A less-expensive solution is needed for Canada to attract auto industry investments

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Greig Mordue is an associate professor and the ArcelorMittal Dofasco chair in advanced manufacturing policy in the faculty of engineering at McMaster University.

The past few weeks have brought a trio of federal and Ontario government announcements about incentives for automakers: $518-million for General Motors GM-N plants in Ingersoll and Oshawa, $267-million for Honda HNDAF in Alliston, and $1-billion for a Stellantis-LG battery plant in Windsor. Of the three announcements, two are for the refurbishment of existing facilities. Only the battery plant in Windsor is new.

Regardless of these projects’ nature – to overhaul old plants or build new ones; to make vehicles powered by internal combustion engines or ones that run on batteries – these announcements suggest that our governments have accepted the fact that the price for mitigating Canada’s high-cost labour (compared with the U.S. South and Mexico), its expensive electricity, and the vagaries of dealing with a border is about 20 per cent of the cost of automakers’ investments in Canada.

Of course, providing this kind of support is far from new. Including the latest announcements, Canada and Ontario have doled out 21 auto-related incentive or rescue packages of $100-million or more since 2000. Every vehicle maker in Canada has benefited: General Motors, Ford F-N, Chrysler and its various iterations (now known as Stellantis), Toyota and Honda.

Including the bailouts of GM and Chrysler in 2009, government support of those five companies since 2000 has cost $8.6-billion. Based on total production in Canada since then, that’s about $200 for every vehicle made.

Here’s how these things typically work. About two years before an aging model is set for an overhaul – which occurs at five- or six-year intervals – a manufacturer decides whether the new version will be made in an Ontario plant or elsewhere (e.g. Mexico, Michigan or the U.S. South). When that happens, the federal and provincial governments assemble a package to encourage them to stay, usually offering about 20 per cent of the total spending the automaker will need to refurbish the plant. The formula employed in support of the Stellantis-LG battery plant, a new “greenfield” facility, was similar. It is our governments’ usual method of demonstrating support and nailing down jobs.

One critical distinction between the Canada-Ontario approach and the support offered by U.S. jurisdictions is both unique and expensive. U.S. states – and in the U.S., only the states incentivize auto plants, not the federal government – generally employ a “one and done” method, incentivizing new plants only and doing so on a one-time basis.

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By that standard, U.S. states would have contemplated supporting almost none of the projects that Canada and Ontario have got involved in since 2000. Even recent projects in the U.S. to retool assembly plants to build battery electric vehicles have also proceeded largely devoid of incentives.

Of the 21 packages our governments have extended since 2000, only two have been for new facilities: a Toyota assembly plant in Woodstock that opened in 2008, and the recently announced battery plant in Windsor. Other than the bailouts of 2008-09, the rest have been for refurbishing plants.

While the United States’ one-and-done practice can be characterized as “buying” jobs, the typical Canada-Ontario method is to “rent” them until the next model change, when the lease on those jobs comes due. In fact, several assembly plants in Ontario have received incentive packages on multiple occasions since 2000.

Is the Canada-Ontario approach prudent? What would have happened had Canada and Ontario let the automakers make decisions without offering incentives?

Of course, if you ask the actors, all will say they are essential. For Queen’s Park and Ottawa, cash is arguably their only remaining tool for attracting automotive investment. Duty remission, tariffs and other measures have been bargained away in trade negotiations or prohibited by rules of modern global governance. Meanwhile, automakers are not inclined to say, “no thanks, keep your money.”

These packages are generous, but what role do they really play?

The easy answer is this: In 2000, Ontario auto factories made three million vehicles and employed 54,000. Last year, billions of dollars of government support later, 37,000 people made about 1.1 million vehicles.

For a little more nuance, consider the recently announced Honda project. which is typical of the long list of refurbishment projects Canada and Ontario have lined up to support. It is said that the $267-million Honda is getting to refurbish its Alliston plant will keep production there for six years. But that $267-million will fund about six months’ worth of pay and benefits for Alliston’s 4,000 workers, while a plant in Mexico would take eight to 10 years to dispense that much to its workers. If the point of an incentive package is to mitigate the high cost of labour in Canada and Ontario, Honda would have required an incentive package about 10 times larger than the $267-million they actually got.

The reality is that these companies still have plants in places such as Alliston, Brampton, Windsor, Oshawa, Cambridge, Oakville and Ingersoll for two reasons, neither having anything to do with government incentives.

First, they are there because it did make sense to locate them there when they were established, often several decades ago, when the rules allowed governments such as Canada’s to threaten automakers with blocking access to the Canadian market if they didn’t build vehicles here. Back then, our governments could also deploy a suite of now-prohibited investment attraction tools. It was also before automakers learned they could make vehicles of sufficient quality in low-cost places such as Mexico.

Second, they are still here because, well, they’re already here. Building and equipping a new two-million-square-foot assembly plant, hiring and training thousands of people, and establishing a proximate supply base is a complex undertaking. Building a new or renewed model in an existing facility is easier and relatively risk-free. The U.S. approach, which generally limits support to new plants only, reflects its policy makers’ recognition of that basic truth.

Everyone agrees that assembly plants are important economic contributors. They provide well-paying jobs, spur upstream and downstream activities, and generate significant tax revenue. The real question is this: Are incentives to automakers to encourage them to build vehicles here always necessary?

Going forward, it is probable that the process of awarding vehicle production mandates will unfold the way it always has: automakers will favour refurbishing assembly plants over building new ones. And if U.S. states limit incentives to new plants only, why do Canada and Ontario spend billions supporting every project by every automaker every time they ask?

It is likely that the most appropriate approach lies somewhere between “fund everything” and “fund nothing.” For the past 20 years, our governments have tilted to the former. However, as the electrification process unfolds, and our governments are asked to consider myriad new investment opportunities, a more informed understanding of how automakers really make decisions is necessary and a more nuanced, potentially less expensive way to respond, is required.

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