Policy, not cutting labour costs, is the key to preserving our auto industry

Posted on August 27, 2012 in Policy Context

Source: — Authors:

TheGlobeandMail.com – commentary/columnists
20 August 2012.   Jim Stanford

Triennial contract talks between the Canadian Auto Workers union and the North American auto makers kicked off last week in Toronto, the first since the industry’s near-death experience of 2009. The discussions feature a familiar clash of ideas: the auto makers are demanding labour cost reductions to match cheaper foreign jurisdictions, while the union argues that workers deserve some payback for their sacrifices, which boosted the industry’s profits. (Full disclosure: I crunch the numbers for the CAW side in these negotiations.)

Some commentators argue it’s not just wages and benefits that are at stake in these talks, but the future of the whole industry in Canada. If the union doesn’t cut compensation, they suggest, the auto plants will leave.

These dire predictions are overstated. While the strong Canadian dollar has indeed pumped up apparent costs in Canada, our industry still has a lot going for it. Productivity is 5 to 10 per cent higher here than in the United States. Plant utilization (which can affect costs more than compensation) is strong. Assembly plants can’t just pick up and walk away; they are enormous, fixed, long-lived assets. And the companies are making very strong profits in Canada (in retail as well as manufacturing). They won’t walk away from a good thing. Indeed, Toyota and Honda, unconstrained by pre-bargaining optics, are ramping up production here despite the high dollar and compensation that essentially parallels the CAW’s.

Worldwide experience, moreover, suggests that low labour costs are no magic bullet for industrial success. Scores of countries feature poverty-level wages but have no auto production whatsoever. Meanwhile, the most successful auto makers – in Germany, Japan and South Korea in the developed world and in the emerging markets of Brazil and China – are increasing wages, not cutting them. In fact, the whole point of attracting a high-productivity, export-oriented sector like auto manufacturing is precisely because it generates above-average incomes that spill over throughout the domestic economy.

Instead of browbeating their workers into ever-lower compensation, these jurisdictions have invoked a toolbox of pro-active policy measures to boost investment, productivity and net exports: everything from subsidized capital and managed currencies to technology incentives, trade interventions and even outright public ownership. Effective policy, not wage cuts, is the common ingredient in their success.

Imagine, purely for discussion, that labour costs were reduced in Canada. Right now, with a very strong dollar, total nominal labour costs (including benefits) at the three companies average about $3 per hour more than in the U.S. (Real wages, adjusted for higher Canadian prices, are actually lower here.) Suppose that gap was eliminated and costs fell by $3 per hour. Would that usher in a new era of automotive prosperity?

It takes an average of 29 hours of in-house shop-floor labour to manufacture one vehicle (including engine, transmission and final assembly). A $3 hourly saving therefore translates into an $87 reduction in the cost of a car. That’s not even enough to pay for deluxe floor mats in your new sedan, let alone underwrite the future success of an entire industry.

Meanwhile, the all-important policy context in Canada is currently making things worse, not better, for the auto industry. For example, the Harper government is aggressively pursuing free-trade deals that would eliminate tariffs on imports from three different auto-exporting powerhouses: the aforementioned Germany, Japan and South Korea. That would undermine the competitive position of domestic-made vehicles by about $2,000 per unit – outweighing our hypothetical labour savings by a 20-to-1 ratio. Similarly, the continuing flight of the loonie eats up any labour savings as fast as they can be tallied; indeed, the loonie’s 5-cent rise since June alone has added $3 per hour to Canada’s apparent hourly cost.

It seems almost pointless to even worry about labour costs when the broader policy framework that is so essential for industrial success is glaringly absent.

Direct hourly labour costs are less than 5 per cent of the total cost of designing, engineering, manufacturing, transporting and selling a new vehicle. Yet they capture 99 per cent of the attention. If the analysts are serious about preserving and building this industry for the long term, they’d better look beyond the headline-grabbing labour talks and start to imagine an all-round industrial policy framework – like those in other successful jurisdictions – that offers a more promising economic recipe.

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