The Future of Canada's Troubled Automotive Industry

MR. STALDER:

Distinguished members and guests, ladies and gentlemen: Our guest speaker today, Patrick Lavelle, is President of the Automotive Parts Manufacturers' Association of Canada, which represents three hundred independent automotive parts manufacturers across Canada who are suppliers of original equipment and service parts to the worldwide automotive industry.

Mr. Lavelle was born in Toronto in 1939. He was educated at St. Leo's Public School in Etobicoke, St. Michael's College High School in Toronto, and the University of Western Ontario in London.

Mr. Lavelle began work as a journalist with The Kingston Whig-Standard and the United Press International in Toronto. From 1961 to 1963, he was a public relations account executive for Maclaren Advertising in Toronto. And in 1963, he became the Director of Communications for the Liberal Party of Canada in Ottawa. Then, for a period of a few years, Mr. Lavelle was Executive Assistant to the Honourable Allan MacEachen as Minister of Labour and Minister of National Health and Welfare.

In 1967, he was Assistant to the President of Maisonneuve Broadcasting in Montreal. In the next six years, our guest of honour further distinguished himself by being Executive Assistant to the Government Leader in the Senate, the Honourable John Connolly; an account executive for Public and Industrial Relations Limited in Toronto; and Director of Marketing and Sales for Consumers Glass Company Limited in Vancouver and Toronto.

From 1974 to the present, Mr. Lavelle has been the President of the Automotive Parts Manufacturers' Association of Canada in Toronto. In addition to the responsibility of this position, from 1980 to 1982 he was Agent General for the Government of Ontario in the Ministry of Industry and Trade. Ladies and gentlemen, please join me in welcoming our guest of honour, Mr. Patrick Lavelle.

MR. LAVELLE:

Mr. Chairman, ladies and gentlemen: I am pleased and honoured to have been invited to address this historic club. It is particularly gratifying for me to be here today as I am in the middle of the almost impossible task of attempting to bring about a consensus among the widely divergent aspects of the Canadian automotive industry--an undertaking I at one time thought impossible, and in fact, it may be. None the less, it is quite apparent to me at least that now more than ever, a consensus is absolutely necessary if the automotive industry is going to survive. I liken ourselves somewhat to Sir Edmund Hillary, who will speak to you next week, except we are at the bottom of an impossible climb. But you must remember that he made it; hopefully, so can we.

Those who came here today expecting that I will be attacking the Japanese, calling for measures to protect the Canadian automotive industry and for the end of the Canada-United States Automotive Agreement may be disappointed. I will attempt to look at the broader aspects of Canada's most important and dynamic industry.

It is important to state at the outset that Canada's automotive industry has been basically profitable and competitive. It has not until recently relied on public policy for support or protection. This is unique in the automotive world, where intervention by governments has been the norm rather than the exception.

The modern history of the Canadian automotive industry dates back to that historic day in Johnson City, Texas, in January 1965, when Prime Minister Lester Pearson and President Lyndon Johnson signed the Automotive Agreement which rationalized the North American industry. The fact that the President was confusing Britain's Harold Wilson with Mike Pearson will give you some idea of the importance the United States placed on the largest bilateral free trade arrangement in history. The United States has not put a lot of emphasis on the agreement since then--except when there were rare United States deficits. We Canadians, however, have responded to it as if it were the Magna Carta--never to be changed or altered.

Simon Reisman and a host of other Ottawa bureaucrats who were present at its creation led us to believe that not only was it the best Canadian trade agreement of all time, but also to change it would defile our heritage--to improve it, impossible! As a result, we have an agreement that is eighteen years old this week and hasn't been changed substantially in all that time despite the radically changed economic environment in which it presently functions--particularly in North America.

The Automotive Agreement has produced many economic benefits for both countries. Mass production for an enlarged market has created thousands of jobs and improved efficiencies, particularly in Canada, where the market is smaller. But it has also provided the United States companies with close to a million vehicle sales, year after year, through their Canadian subsidiaries.

Because of Canada's lower costs, the automotive industry flourished here, particularly the Canadian-owned highly independent parts industry, where production increased over five times between 1965 and 1981. But we still import twice as many parts as we produce. Accordingly, over two-thirds of the $5 billion of parts produced in Canada are manufactured by independent companies who buy the bulk of their raw materials and components from other Canadian industries. The vehicle assemblers, on the other hand, with the exception of a few small truck assemblers, are 100 per cent foreign-owned and while they have been good corporate citizens, their loyalties are quite naturally divided.

