in market share can in turn be decomposed into two factors:
1. A decline in the market share of the companies which produce vehicles in Canada (particularly
the Big Three producers); and
2. A decline in Canada’s share of the total production of those companies.
The overall market share of the Big Three automakers has been under pressure for years, and it
declined further in 2001–to a record low of 64.7% of the combined North American market. Since the
Big Three account for three-quarters of Canadian vehicle assembly, their success (or lack of it) will
determine the overall pattern of the Canadian assembly sector. Several factors have contributed to the
erosion of the Big Three market share in recent years, including:
C exchange rates: The lower value for the Japanese and European currencies against the U.S.
dollar, makes North American imports from those regions more competitive.
C more competition in light trucks: For years, the Big Three were able to withstand the
erosion of their market share in passenger cars (which is now less than 50% in North America)
by increasing their reliance on sales of light trucks (including pickups, minivans, and SUVs).
The Big Three traditionally dominated the light truck segments, which became more important
in the total new vehicle market (reaching 50% of all light vehicle sales by the mid-1990s). In
recent years, however, light trucks have declined as a share of total sales. More importantly,
offshore manufacturers have challenged the Big Three’s dominance of these segments with
competitive new models. For both reasons, the Big Three can no longer rely on pickups,
minivans, and SUVs to “hide” their weakening position in passenger cars.
C model launches: The Big Three have worked hard to improve the quality and appeal of their
vehicles, and to speed up their new model launches. Yet even though they earned
unprecedented global profits during the booming 1990s (and hence had ample funds to devote
to new products, if they chose to do so), the Big Three still lag their Japanese and European
competitors in the number of new product launches.
C newly industrializing exporters: Under the doctrine of globalization, developing countries
are increasingly turning to exports as the sole engine of economic growth. Two developing
economies in particular have made major inroads in the North American market in recent years:
Korea and Mexico. Both countries have experienced difficult economic circumstances–due to
foreign exchange panics, international debt, and other factors. And both have adopted a single-
minded focus on boosting exports, particularly auto exports, to improve their economic
prospects.
6
No Silver Lining But in no way can the success of those two
Japanese-owned plants offset the generally
Some analysts argue that the current downturn gloomy state of the overall industry (including the
in the auto industry is mainly a problem of the financial crisis faced by independent parts
Big Three producers (GM, Ford, and Daimler- producers). The Honda and Toyota facilities
Chrysler), who have been hardest-hit by employ about 6,000 workers–barely one-tenth
declining sales and financial difficulties. They the combined Canadian employment of the Big
point to the Canadian assembly facilities Three, even after recent layoffs. Canada’s share
operated by Honda and Toyota as a “bright spot” of total North American production at “transplant”
in the current outlook. facilities is smaller than its share of Big Three
production; and this share has actually declined
in recent years (due to the construction of new
plants in Mexico and the southern U.S.). Honda
and Toyota have not invested in any high-value
parts operations (such as engine or transmission
manufacturing) in Canada. Indeed, General
Motors has laid-off more production workers from
its engine and parts operations in St.
Catharines, Ont. in the past decade, than Toyota
and Honda have hired in Canada in their entire
history. Therefore, protecting jobs at existing
plants will be more important to the industry than
trying to win high-profile new investments from
Any investments in Canada’s auto industry are other companies.
obviously much appreciated, and the growth of
the Honda and Toyota operations have So while the Canadian operations of these two
contributed to the diversification and productivity companies are welcome and appreciated, the
of Canada’s auto industry. state of our national industry is still primarily
dependent on the health of Big Three facilities in
Canada.
At the same time as the Big Three share of the total North American market has continued to
decline, Canada’s share of the Big Three’s total North American production has also
declined–reversing earlier advances in that share during the 1990s. Some of this decline reflects the
growing importance of Mexico as a site for new investment and new models. Some reflects a
consolidation of Big Three production in U.S. facilities (such as Ford’s decision to locate its F-series
pickup production almost exclusively in U.S. plants). And some of the decline reflects pure unfortunate
luck-of-the-draw: some vehicle models become hot sellers (resulting in full-capacity production and
sometimes additional shifts or incremental investments), and some models flunk out. During the mid-
1990s it seemed as if most of the specific models which were assigned to Canadian facilities enjoyed
strong customer support, and this helped to reinforce Canada’s strong production and productivity
records–which in turn helped to attract more new investment. In a virtuous circle, success bred more
success. More recently, however, sales of the models assigned to Canadian plants have flagged. For
example, the market popularity of Chrysler and Ford minivans was an important factor in strong
Canadian assembly output over the last decade; both brands are now struggling in the face of market
saturation and offshore competition. The sagging market popularity of “muscle cars” doomed the
Boisbriand plant, no matter how impressive its productivity and quality numbers became. Daimler-
7
Chrysler added a third shift to its Bramalea car plant in 1998 on hopes of strong sales for its stylish LH
sedan, but those sales proved to be unsustainable and the third shift lasted only 3 years.
