Will these converging headwinds lead to a repeat of 2009?
By Angela Johnson, Vancouver, Canada:
Fiat Chrysler Canada sales, after a record first half, plunged 20% in August year-over-year. Not exactly what we wanted to hear from the company that just received C$85.8 million in funding from the province of Ontario to help offset the C$2.6 billion retooling costs at the Windsor Assembly Plant to accommodate the Chrysler Pacifica minivan.
“It’s about time the government stepped in and provided some support,” explained Tony Faria, the co-director for the Center of Automotive and Vehicle Research at the University of Windsor. “I hope it’s only the first [step].” Because corporate welfare programs are never enough.
Not everyone was getting wiped out: Ford car and light truck sales jumped 9.0%. But GM sales dropped 8.5%. Total sales for all automakers fell 2%.
In the US, the largest export market for Canadian auto assembly plants and component makers, it was similar, only worse: Vehicle sales fell 4.1% in August, year-over-year, with GM down 5.2%, Ford down 8.8%, and Fiat Chrysler down 2.4%
From the manufacturer’s point of view, demand weakness in the US has been apparent for months: In the second quarter, exports of Canadian-made cars and light trucks plunged 6.6%, part of Canada’s worst export plunge since 2009.
Will these converging headwinds lead to a repeat of 2009? At the time, the Canadian divisions of Chrysler and General Motors, after having been subsidized by provincial and federal government for years, got a bailout to the tune of C$13.7 billion.
From 2001 to 2013 around 14,300 jobs were lost in vehicle manufacturing in Canada according to the Automotive Policy Research Centre, based in the province of Ontario. According to the International Organization of Motor Vehicle Manufacturers, Canada currently takes 15th place worldwide.
Though carmakers assert labor is not their only consideration, the fact remains the southern US and Mexico hold their appeal, compared to the demands of the auto workforce in the province of Ontario. The electricity cost in that province is also notoriously, prohibitively high.
In Mexico, Canada’s big competitor, auto production climbed from 1.2 million in 2007 to 3.4 million in 2015. By 2020, production is expected to rise to over 5 million vehicles. The rise in Mexico’s auto industry, thanks in part to the devalued peso, stands in contrast to the Canadian automotive landscape. Here, no new assembly plants have been built since 2008, and promises to put those factories into production are under discussion even now.
This is not doom and gloom but cold, hard facts staring the US economy’s biggest trading partner in the face.
Can a trade deal in the works bring more smiles to the industry? Consider the Trans-Pacific Partnership (TPP) between the US, Canada and 11 Pacific Rim countries. Signed but not yet ratified, it’s the new trade darling document. But a study of the deal’s fine print, according to Automotive News Canada, “reveals an even larger threat to the health of Canada’s auto supplier sector than previously feared:
Provisions found in supporting documents – or “buried in an appendix to an annex,” in the words of study author John Holmes – would allow automakers and parts producers to substitute parts from low-cost nations and still qualify for tariff exemptions under the trade deal.
While much of the attention on the TPP has been focused on the end of duties on vehicle imports, “Our sense is that it’s the regional content values on auto parts that poses the most serious challenge to the industry within Canada,” said Holmes, emeritus professor of geography at Queen’s University.
Particularly vulnerable to increased competition from large, multinational companies with operations in low-cost countries are small and medium-sized Canadian suppliers that stamp metals, make plastic parts, etc. These auto suppliers are forming “at least half of the industry that is a key part of Canada’s manufacturing sector, but one which has been much slower to rebound from the 2008-’09 financial crisis than its American counterpart.”
Indeed, C.D. Howe Institute corroborates this position with their report that Canada’s automotive sector would be the biggest loser under the TPP and would “experience a relatively large decline in total shipments,” to total C$420 million in lost shipments per year, “both through erosion of the domestic market share and through a loss of export sales due to preference erosion in the key US market.”
Even if small in the overall scheme of things, it’s something the industry can’t afford to lose.
Last year in the US, GM’s successful deal with the United Auto Workers led to a US$1.9 billion investment for an assembly plant. We watch for the big news later this month, since the talks continue for now, and Canadian contracts end on September 19. But we’re not holding our breath. If the Canadian auto industry can pull off an attractive deal, maybe Canada’s real estate concerns and continuing oil sector troubles won’t feel so painful. But we’re not holding our breath on that either. By Angela Johnson, Vancouver, Canada.
Already, more Canadians sour on the Magnificent Housing Bubble. Read… Fear Spreads of a Housing Crash in Canada