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A worker on the production line at Chrysler’s plant in Windsor, Ont., works on one of the company’s minivans Tuesday, January 18, 2011. (Geoff Robins/The Canadian Press)
A worker on the production line at Chrysler’s plant in Windsor, Ont., works on one of the company’s minivans Tuesday, January 18, 2011. (Geoff Robins/The Canadian Press)

Byrne Purchase

The real problem facing Ontario’s factories: Markets are moving south Add to ...

The announcement by Fiat Chrysler CEO Sergio Marchionne that his company was no longer seeking $700-million in federal and provincial government largesse was clearly a shock to the two governments. But it was also a defining moment in Ontario’s political economy.

It is pretty certain that the two governments were trying to get some specific long-term commitments. But Fiat Chrysler chose this moment to reveal a fundamental truth.

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When it comes to global corporations, hundreds of millions of government dollars won’t buy you much anymore, if they ever did. And they certainly won’t buy you any concrete promises for the future.

Yet I wouldn’t be surprised if the two governments reduced their “ask” so much that it would be easy for Fiat Chrysler to take the money and let everyone go back to thinking it’s business as usual.

Even so, it isn’t. There is something profound going on in the North American economy, with possibly devastating implications for Ontario’s economy.

Ontario’s productivity performance has been abysmal for the past 10 years. Yet most forecasts have it returning to roughly its longer term historical average. Budget projections count on it.

Yet why should we believe that? Much depends on the location decisions of global corporations that serve the North American market from multiple plants. These are the most productive facilities in any industry. There may be small fringe or niche competitors in the same industrial classification. But they are not in the same league when it comes to value added – that is, high paying jobs and profits.

The location of those high productivity plants depends on the interplay between production economies of scale and transport costs for materials moving in and products moving out to market. There are other considerations such as the local cost and quality of labour, the cost and quality of energy supply, local regulations covering all aspects of the business and, of course, local taxes.

When considering a southern Ontario location to supply a portion of the North American market, the global company has also to take into account border infrastructure bottlenecks, border security delays and possible prolonged disruptions, as well as a wildly fluctuating Canada-U.S. dollar exchange rate.

Throw in the fact that Ontario has: a transportation infrastructure crisis mired in political gridlock; hopelessly mismanaged its electricity sector; high housing costs compared to parts of the U.S.; and politically powerful public and private sector unions.

Then add to these facts that Ontario remains a “milch cow” for federal interprovincial income redistribution and that Ottawa has an industrial strategy built around the idea of Canada as an energy superpower. True, that superpower vision may turn out to be a pipe dream (forgive the pun); but it is what we see unfolding all around us with various federal regulatory decisions. Then there is the uncertainty of a revived political separatism in Quebec.

And, in case no one has noticed, the states with the fastest growing populations are in the U.S. south and west. This is not to mention the huge market potential of 120 million Mexicans. Mexico is already very competitive in a number of industries, including autos.

A modern factory is not an unalterable commitment to a community. It’s simply a big, easily constructed box. The core of the business, embedded, in part, in the complex machinery that the factory houses can be unbolted from the floor and moved. The other core parts of the business are embedded in its brand and its other intellectual properties; and those intangible assets have no specific geographic anchor either.

As the growth markets move south and west in North America, the optimal zone for plant locations will move south. It only takes 100 or so kilometers to move the zone right out of southern Ontario. This is the new economic reality we confront. And it is brutally indifferent to our local political squabbles.

Bryne Purchase, a former Ontario deputy minister of finance and energy, science and technology, is an adjunct professor at the School of Policy Studies at Queen’s University.

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