For all of these reasons, Canada’s share of total North American Big Three production
declined from 17.9% in 1999 to 16.3% in 2001. This decline in our share of Big Three output
translated into reduced Canadian production of about 200,000 units. (Interestingly, our share of total
“transplant” production in North America also declined slightly during this period, indicating that even
with offshore-based producers Canada faces a challenge to maintain its share of investment and
production.) At the same time, the Big Three’s market share itself declined by over 5 points, from
68.9% to 63.8%. This reduction in the Big Three’s market share translated (given our share of Big
Three output) into a further reduction in Canadian production of about 300,000 units. Thus, these two
factors–the declining market share of the Big Three, and Canada’s declining share of total Big Three
production–together account for the decline in Canadian output of some 500,000 units between 1999
and 2001. Canadian production by Honda and Toyota was stable during this period. If North
American vehicle sales decline further in the next 2-3 years (as expected), once current sales incentives
are rolled back, and/or if the Big Three’s share of the total market continues to erode, then the numbers
will likely get worse for Canada’s auto industry before they get better.
Part II: What’s So Special About Auto?
Why should Ontarians, and the Industry Snapshot
Ontario government, be concerned
Canada’s auto industry is a crucial source of employment,
about this worrisome outlook for the value-added, and exports. The success of the industry in the
auto industry? Why should the 1990s was one of the most important drivers for Canada’s
thousands of auto layoffs announced in overall economic progress that decade. Likewise, the
industry’s current downturn will undermine the future growth
recent months elicit any particular
of the whole national economy.
concern, given the layoffs in other
industries and regions? Assembly Parts Total
Sector Sector Auto
The auto industry directly
Employment 55,000 95,000 150,000
accounts for close to 5% of Ontario’s Shipments $70 billion $34 billion $104 billion
GDP, and about 150,000 jobs (see Value-Added $8 billion $11 billion $19 billion
box). But apart from its direct Payrolls $3.5 billion $5.5 billion $9 billion
importance in the province’s GDP and Exports $65 billion $26 billion $91 billion
(2000 data)
employment numbers, there are several
other unique features of Ontario’s auto The auto sector generated a positive trade balance (exports
industry that demand high priority greater than imports) of $15.5 billion in 2000. That accounted
attention from our economic policy- for 55% of Canada’s overall merchandise trade surplus.
8
makers. Because of these features, all Ontarians have a stake in the auto industry’s future success, not
just those employed in auto factories. These features include:
C trade-intensity: The auto industry is Canada’s most important export industry, accounting for
close to 30% of our total merchandise exports in 2000. It is also one of the few high-value,
high-technology industries in which Canada does well in the global marketplace. Our $15
billion trade surplus in automotive products in 2000, accounted for a shocking 55% of our
overall merchandise trade surplus that year. In other words, without the auto industry our trade
surplus would have been less than half as large as it was. Industries which are heavily engaged
in foreign trade, carry a disproportionate importance in national economic affairs. A country’s
overall economy can be constrained by a lack of success or competitiveness in global markets,
so an industry which contributes to a positive trade performance can expand a country’s overall
output and employment by more than its own direct activities. We are not interested in trade
success for its own sake, nor is our goal to run up large overall trade surpluses (with resulting
consequences for workers in other countries). But since the ability to export is vital to our
collective ability to finance needed imports, we should all take an interest in the future viability
of our most important export industry.
C technology: The so-called “information economy” generated a lot of media hype in recent
years (although this hype has quieted down since the collapse of dot-com stocks). Many
people assume the “information economy” refers to Internet companies and other computer
industries. But to really see the information economy at work, just lift up the hood of your car:
the new technology reflected in modern automobiles, as well as in the processes used to
produce those vehicles, will ultimately be far more important to our standard of living and our
economic progress, than Internet booksellers and other high-profile but fleeting symbols of a
new technological era. Auto assembly uses more applied robotics than any other major
industrial sector in Canada, and the hands-on experience gained in these applications provides
an important boost to our overall industrial and technological capabilities.