In recent years, the energies of the American vehicle industry have been pushed and directed to survival, forcing it into alliances that years ago it wouldn't or couldn't contemplate. This means an accommodation with Japan, whose vehicle industry now dominates the world and probably will for the foreseeable future. This reality is having a dramatic effect on the Canadian industry. By the end of the present decade, Japan will have 50 per cent of the Canadian motor-vehicle market, if imports continue at the present rate. Over the same period, Canada will become the third source of supply for most imported parts into the United States, following Japan and South America. Since 1965, we have been first. Even now, Japan ships four times as many vehicles to the United States as we do. Many of those Japanese cars and trucks will be imported and sold in Canada by the domestic vehicle producers, in addition to sales by the regular Japanese distributors. The parts in those vehicles will be purchased in some Third-World country (if not Japan), where operating costs are lower than in Canada.

In the coming years, profitability and growth will return to the vehicle market in Canada. Canadians not only love their cars but they also need them to maintain their life-style and to develop the economy. We fail to realize, however, that by purchasing cars without Canadian content, we deprive local industry of necessary production which has a ripple effect on the country's trade and industrial activity from the steel mills of Hamilton to the docks of Vancouver and Halifax.

The Canadian automotive industry is the sixth largest in the world. It is also one of the most affluent. But the likelihood that it will continue to develop to the advantage of future generations is becoming increasingly remote. Canadians seem content to let the industry decline.

It is no secret that the United States assembly industry is no longer competitive with Japan. Whether this is because of currency manipulation on both sides or the higher productivity of Japanese workers, it is a fact that is no longer challenged. Professor Abernathy, the Harvard automotive expert who identified the competitive gap between the American and Japanese industry, in a private talk to a group of Canadians last fall, said that the United States industry was turning itself around but not without tremendous cost and dislocation.

The American industry is making great strides to improve its competitive position. It has introduced Japanese methods into both its management and manufacturing processes and most importantly, wage costs in the industry are actually declining.

I have never heard any senior executive at General Motors say that they can't compete with the Japanese but that hasn't stopped the company from organizing their marketing strategies around the fact that in some product lines they must import or joint-venture in order to retain their prominent place in the North American market. Also, I have heard others from the industry, including those from the multinational parts industry, declare that North American competitive pressures will eventually force their companies into making investment, management, and production decisions which will go against North American locations. This is already taking place.

A few weeks ago, I accompanied Premier Davis to a meeting in Detroit with ten of the largest multinational independent automotive parts firms operating in this country. The message was clear--if Canadian workers couldn't match wage demands with productivity increases, the firms would place future investments elsewhere.

An important aspect of the United States revival has been the readiness of United States labour to accept the hardships which will eventually lead to a more competitive North American industry, with job security and productivity growth being the bottom line. In Canada, we have been less ready to accept the realities that we face. The Chrysler strike, while perhaps justified by workers whose wages have been frozen for three years, was an indication that some Canadians are not aware of the competitive pressures we face.

Canadian automotive workers are productive and have deserved the benefits that have made them the top wage earners in the manufacturing sector. The future does not hold such promise. If the industry is to be competitive in the future, wages of both management and labour will have to be tied to increasing productivity along with a greater ability to find more common ground with each other.

Despite the difficulties I have already alluded to, Canada has retained its comparative advantage as a parts-producing nation, particularly vis-a-vis the United States. The advantages of the lower Canadian dollar and raw materials, particularly steel, have been eroded in recent years, making it imperative that Canadian producers reinvest and alter their current strategies to adapt to a radically changing environment.

It is impossible to consider Canada's position in isolation. I want to assure you despite protestations to the contrary, the United States government is supporting its domestic industry. Domestic policies have been altered to remove some of the more costly regulations introduced on emission and safety control. A 25 per cent duty was unilaterally slapped on all Japanese trucks imported into the United States. For the past two years, quotas have been applied that have kept the Japanese at or about 25 per cent of the United States car market.

Two Japanese vehicle companies, Honda and Nissan, have invested in the United States, many foreign parts plants have located there as well, and local content laws or other hidden pressures, real or imagined, are forcing Japanese investment and parts to source in the United States. And we fully expect that the United States Congress will reintroduce a 90 per cent American content bill during the present session, which is now under way. This bill, while aimed at the Japanese, includes Canada in its net. Knowingly or not--and I suspect not--it is a bill that jeopardizes over $25 billion of automotive trade between our countries if the Canadian government retaliates as it surely must. These are well-orchestrated moves from the American point of view but they have not helped Canada. In fact, it can be argued that they have had serious adverse effects here, by virtue of the Japanese shifting their focus and their excesses to the Canadian market.

We Canadians, especially those who support fair trade, like to forget that the Japanese automotive market is protected. We forget that the efficient Japanese vehicle industry has emerged from a long period of government-supported policies, including subsidized steel prices and research and development, and that they have entered into marketing arrangements with many other countries, where they have a smaller share of the market than in Canada. In their own market, imports account for less than 3 per cent of sales.

