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Vehicles on the assembly line at Ford Motor Co. of Canada’s Oakville plant. A troubling trend in auto maker investment is beginning to raise questions about the medium- and long-term health of an industry that contributes 1.5 per cent of Canada’s gross domestic product directly, and much more when the spinoff benefits it generates are included. (Fred Lum/The Globe and Mail)
Vehicles on the assembly line at Ford Motor Co. of Canada’s Oakville plant. A troubling trend in auto maker investment is beginning to raise questions about the medium- and long-term health of an industry that contributes 1.5 per cent of Canada’s gross domestic product directly, and much more when the spinoff benefits it generates are included. (Fred Lum/The Globe and Mail)

Lagging investment a threat to Canadian auto industry Add to ...

Auto assembly plants are working overtime and vehicle sales are steady, so one of the key engines of Canada’s economy seems to be running smoothly.

But a troubling trend in auto maker investment is beginning to raise questions about the medium- and long-term health of an industry that contributes 1.5 per cent of Canada’s gross domestic product directly, and much more when the spinoff benefits it generates are included.

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Canada has received far less than its traditional share of investment by auto makers in North America since the industry’s recovery from the recession got into gear in 2010, new data show. Between that year and 2012, global auto makers invested $42.3-billion (U.S.) in Canada, the United States and Mexico, according to data from the Center for Automotive Research (CAR), an industry research organization based in Ann Arbor, Mich. Just $2.3-billion of that money was spent in Canada, or 5.4 per cent.

That’s considerably less than the double-digit share of investment auto makers pumped into Canada for more than two decades and – along with other data – bolsters the argument that the country is much less attractive to the world’s auto makers than it once was.

This is a key concern for all three levels of government, which rely on billions of dollars of taxes generated by assembly plants and tens of thousands of employees to finance social programs and other spending.

A further decline in the auto industry would deal another blow to Ontario’s manufacturing heartland, where shuttered factories already dot the landscape.

It also raises questions about the payoff from the $13-billion effort by the federal and Ontario governments to help bail out Chrysler Group LLC and General Motors Co. in 2009. With the bailout, those governments extracted promises that protected jobs and Canadian plants for seven years. Four years later, however, investment trends are causing fear about what happens after 2016.

“There is no real capital-A advantage to being in Canada,” said Kim Hill, CAR’s director of sustainability and economic development strategies and the author of a report that contained the investment data. “There used to be – health care and the (Canadian) dollar.”

The CAR numbers are backed up by Statistics Canada data compiled by industry analyst Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc., showing that auto makers’ capital spending of $767-million (Canadian) in Canada last year represented 9 per cent of the investments they made in their U.S. and Canadian operations. That’s the first time that indicator has been in single digits since 1990 and compares with a figure of 40 per cent as recently as 2007.

Other signals are also glowing red, including the four measurements of the industry established by the Canadian Automotive Partnership Council (CAPC), a joint industry-union-government group set up in 2002 and given the task of developing an automotive strategy for Canada amid a flood of investment by auto makers in the southern United States.

The group set targets in four key areas: employment in the assembly and parts industries; shipments of parts; the automotive trade balance; and vehicle production in Canada as a percentage of North American sales.

Not a single target has been hit. In some categories, notably employment and trade, the results fall well short of the targets.

The target for jobs was 150,000. Assembly and parts jobs stood at 101,510 last year.

“This is an employment-less recovery,” Mr. DesRosiers said.

The performance of the auto industry on the trade front is even worse. In 2001, the auto industry made a massive positive contribution to Canada’s trade performance with a surplus of $11.6-billion. By last year, that figure had plunged to a $17.3-billion deficit.

There have been some snippets of good news. General Motors of Canada Ltd. recently announced a $250-million investment at its Cami Automotive plant in Ingersoll, Ont., that should secure that facility and about 2,500 jobs well into the 2020s. Toyota Motor Manufacturing Canada Inc. is adding workers and production capacity at its two plants in Cambridge, Ont., and Woodstock, Ont.

And substantial chunks of the auto industry in the Ontario cities of Windsor, Oshawa and Brampton – as well as Cami itself – would have vanished if Canadian taxpayers had not contributed billions to the bailout plans for Chrysler and GM.

Since those rescues, however, the world’s auto makers have announced investments of $11-billion (U.S.) in Mexico, compared with the $2.3-billion in Canada.

The industry’s performance also raises the stakes for the federal and Ontario governments as they assess a request by Ford Motor Co. for a contribution of several hundred million dollars toward a $1.2-billion redevelopment of the company’s only remaining vehicle assembly plant in Canada.