9
Productivity: A Success Story
C productivity: Thanks in part to
heavy auto investments in new The auto industry has one of Canada’s best records
technologies, Canada’s auto industry of productivity growth. Productivity is a measure of
was a leader in our overall national an industry’s efficiency; one simple way to measure
productivity is how much GDP (or value-added) an
productivity growth over the past industry produces per worker. By this standard, the
decade (see box: A Success Story). auto industry improved its productivity by 75 percent
Many concerns have been expressed in the 1990s (both in assembly, and in parts)–five
about Canada’s relatively sluggish times faster than the average of other industries in
Canada. And the auto industry is a rare example of
productivity growth–since rising a Canadian industry which is more productive than
productivity, ultimately, is essential its U.S. counterpart.
for continued improvements in
incomes and in our overall standard
of living. The auto industry has made
a disproportionate contribution to
Canadian productivity growth;
hence, measures which stimulate
more output and employment in this
industry will help to pull up overall
productivity levels. (Of course,
productivity growth is a twin-edged
sword, in that higher productivity
also implies less demand for labour
at any given level of output; that’s
why the CAW has campaigned to
Productivity has declined somewhat during the
reduce average yearly and lifetime
current slowdown; this is common when an industry
working hours in the auto industry, contracts (because companies cannot use their
so that productivity growth is facilities to maximum efficiency).
reflected in more leisure time–not
just declining employment levels.)
C spin-off job-creation: The 150,000 Ontarians employed in auto assembly and parts
production facilities are not the only ones who owe their livelihoods to the auto industry. The
auto industry has strong linkages through other sectors of the provincial and national economy.
These linkages imply that hundreds of thousands of other jobs also depend on the auto
industry’s continued viability. These spin-off job-creation linkages are experienced in two
major ways. First, the auto industry has strong “upstream” linkages to the various industries
which supply auto manufacturers with inputs, parts, supplies, materials, and services. It is
estimated conservatively that each job in auto production (assembly and parts) likely supports
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another two jobs in the various supply industries which count on the auto industry as a major
customer–including steel and other primary metals, metal fabrication, plastic and rubber
products, tooling, maintenance, utilities, and an infinite variety of business services. At the same
time, the auto industry also generates powerful “downstream” economic linkages, based on
the consumer spending power of those involved in the auto industry. Autoworkers in the
assembly and parts sectors take home over $9 billion per year in wages and salaries, and they
spend most of that on goods and services produced right here in Canada (including the public
services which they finance through their tax payments). That spending–on housing, personal
and recreational services, public services, and manufactured consumer goods–in turn supports
hundreds of thousands of additional jobs throughout the national economy. Ontario enjoys by
far the strongest direct and indirect
job-creation effects from Canadian
Footing the Bill automotive production and export.
The auto industry is not only an essential part of Canada’s
For all these reasons, the
overall economy. It is also a crucial source of government
revenues. The Ontario government collects billions of dollars importance of the auto industry
in taxes each year as a result of the auto industry’s activities: extends well beyond auto-
dependent communities like
Income taxes paid by direct auto workers $1 billion
Windsor or Oshawa.
PST collected on auto sales $1.5 billion
Corporate income taxes from auto companies $100 million Manufacturing industries across
Income and sales taxes on spin-off activity $1 billion + Ontario, and across Canada,
depend on the demand generated
Some politicians claim that government “can’t afford” to spend
by this industry. A wide range of
money on programs that would benefit the industry. But if the
industry continues to decline, governments will lose this consumer industries also counts on
lucrative source of revenues, and be substantially poorer as a the spending patterns of
result. In reality, the Ontario government can’t afford not to autoworkers. And government,
help the auto industry. And whatever money governments
too, has a big financial stake in the
allocate to investment and technology programs in the
industry, will be more than recouped in continued tax continued well-being of the auto
industry–through income taxes and
other revenues collected from its
various stakeholders (see box:
Footing the Bill).
