In the game of industry optics, the recent announcement by Ottawa and Ontario to hand out $34 million to Toyota Canada to build a new assembly line for Lexus hybrids at its Cambridge, Ont., plant was definitely podium-worthy.
The timing was impeccable. GM’s decision to ship out Camaro production from Oshawa to Michigan by 2015 and the omnipresent murmur around Canada’s competitiveness in the automotive sector led to an agonizing 2012 for manufacturing prospects in Ontario.
The fiscal handshake, which also brought with it a five-year extension of the $250-million, federal-government sponsored Automotive Innovation Fund, sent a much-needed signal to automakers vested in the Canadian market that policymakers are serious about saving the industry. I am sure Ford — which is seeking Ottawa’s help in a purported $1.2 billion investment to bring a new global platform to its Oakville plant — was paying attention.
The choice of vehicle was relevant too. The Lexus RX450 hybrid has never been built outside Japan and the decision to ship it out to our shores over more low-cost environments demonstrates confidence in Canadian technical know-how. Indeed, high-margin, high-technology cars such as luxury hybrids are the segments we should be vying for.
But is this shot in the arm of Canadian automotive production as fleeting as any other feel-good moment?
Unfortunately, the odds are stacked against Canada — well, for that matter, against any other developed nation that has a stake in the business of making cars.
Make no mistake; government intervention goes a long way in attracting businesses.
Our southern neighbour is the most obvious example. Beyond the auto bailout, American governments at federal, state and regional levels have been pumping in billions of dollars in subsidies, training grants and tax incentives over the last few years to attract automakers.
Policy-level rethink has also helped. In recent times, automakers, particularly the Germans and Japanese, have often bypassed auto central Michigan to set up shop in low-cost, high-incentive, anti-union states such as Alabama, Tennessee and South Carolina.
Not surprising, that in order to remain competitive, Michigan recently became the 24th U.S. state to push out right-to-work legislation, which effectively renders powerful automotive unions toothless in the state.
Countries such as Australia, which like us doesn’t have a homegrown automaker, provide a better template for Canada. Both General Motors and Toyota have each received nearly $1 billion dollars in government lifelines down under and are seeking more to ramp up production in the country.
At least in one case, the funding has been largely instrumental in reversing the trend of shipping from a low-cost manufacturing base to a high-cost destination. Toyota Australia announced this month that it will be sending about 18,000 four-cylinder and hybrid engines to assembly plants in Thailand.
Despite all the government support, motor vehicle production in developed nations continues to slide. According to the International Organization of Motor Vehicle Manufacturers, the number of vehicles (data includes commercial vehicles as well) made in Canada dropped from the high of nearly 3 million units in 2000 to about 2.1 million in 2011.
The tale of disappearing vehicles extends to the U.S., France, Italy, Japan and others. Some of these nations have seen some upticks coming out of the Great Recession but are nowhere near the levels seen at the turn of the millennium. (Germany remains an exception but the full story behind its continued gains in automotive production requires a separate column).
Manufacturing cost is the obvious factor behind this trend. Without going into the much-contested territory of all-inclusive labour cost, it would be safe to say that Canadian autoworker wages can range from $24 to $35 per hour. In the U.S., hourly compensation can be as low as $15-$20.
Compare that with what car factory workers make in current automotive hot spot Mexico — about $40 a day. When you combine that with relentless government spending in the auto sector, rapid growth in skilled workers and other socio-economic factors, Mexico’s rise to fourth-largest vehicle exporter in the world seems like a logical progression.
Consider what Nissan chief executive Carlos Ghosn said about Mexico in an interview with The Wall Street Journal: “Mexico is extremely competitive. Plants in Mexico operate more hours a year than other Nissan facilities worldwide. You can run your plants with practically no limits if you want.”
Can Canada compete with that?
There are no easy answers.
Government backing is a must but there needs to be a clear, continuous strategy behind automotive policymaking, rather than ad hoc band-aids. Job growth and assembly line expansion are obvious imperatives but only technical innovation can secure future competitiveness.
Investments must be made in developing automotive technical centres so that Canadian production lines add value and attract more technologically advanced vehicle development that ward off the ever-increasing, low-cost-destination threats.
Finally, all stakeholders need to rethink the issue of labour management. Both automakers and unions might serve themselves better by forgoing entrenched concepts of wage determination and looking at new ways of incentivizing productivity. Profit sharing may be a good starting point.
In the end, maybe Canada can’t beat Mexico. But let’s not lose our right to play.
Kumar Saha is a Toronto-based automotive analyst with the global research firm Frost & Sullivan.
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