There is general agreement among industry officials that the rise in the value of the Canadian dollar, the growing attractiveness of low-wage Mexico and its position as a gateway to growing markets in South America, and the line in the sand drawn by the Canadian Auto Workers against concessions are making Canada less attractive.

“It’s very hard for companies to go to bat for Canada,” lamented one veteran industry official.

Don Walker, chief executive officer of Magna International Inc. and chairman of CAPC, said the currency, and the greater willingness of the United Auto Workers to give concessions to the Detroit Three auto makers, are key factors.

Union issues don’t play much of a role in Magna’s decision-making, Mr. Walker noted, but he added that “Michigan just became a right-to-work state, which will probably get people’s attention when they’re looking at where they’re going to invest.”

Magna’s capital spending on equipment at its Canadian operations amounted to $715-million between 2008 and 2012, demonstrating that the global powerhouse still believes the industry has a long-term future in Ontario, he said.

Mr. Walker points to another likely reason why investment in Canada was a relative trickle. “There’s no car company with its headquarters here,” he said in an interview. “I am sure that given the focus from the American government on the auto industry and the bailout and the influence they can put on people behind the scenes as to where they invest, they’ll have more clout than Canada.”

A simple example shows the effect currency swings can have on the cost of investment. When the Canadian and U.S. currencies are at parity, the $400-million an auto maker would invest to rebuild a paint shop would cost the same on each side of the border.

When the Canadian dollar sits at 85 cents, as it did most recently in May, 2009, that same paint shop investment in Canada would cost an auto maker just $340-million.

Mr. Hill said the Canada-U.S. exchange rate often comes up in his conversations with friends and others in Detroit who have nothing to do with the auto industry.

“That’s just the lay person, so the auto makers are definitely aware as well,” he said.

Because of Canada’s publicly funded health care system, auto makers once enjoyed an advantage of more than $1,000 a car versus vehicles made in the United States.

But the Detroit Three dramatically reduced those costs in their U.S. operations by offloading health care to trusts now run by the UAW. There was a huge upfront cash cost to the companies, but they no longer face the burden of rampant health care inflation.

The new U.S. plan for government-financed health care will help auto parts makers and other manufacturers that haven’t yet shed their health care costs.

“The fact that we’re beginning to address our health care costs here in the States takes away another carrot for companies to look north of the border,” said John Boyd, who heads the Boyd Co. Inc. of Princeton, N.J., a consulting firm that advises companies on site selection.

Halting the decline of the industry will be difficult. The creation of CAPC has built greater awareness among governments of the importance of the auto manufacturing to the economy, but it has been hobbled by regular turnover among the chief executive officers of the auto makers in Canada and in the Industry Minister’s chair at the federal cabinet table.

The CAW has been pleading with successive federal governments for more than a decade to develop a strategy for the industry in Canada – most recently during a meeting between CAW president Ken Lewenza and Prime Minister Stephen Harper last month.

Mr. Walker has long advocated that governments do whatever they can to try to make sure assembly plants in Canada stay open.

He is encouraged by the recent federal budget, which singled out the manufacturing industry and skills training as areas that require financing and tax incentives.

“I think we have to try and figure out what the Canadian government can influence,” he said, but the big Canadian-owned parts makers such as Magna, Linamar Corp. and Martinrea International Inc. will also have to play a role in making sure the industry’s health is restored.

“It’s up to Linamar, Martinrea, Magna – companies who are here – to say we’ve got to be innovative, we’ve got to have better products, we’ve got to have better manufacturing processes, we’ve got to be competitive.”

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THE MEXICO FACTOR

Canada’s loss is Mexico’s gain when it comes to the auto industry, and the gap between the two countries is widening in favour of the country that was seen as the junior partner when the North American free-trade agreement came into effect in 1994.

Wages of $40 (U.S.) a day in Mexico, compared with about $32 an hour at Canadian assembly plants, are a big attraction for international auto makers. So is Mexico’s location near growing markets of South America and a raft of trade deals it has signed with South American countries, say Chicago Federal Reserve Bank senior economist Thomas Klier and James Rubenstein, a geography professor at Miami University in Ohio, in a paper about the Mexican auto industry released this week.

The lower wages are particularly attractive as fuel efficiency regulations boost demand for smaller vehicles throughout North America.

Four car companies have new assembly plants under construction in Mexico and all are slated to produce small vehicles.

In another sign of Canada’s declining prospects, parts makers in Mexico shipped $33-billion worth of components to the U.S. market last year, compared with $13.8-billion exported to the U.S. market from Canada. In 2000, auto makers in the United States bought $14.7-billion worth of Canadian parts, compared with $13.8-billion from Mexico.

Greg Keenan

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Follow on Twitter: @gregkeenanglobe

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