Analysts of virtually any political stripe will recognize the economic importance of the auto
industry, and will admit to the crucial role it played in fostering Ontario’s overall economic growth
during the last decade. Yet there is still controversy over the basic idea that government should play an
active role in trying to foster and nurture the industry–that is, controversy over whether or not we even
need an active auto “policy.” True believers in the supposed “efficiency” of private business and free
markets still argue that, despite the overwhelming importance of the auto industry, government should
nevertheless keep its hands out of the affairs of private business. According to this view, government
should simply focus on making the general economic environment as favourable to private business as
11
possible. Then we can all sit back and wait for the promised investments to come flooding into the
country. The policies which, in theory, will make Ontario more competitive and hence more appealing
to investors would include lower taxes (especially lower corporate taxes), anti-union labour laws,
weaker regulations on business, and conservative budgetary and interest-rate policies.
At the same time as these pro-business policies were being imposed, there was a parallel trend
away from more active industrial development policies, through which government attempted to
stimulate or nurture investment and development in key industrial sectors. Measures and regulations
which encouraged (or in some cases required) companies to invest here were dismantled. Direct
investments by Crown corporations and other government agencies were scaled back. As an end
result, Canada’s overall economy has been left more reliant on investment decisions by private
corporations than at any previous point in our national history.
Free trade has played a particularly important role in the demise of Canadian industrial policy in
recent years. In sector after sector, the vision of both government and industry leaders for how to
develop crucial industries in Canada can be boiled down into a few short words: “access to the U.S.
market.” The assumption is made that since Canadian factories are increasingly oriented toward U.S.
customers, and our free trade relationships with the U.S. provide us with guaranteed access to those
customers (in theory, anyway–but not always in practice, as the ongoing softwood lumber dispute
proves), then companies anxious to serve the booming U.S. market will come flocking to Canada. For
decades the Auto Pact defined Canadian industrial policy toward the auto industry; but that reliance on
a managed trade agreement was eventually replaced with a simplistic faith in the virtues of free trade.
Unfortunately, there is nothing unique about Canada, in terms of having access to the U.S. market. If
companies are primarily concerned with access to U.S. customers, they can achieve the same goal by
investing in low-cost Mexico, or more obviously by locating in the U.S. itself. The free-traders have
forgotten that companies need some other reason to come to Canada. Any industrial strategy based
solely on offering access to U.S. markets, will always relegate Canada to second-best status: we may
have excellent access to U.S. markets, but it can never be as good as companies which are actually
based there. In contrast to the Auto Pact, free trade has not worked as an industrial development
strategy for the auto industry–nor for many other crucial sectors. As more and more auto investment
drifts southward to Mexico, and as our auto trade deficit with Mexico continues to widen, it is
becoming increasingly apparent that the NAFTA is a barrier to
12
the future health of Canada’s auto
The Limits to Competitiveness
industry–not an asset.
The Conservative government in Ontario and other
In short, Canada’s economy has been pro-business politicians argue that if we cut taxes,
re-made over the last two decades, into a cut labour costs, and simply improve our overall
competitiveness, business will come flocking to
lean, mean, business-friendly regime. Virtually Canada with new investment and jobs. This philoso-
all of the important structural changes phy has never been convincing: no matter how cheap
demanded by business have been you make yourself, business can always find
implemented–ranging from low inflation, to someone to work for even cheaper somewhere else
in the world.
deregulation and privatization, to free trade, to
smaller government, to lower taxes. Canada A crystal clear case study in the limits of
is one of the most business-friendly countries competitiveness was provided recently by Ford’s
in the entire world, even in the eyes of announcement that it wants to close the Ontario
Truck Plant in Oakville:
conservative critics (like the right-wing Fraser
Institute in British Columbia). According to C Of the 5 Ford plants which manufacture F-
the free market vision, Canada should be a series pickup trucks, Ontario was the
hotbed of private investment, industrial second-most efficient.
growth, and rising living standards. Yet the C Ford enjoys a 30% labour cost saving on
reality is painfully different. The current crisis every hour worked in Oakville, compared to
in Canada’s auto industry, despite the well- its U.S. plants–much of that thanks to our
known competitive advantages of Canadian medicare system.
plants, is proof positive that making yourself
C The company would save over $200 million
extremely attractive to private business is no per year by locating two shifts of assembly
guarantee of economic and industrial success. in Oakville instead of at existing U.S. plants.
Despite these advantages, Ford wants to shut the
plant– perhaps because the company didn’t want to
appear “unpatriotic” by closing a U.S. truck plant.
