Social Policy in Ontario

Sputtering auto industry needs more than a bailout

Posted on November 12, 2008 in Debates, Governance Debates

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TheStar.com – Opinion – Sputtering auto industry needs more than a bailout: Only a massive overhaul can get the engine of Ontario’s economy running smoothly again
November 12, 2008. Patrick Lavelle

As a result of the signing of the U.S.-Canada automotive agreement in 1965, the automotive industry, the assembly of vehicles and the manufacturing of parts have formed the backbone of the Ontario economy. And by virtue of the spinoff effect they also have played a crucial role in creating wealth and jobs in Canada.

With General Motors, Ford and Chrysler on their knees begging for money from the U.S. government – a demand that will probably be heeded by the Bush or Obama administration – governments in Canada are under the gun to do the same.

The Canadian parts industry, a mixture of subsidiaries of U.S. multinationals and Canadian independents (notably Magna International) have faced similar challenges in past recessions. But the current situation has more negative implications for the industry than any since Canadian prime minister Lester Pearson and U.S. president Lyndon Johnson signed the now obsolete agreement 43 years ago.

With the failure of the so-called Big Three to respond to global competitive pressures over the past several decades, the Automotive Parts Manufacturers Association (APMA) – the lobby group for the independent parts industry – recently asked the governments to provide a staggering $1 billion in assistance to offset the current credit crunch in the U.S. industry.

Both the Ontario and the federal governments are likely to respond in some form. But there should be no enthusiasm for giving money to the companies without calling for a major restructuring of the Canadian industry, one that may impose short-term pain for the long-term gain of both its employees and shareholders.

In the past, governments have provided Band-Aid solutions for the parts industry by establishing loan guarantee funds or technology centres to improve productivity. The vehicle assemblers have already received billions in subsidies to encourage the building or expansion of assembly facilities in southwestern Ontario.

All of this can be justified based on the creation and maintenance of thousands of jobs and the spinoff effect of those jobs throughout the economy, especially in southern Ontario.

Many Canadians will undoubtedly be of the view that the industry has received enough help and that governments – facing growing deficits and debt – are not in any position to help one industry while ignoring many others that are or soon will be lining up for handouts.

Unfortunately, governments – particularly the Ontario government – have very few options and will have to come to the table, willingly or otherwise, or see the auto industry follow the Canadian steel industry into foreign hands without domestic input.

In view of the bilateral nature of our automotive trade flows, one would hope that the governments of Canada and the United States would co-operate fully where there are common approaches so that Canada will not be side-swiped by American policy decisions.

The strength of the independent parts industry is its mixture of Canadian and foreign-owned companies – the majority being Canadian. A number of these companies have emerged over the years and have provided stable employment for thousands of Canadians, while foreign parts makers have opened and closed Canadian subsidiaries willy-nilly depending on competitive pressures in their home markets.

The first requirement of any solution is to determine the real strategic issues facing the industry. Providing credit to help offset problems in the U.S. industry is hardly a justification for turning over millions of taxpayer dollars in either loans or loan guarantees.

The future prospects of the industry in a global environment are not clear even though millions of cars will continue to be produced and sold in the North American market in the years to come.

The question remains how many of those vehicles will be manufactured by General Motors and Ford – assuming that one way or another Chrysler will disappear. While the U.S. focuses on GM and Ford – both too large to fail – it remains in Canada’s interest to maintain both companies and attract more third-country vehicle producers from Japan, Korea and other Asian countries.

Canadian parts manufacturers have virtually ignored the opportunities and benefits of becoming suppliers to foreign vehicle manufacturers – mainly Japanese – that have established state-of-the-art facilities in North America, let alone pursued opportunities in other parts of the world. They have set their sights on the U.S. manufacturers even though it has been evident for years that Detroit was failing to produce cars that people wanted to buy.

The quality and technology demands of the Japanese manufacturers – evident in the quality of their finished vehicles – present many obstacles to Canadian and American-owned subsidiaries. Canadian parts companies are under the thumb of the Canadian Auto Workers Union (CAW) and the American UAW, which have been reluctant to adopt standards and work rules that would make Canadian companies more cost competitive.

The governments, the industry and their employees have one last chance to retain the industry as a major contributor to the Canadian economy – if they take the opportunity to restructure and reverse the ominous trends which appear to be spelling its demise.

A hard-nosed and non-political expert who has adequate resources should be appointed for an independent and critical assessment of the industry to determine what government assistance is required and under which terms it should be delivered. This should be accomplished in 30 days.

At the same time, a task force comprised of all aspects of the automotive industry, including labour and the Japanese manufacturers, should be given time to respond to the competitive and environmental issues facing the industry and propose a long-term solution.

Unless some form of long-term restructuring formula is adopted by the industry as a whole, it would be difficult to make a case that the automotive parts industry should be treated differently than any other sector of the economy.
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Patrick Lavelle is former deputy minister of Industry Trade and Technology for the province of Ontario, former president of the Automotive Parts Manufacturers Association of Canada, and former chair of the board of the Export Development Canada and the Business Development Bank of Canada.

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