The federal government is quietly assessing how much damage a double-dip recession would do to Canada’s recovering auto assembly industry, a move that could pave the way for more government assistance.
Amid sluggish growth that has triggered new fears in the United States, the Department of Industry said Tuesday it intends to hire American auto industry experts to assess the competitiveness of Detroit Three assembly plants in Canada.
The move to study the viability of the Canadian plants comes as U.S. auto companies approach Ottawa decision makers, cap in hand, to ask for help while they prepare to revamp product lines at Canadian factories. A federal fund set up to lend money to auto makers is approaching empty, having committed more than 80 per cent of its cash.
The government is requesting a review of the criteria that auto makers consider “when evaluating whether to continue manufacturing plant operations.” The results could help Ottawa determine which plants are vulnerable but also where opportunities lie for others, said Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich., which has been tapped to write the report.
Ottawa also wants an evaluation of each of the Detroit Three’s five assembly plants in Canada, their competiveness, and how they stack up against rival factories in the U.S. and Mexico. This would be just the kind of an information the government would be looking for it were to lay the groundwork for more money.
North American vehicle sales have slowly rebounded from the 2008-09 automotive industry crisis, the department noted while announcing the study. But, it said, gathering storm clouds are a problem.
“The health of the auto sector could be threatened once more due to waning U.S. consumer confidence in light of the economic uncertainty surrounding the global debt crisis,” the department said. “During the past recession, plants were shuttered and shifts cut, as production dropped in response to low demand.”
Rating agency Standard & Poor’s, which pegs the chances of a double-dip recession in the United States and Europe at 40 per cent, provided a glimpse Tuesday of what such a downturn would look like.
That scenario includes a 15-per-cent slump in U.S. vehicle sales to 11.7 million in 2012, compared with its current forecast of 13.5 million.
“Our view is that even a downturn of this magnitude wouldn’t automatically lead to the kind of havoc that ensued as the auto industry plunged toward the bottom during the Great Recession,” the rating agency said. “For one thing, sales of 11.7 million would be 12.5 per cent above those of 2009 and auto makers should be somewhat profitable at that level.”
The research contract is due to run until Jan. 31, 2012, about three to six weeks before the Harper government is expected to table its next federal budget.
This review comes as one form of federal assistance – a repayable lending fund – has allocated more than four-fifths of its money. The Automotive Innovation Fund has allocated more than $205-million of the $250-million it was given to distribute in 2008.
“They’ve got their hands out in Ottawa expecting government to be at their side,” one industry source said of the U.S. auto makers.
First up is Ford Motor Co., which is planning a revamp of up to $1-billion of its Oakville, Ont., assembly complex. Chrysler Group LLC has been discussing a revitalization of the paint shop at its large car assembly plant in Brampton, Ont., and is expected to ask for government help. The hot-selling Chevrolet Equinox and GMC Terrain crossovers assembled at a General Motors of Canada Ltd. plant in Ingersoll, Ont., are scheduled to be redesigned in 2014, which would require major spending on tooling at the plant.
Such government assistance is now part of doing business in the industry, as illustrated by vast subsidies given to auto makers building plants in Mexico and in southern U.S. states such as Alabama, Mississippi and Tennessee.
It’s not only Detroit Three companies that have benefitted in recent years. Toyota Motor Manufacturing Canada Inc., for example, will receive a $141-million package of loans and grants from the federal and Ontario governments for various projects at its two Ontario plants, including the assembly of a battery-powered version of the RAV4 crossover.
In the short term, the vehicle assembly industry in Canada is in good shape, considering what it has been through in the past few years, said Canadian Auto Workers (CAW) economist Jim Stanford. The recession sent two of the Detroit Three into Chapter 11 bankruptcy protection in the United States and led to a sweeping transformation of their operations, with tens of thousands of jobs cut in the United States and Canada, dozens of factories closed and tens of billions of dollars in debt wiped out.
Sales are recovering – although slowly – and all three companies are profitable.
“The facilities are modern and the companies are making a lot of money in Canada,” Mr. Stanford said.
There are, however, long-term challenges, he noted, including the hefty subsidies other political jurisdictions in North America offer to auto makers to lure new investments and the fact that most of the growth for the foreseeable future will be in emerging markets. The number of vehicles exported to those countries from Canada is negligible.
The study may indicate that the federal government is thinking about a long-term automotive strategy for Canada, he said, something the CAW and industry groups such as the Canadian Automotive Partnership Council have been urging Ottawa to do for years.