No matter how hard you work to make your employer
profitable today, you can always be out of a job
tomorrow if the company decides you are no longer
part of their business plan. And as long as we cede
all the decision-making authority in this crucial
industry to foreign-based business leaders, we will
always be at the complete mercy of their actions–no
matter how whimsical they may seem. That’s why
we need an active auto policy, to allow us to have a
say in the future of our own industry.
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Part III: Getting Back in Gear–What is Ontario’s Role?
The future health of Canada’s auto industry is obviously central to our province’s economic
progress. And relying solely on free trade, private corporations, and strong economic “fundamentals”
will in no way ensure that Ontario continues to attract a healthy share of new investment and
employment, once the continental industry begins to rebound from its current slump. The CAW has
proposed a multi-dimensional auto policy strategy, which would require the active participation and
support of both the federal and provincial governments, the industry, and other stakeholders. This
strategy consists of three major streams:
1. A set of measures aimed at managing the current downturn in the industry in a more humane
and efficient manner, and protecting as many Canadian jobs as possible during this slump.
2. A set of measures aimed at enhancing Canada’s prospects for obtaining a healthy share of
future investment in auto assembly and auto parts production, once the industry recovers from
the current crisis.
3. A set of measures aimed at addressing Canada’s worrisome and growing trade deficits in
automotive products with key trading partners (in particular Japan, Korea, Europe, and
Mexico).
While the measures we have proposed do not answer all of the questions and challenges facing
Canada’s auto industry (and we have also proposed a ministerial-level task force to investigate and
make policy recommendations on the outstanding longer-run threats facing the industry), they would
make a positive contribution to the industry’s future well-being–and hence to the overall trade,
productivity, and investment performance of the Ontario economy. The Ontario government has an
important role to play in two of these three broad areas:
A. Managing the Current Downturn
By 2003, as described above, the auto assembly sector could have contracted by one-third
relative to its peak 1999 levels, erasing most or all of the impressive gains which the industry racked up
during the 1990s. The auto parts industry, dependent on sales to assemblers, will have declined by a
similar amount. This will certainly constitute the worst downturn in the industry in at least 20 years.
Government needs to play an active role, working with industry, the CAW, and affected auto
communities, to minimize the negative economic and social impacts of the contraction, and to preserve
as many jobs and as much of our productive capacity as possible –pending a future upswing in the
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industry’s fortunes. To this end, we propose the following specific measures on the part of the Ontario
government:
C Emergency financial assistance to independent parts producers. Several major
independent Canadian parts producers are facing acute financial difficulties–stemming both from
the current industry slowdown, and from longer-standing structural problems in the industry (in
particular the heavy engineering and investment costs which have been shifted from assemblers
to independent parts suppliers in recent years). If companies like A.G. Simpson, Budd
Canada, and others fail during the current slowdown, Canada’s parts industry will be left in a
significantly weaker position to participate in any future auto industry rebound. Emergency
financial assistance (in the form of loan guarantees and/or tax holidays) should be offered to
independent parts companies to help them weather the current storm, negotiated on a case-by-
case basis with the federal and provincial governments.
C Support for continuing production at the Pillette Road maxi-van plant. Production at
this facility will cease in 2003, resulting in the lay-off of the remaining shift, unless Daimler-
Chrysler allocates a new product. One option that could buy some time for the plant would be
for the federal and provincial governments to assist Daimler-Chrysler in updating the existing
maxi-van product so that it can meet new environmental and crash test standards required
under U.S. law.
C Legal protections for laid-off workers. The current industrial downturn is highlighting the
unfair and one-sided changes which have been made to various employment standards
legislation during recent years by the Conservative government of Ontario. The government
eliminated important provisions which helped to protect laid-off workers in cases of plant
closure. For example, it cancelled the Employee Wage Protection Fund, and eliminated a
provision in the Labour Relations Act requiring companies to negotiate plant closure
agreements with affected unions; both of these changes should now be rescinded, in light of the
painful lay-offs sweeping the province. The financial capacity of the Pension Benefits
Guarantee Fund (which stood at only $200 million, even before the government committed to a
significant contribution to the pension fund at troubled Algoma Steel) should be strengthened in
light of recent demand on its resources, and the bankruptcy act should be amended to provide
the employees of a bankrupt company equal standing with secured creditors in the disposition
of the company’s remaining assets. The financial burden and emotional stress of losing one’s
livelihood are enormous in any case; it is especially unfair that workers in Ontario now face
extra costs as a result of the Conservatives’ various labour law changes. (These proposed
policy measures would apply to all employers and laid-off workers in Ontario, not just to those
in the auto industry.)
