When the Freedom Ace unloaded a fleet of new vehicles at the port of Vancouver this month, it marked the start of a transformation of the auto industry in Canada.
The Mitsui O.S.K. Lines cargo ship – capacity 6,400 cars – was carrying the first made-in-China vehicles for the Canadian market. But they’re not from the Chinese auto makers that have shown up regularly at auto shows in Detroit and elsewhere promising they will soon start shipping their vehicles to North America.
Instead, the Freedom Ace was unloading a shipment of subcompact Honda Fit models, assembled at Guangqi Honda Automobile Co. Ltd., in China, which will replace Japan as the source of Fits imported by Honda Canada Inc.
The subcompact segment generates little profit but is crucial for car companies to attract new drivers in hopes they will stay loyal to a brand and move up to higher-priced models that produce greater profits.
The move to China comes amid intense competition in the segment and the soaring value of the Japanese yen, which is making the export of the smallest cars for the North American market prohibitively costly for Japan-based operations run by Honda Motor Co. Ltd. and other auto makers.
“It is almost impossible for Honda to make money from small cars if they try to make Fit in Japan and export it to Canada,” Koji Endo, veteran auto analyst and managing director of Advanced Research, said in an interview in Tokyo.
The production shift is not designed to counter the rising value of the yen, Honda Canada spokesman Richard Jacobs maintained, but is part of a strategy to make its global plants as efficient as possible, with regions supplementing each other.
The plan is that each region will export 20 per cent of the vehicles it makes to other markets, Honda chief executive officer Takanobu Ito told reporters at the Tokyo Motor Show.
But importing cars from China can provide Honda Canada with a competitive advantage on several of its rivals and help offset a 6.1-per-cent duty that Canada slaps on vehicles imported from outside North America, which takes on added importance in a segment with razor-thin profit margins.
Auto plants in China have lower fixed costs than those in Japan right from the start because of cheaper real estate, Mr. Endo noted, pointing out that labour costs in China are roughly 5 per cent of those in Japan. Components provided by suppliers are also less expensive because of lower wage costs, he added.
Fit sales tumbled to 2,802 in the first 11 months of 2011, compared with 6,245 a year earlier amid production disruptions caused by the March 11 earthquake, tsunami and electricity crisis in Japan. Those numbers put it in ninth spot in the segment, where new entrants from Chrysler Canada Inc., Ford Motor Co. of Canada Ltd. and Mazda Canada Inc. have grabbed market share from auto makers from Japan and South Korea.
Chrysler and Ford assemble the Fiat 500 and Fiesta models respectively in Mexico, which is also where Nissan Canada Inc. sources its Versa. Assembly in Mexico means those cars are not subject to the 6.1-per-cent duty. General Motors Co. is now manufacturing the Chevrolet Sonic in Michigan, so it doesn’t face the tariff that applied to the South Korean-built Chevrolet Aveo that had been GM’s subcompact car.
Mazda Canada Inc. will begin importing the Mazda2 and the compact Mazda3 from a new plant in Mexico in 2014.
Hyundai Auto Canada Corp. and Kia Canada Inc. could also soon escape the tariff if the federal government concludes negotiations on a free-trade agreement with South Korea that eliminates the auto duty.