C Establishment of Community Adjustment Funds. When a private corporation makes a
bottom-line decision to close a facility and lay-off large numbers of workers, the economic
15
consequences of those actions on workers and their community are typically not factored into
corporate decision-making. Yet entire communities can be thrown into turmoil by corporate
decisions to pull up stakes and close major production facilities. Laid-off workers may have
invested years of effort and training in their respective positions; host communities may have
invested millions in infrastructure to attract and service the facility. They deserve some
reasonable compensation from the downsizing corporation for the damages which they will
incur as a result of the closure. We therefore propose that any company which releases 1000
or more of its employees within a defined community during any 12-month period, be required
by provincial legislation to contribute $5000 per laid-off worker to the establishment of a
Community Adjustment Fund in the community affected by the lay-off. Companies which
announce lay-offs of between 500 and 1000 workers within a 12-month period in a defined
community would be required to contribute $2500 per worker toward the Community
Adjustment Fund. The community funds would be administered jointly by local union officials,
community economic development staff, and labour force development and retraining
specialists. The Fund would sponsor counseling, adjustment, and retraining activities for the
laid-off workers, and would also be mandated to cooperate with community economic
development initiatives aimed at developing alternative sources of employment in affected
regions. The CAW will continue to negotiate severance packages with auto companies and
other downsizing employers, along with other provisions on income and job security,
notification of closures, and adjustment provisions. But while we can be justifiably proud of
what the union has done to protect jobs and look after those who lose jobs, the union alone
can’t negotiate on behalf of entire communities to mitigate the negative consequences of major
lay-offs and plant closures; government and the corporations have a responsibility to play a
role, too. These mandated Community Adjustment contributions would recognize, in a small
way, a downsizing corporation’s responsibility to its workers and their community. They would
also create a modest disincentive for future plant closures.
B. Positioning Canada for the Next Wave of Investment
The preceding measures would help to moderate the social and economic consequences of the
current auto industry downturn, and in some cases protect some of the jobs and capabilities that are
threatened in this downturn. But these adjustment measures would not on their own have any impact
on Ontario’s longer-run ability to attract future new investments in auto assembly and auto parts
facilities. The future viability of the domestic auto industry can only be maintained if we continue to
attract a significant share of new auto investment in North America (through the retooling of existing
plants, and to a lesser extent the location of new “greenfield” facilities here). The fundamental
economics of auto investment in Canada are still generally positive (thanks to the industry’s well-known
competitive advantages, including low labour costs, competitive taxes, a strong physical and social
infrastructure, and generally convenient location). But these advantages, as we have seen, are no
guarantee that the Canadian industry will continue to attract the strong investment that boosted the
industry so powerfully during the 1990s. Canada’s investment position faces important challenges: from
16
low-cost Mexico, from states in the southern U.S. which use heavy subsidies to attract new
investments, and from coming technical and organizational changes in automotive manufacturing (like the
advent of “flexible” assembly practices). For all of these reasons, Ontario needs to take a pro-active
approach to facilitating and attracting strategic future auto investments. We propose the following
measures to boost our longer-run investment prospects:
C Ontario participation in a Technology Partnerships Canada facility for the auto
industry. The federal government’s Technology Partnerships Canada (TPC) program has
been an effective policy tool in recent years in motivating and leveraging important private
investments in Canada’s aerospace, defense, advanced materials, and environmental
technology industries. In its 6 years of operation, the program has distributed a total of $1.7
billion in investment subsidies. These subsidies are, in theory, repayable (in situations in which
subsidized projects generate substantial profits for their owners), and have contributed to the
continued development of Canadian productive capacity in selected high-technology, trade-
oriented industries. The subsidies (when properly defined and managed) are also perfectly legal
under existing international trade law. Canada’s auto industry invests about ten times as much
per year in new capital equipment and facilities, as all of the industries subsidized under the
existing TPC program put together. And the auto industry is characterized by the same
valuable characteristics–high value-added, trade intensity, and utilization of new technology–that
17
Is This Corporate Welfare?
David Lewis, who was the leader of Canada’s
NDP in the 1970s, made famous speeches
against “corporate welfare bums:” companies
who complained about government taxes and
regulations, even as they gladly accepted big
public handouts. But today, it is right-wing
forces who use Lewis’s slogans. The Canadian
Alliance party and the Canadian Taxpayers’
Federation have loudly criticized any programs
which use public funds to subsidize business
investments or industrial developments. Instead
of allowing government to influence the shape of
economic development through active investment
and industrial policies, these conservatives want
big tax cuts for corporations. But isn’t that the But well-designed incentives and subsidies,
biggest corporate handout of all? especially when tied to concrete and enforceable
commitments by the subsidized companies, can
In fact, government subsidies for investment and be an effective way to promote new investment in
industrial development have declined steadily in key industries. Conservatives want business to
recent years, from about 3% of our economy in call all the shots in the economy; they
the early 1980s, to barely 1% today. This trend manipulate slogans about “corporate welfare” to
reflects government budget-cutting, and the reinforce business domination over our society.
overall move toward a business-dominated, free- In contrast, the CAW argues for a more
market economy. balanced approach to developing our
economy–one where governments and
We do not want corporate boondoggles, where communities have some say in the crucial
companies take big handouts from government decisions. Business subsidies and investment
but then fail to deliver promised investments and incentives, used carefully, are one way to a-
jobs. chieve that goal.
motivated the federal government to establish TPC support for these other, smaller sectors.
We imagine extending the TPC program to the auto industry, with the allocation of sufficient
funding to reflect the auto industry’s more substantial investment patterns, and to influence
corporate investment decisions. We suggest the initial federal allocation of $500 million per
year into a TPC auto investment facility. We also suggest that the Ontario government, given its
huge fiscal stake in the auto industry, contribute 50 cents to the auto TPC fund for every federal
dollar (or some $250 million per year). A $750 million total annual budget would allow the
facility to subsidize auto assembly and parts investments at an average rate of up to 25% (since
the assembly and parts sectors typically spend about $3 billion per year on new facilities and
capital equipment); this is a significantly lower rate of subsidy than new investments already
receive from local and state governments in the U.S. These funds would be allocated to
support qualifying investments in Canadian auto assembly and auto parts production facilities.
As with the existing TPC program, qualifying projects must demonstrate the application of
leading-edge technologies (in the nature of the product and/or in the process used to produce
18
that product). We also propose that supported companies be required to sign commitments to
meet specific yearly employment targets related to the new investment; companies which fail to
meet those targets (for example, by closing facilities which had benefitted from a TPC subsidy)
would be required to immediately repay the TPC support in full.
C Federal-Ontario investments in transportation infrastructure. The federal government
has shown it is willing to sacrifice important aspects of Canadian sovereignty in the interests of
preserving access to the U.S. market for Canadian-based companies. (For example, Ottawa
has agreed, in the wake of the September 11 events, to harmonize important aspects of
Canadian immigration policy with U.S. practices in an effort to convince U.S. officials to relax
border inspections.) Yet the government, along with its Ontario counterpart, tolerates the
continued inconvenience and cost which is imposed by Ontario’s overstretched transportation
infrastructure–problems which could be largely mitigated with relatively modest investments in
highways and border facilities. It seems ironic that our government is willing to abandon its
sovereignty over immigration policy to speed border traffic, yet not willing to address more
concrete delays in cross-border traffic with relatively modest investments in infrastructure.
After all, most U.S.-bound auto shipments spend substantially more time traversing the 15
traffic lights which are encountered between the end of Highway 401 and the Ambassador
Bridge in Windsor, than they do waiting for border inspection. Improving the efficiency of our
road links to the U.S. would be an efficient, timely, and practical means of reinforcing the
generally positive location attributes of Canadian production facilities.
We propose that the federal and Ontario governments establish a joint $1 billion budget
(financed 50:50 by the two levels of government) to target existing road transportation
bottlenecks in the Oshawa-Windsor corridor–potentially including the widening of Highway
401 between London and Windsor, the extension of Highway 401 to the Detroit River, and the
construction of a new bridge crossing between Windsor and Detroit. Measures like these
would reduce shipment times for Canadian auto exports by substantially more than even the
complete elimination of waiting times at the U.S. border. They would be more broadly
beneficial to the public, as well, by improving the safety and reliability of the road network in a
particularly congested part of the province. The federal government’s share of this fund could
be financed from the broader infrastructure budget already announced in the 2002 federal
budget; the Ontario government would have to allocate its own share of resources to the fund.
The crucial challenge is to attain a level of cooperation between the two levels of government to
improve the integrated road network, and to break away from the current tendency for finger-
pointing between the two levels (who, despite their bickering, share a huge common interest in
attracting future auto investment to Canada).
Part IV: Considering the Long-Term Future of Auto
19
The specific measures outlined above would assist Ontario’s auto industry to manage the
immediate crisis, as well as with the medium-term challenge of attracting incoming auto investment and
addressing emerging auto trade imbalances. But in addition to these issues and challenges, the industry
also faces several even more imposing and, in some cases, ominous problems and challenges. These
problems are generally global in nature, and hence auto industry stakeholders in other countries are also
coming to terms with them. Given the vital importance of the auto industry to Canada’s overall
economic performance, it is crucial that we get a head start on addressing these longer-term issues.
The longer-run challenges facing the auto industry include:
C environmental sustainability: Future motor vehicles must address a range of sustainability
issues (including especially greenhouse gas emissions, as well as other environmental challenges
such as auto recyclability). A country which takes the lead in investing in sustainable
transportation technology, is a country which will cement its leadership as the global auto
industry enters a new era.
C technological change: Auto companies are moving quickly to adopt a whole new generation
of technology and flexibility in their approaches to organizing production. Major organizational
changes will accompany this new technology–as reflected in the advent of flexible assembly
plants (such as Ford’s new Dearborn facility), and in the ability of OEMs to completely
outsource final assembly functions (as undertaken by Magna in Austria). These changes hold
major implications for workers, communities, and governments, as international investment
patterns shift to reflect the new technical and organizational horizons of the industry.
C working hours: A long-run challenge is also posed by the faster-than-average productivity
growth which has characterized the auto industry over long periods of time. Unless working
hours are continually reduced, this productivity growth implies that relatively well-paying auto
industry employment will shrink steadily as a share of the total labor force. Yet one major
motive for paying particular policy attention to the auto industry is precisely because of the
relatively high-value employment and production opportunities which the industry offers. If the
social benefits of auto production and employment are to be maximized and broadly shared,
this will require ongoing initiatives to reduce working hours to offset productivity growth.
No-one can claim to have the answers to these and other long-run challenges facing the auto
industry. Yet it is crucial that Canada develop a broad awareness and appreciation of the daunting
challenges facing our most important manufacturing industry. We propose, therefore, the creation of a
high-profile multi-stakeholder task force to investigate the longer-term prospects of Canada’s auto
industry in the face of these challenges, and to develop policy recommenda-tions in light of those
investigations for all levels of government, business, and labour. This task force must represent much
more than just another “talk-fest”–a symbolic initiative aimed more at demonstrating that some
20
government department is on the ball, rather than in generating useful information and analysis. It must
include top-level participation from the industry; from the federal, provincial, and local governments;
from the academic and research community; and from labour. If nothing else, the establishment of such
a task force would at least constitute a recognition on the part of its participants that the future health of
the auto industry will shape the pattern of Canada’s overall economic development–and hence that the
industry’s future is far too important to be left to corporate executives alone. We recommend that the
task force be established immediately, hold meetings and consultations with industry players, and report
back publicly by the end of 2003. The subsequent implementation of any recommendations flowing out
of the task force would then be assigned to relevant levels of government.
Conclusion
The importance of the current downturn in Ontario’s auto industry cannot be overstated. The
industry could shrink by one-third, comparing 2003 to its 1999 peak, in terms of assembly,
employment, and parts production. This is not just a temporary cyclical downturn; in fact, the downturn
is occurring despite historically strong North American vehicle sales. The current crisis, rather, is a
deeper and longer-lasting downturn which could leave our most important manufacturing and export
industry unable to meet the economic responsibilities we have become accustomed to it fulfilling.
Imagine what the provincial economy would have looked like in the 1990s, if we had not experienced
the unprecedented investment, job-creation, and export performance which resulted from a decade of
unprecedented auto expansion. An already-miserable economic decade, would have been all the more
painful. Yet that is the very prospect we face in the coming years, if governments simply sit back and
watch the industry decline– pretending that our strong “economic fundamentals” will somehow protect
us at the end of the day. We risk losing its position of world leadership in this most valuable industry,
and it will not be easy to win that leadership back. For these reasons, we urge the Ontario government
to act, and act quickly, to develop a broad active auto strategy, involving all levels of government, the
industry, auto communities, and labour. The future of this industry, so central to our future economic
prospects, cannot be left up to the corporate executives alone.
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