I am not faulting the Japanese but rather those Canadians who feel that we should simply let these competitive pressures wash over us without response. It is impossible to contemplate a 100-per-cent-imported Canadian automotive industry without weighing the consequences of this free-market-oriented scenario. The steel industry would lose 25 per cent of its volume; over a thousand independent Canadian parts companies would be jeopardized; and the glass fabricators, tire makers, and the plastics industry would experience dislocations from which they would never recover. Over twenty-five thousand automotive workers have already lost their jobs and another one hundred thousand direct automotive workers would be set loose at a time when the economy is not producing new jobs as it once did. The suggestion of one analyst was to initiate a fund so that auto workers could move to other jobs.

What he forgot to tell us was where those jobs are located. In Sudbury, Alberta, perhaps British Columbia?

Because we are so uninvolved in our own defence, we forget how strategic an automotive industry is in time of national emergency. Giving up on a vital industry and severely damaging others when the world is habitually on a war footing seems senseless.

And while very few people have proposed to let the industry go, their lack of concern is usually phrased in the need to provide consumers with vehicles that are competitively priced, efficient, and quality-oriented. We share their desire but it does not occur to these same people that if we give up our options and our domestic industry, regardless of what it is, we will be in the hands of foreign producers who can and will manipulate the market as they choose. One of our problems with the automotive industry is that many Canadians perceive it to be foreign-owned and regionally located and therefore, not worthy of their more nationalistic or patriotic concerns. I have already pointed out that this is an erroneous perception. The parts industry is 60 per cent Canadian-owned (while located mainly in Ontario and Quebec, there are parts plants from coast to coast); the steel industry is 100 per cent Canadian-owned; and the domestic dealers, retailers, and aftermarket producers also have a high degree of Canadian ownership.

The vehicle producers are foreign-owned but they have built plants across the country and generally, they are prepared to live by the rules established by the national government--as any foreign corporation should--be it American, Japanese, French, or British. If the rules are too loose, then it's up to the government to tighten them up. Rather than opt for the zero-sum game, it seems more appropriate to search for some alternate strategies that will increase the competitiveness of the Canadian-based industry and that will provide economic benefits to this country in tune with its size and future growth--namely, more jobs, renewed profits, and investment.

Last October, on the day he became Minister of Industry, Trade, and Commerce, the APMA proposed to Mr. Lumley that the domestic labour, vehicle assemblers, and automotive parts manufacturers be called upon to produce just such a strategy. Mr. Lumley, because of his private-sector orientations, accepted our challenge and handed us the task with his help to undertake a study, which we are presently doing. The Task Force includes, among others, the Presidents of Ford, Chrysler, General Motors, the Canadian Director of the UAW, Bob White, who along with me is a co-chairman.

Our mandate is to review the present state of the automotive industry and make recommendations to the government for both short- and long-term solutions. This will involve the present threat of Japanese infiltration, our trade position with the United States, and the long-term competitiveness of the industry. Contrary to the perception of some, this is not an effort to develop protection for ourselves. It is a serious attempt to dissect the competitive and structural problems facing the industry so that we will be able to compete in the future on an equal footing with our competitors.

As a member of the Task Force, I will not prejudge the conclusions of the commission. This is only January. My immediate and most important concern is the survival of the independent parts industry in Canada and to ensure, from the industry's point of view, that our conclusions are not selfserving. We are prepared to accept a number of realities in the process. We are no longer as competitive as we once were but the industry--particularly the parts industry--is lean and trim after three years of harsh production and employment cutbacks.

We are encouraged that Canadian-owned companies, such as Magna International, the largest independent parts company in Canada, is projecting a large increase in profits in 1983. In recent years, only two publicly traded parts companies have lost money in Canada and that was because of very special circumstances.

As growth returns, so will productivity gains, which were once the highest in Canadian manufacturing. Canadian competitiveness, based on the dollar alone, will be enhanced as Canadian inflation rates move in line with those in the United States as a result of the industry's adherence to the government's restraint program.

Canadian steel prices, once 15 per cent below those in the United States, but now under attack from predatory pricing by the United States mills, will return to more competitive pricing once the American steel industry completes its shakeout and reorganization.

Ontario Premier William Davis has just inaugurated an Automotive Parts Technology Centre, which will help bring new and innovative management and manufacturing techniques to small-and medium-sized parts companies in Ontario. It will also assist in plugging these same companies into financial benefits at the federal level, which they have been unable to obtain in past years. The comparative advantage we have had with the United States in this industry will improve if we take the time now to adopt policies which will allow Canadian companies to gear up for the challenges that await. Mr. Lumley has indicated publicly that the government will help establish a climate in which the industry can retain its competitive advantage. This is a welcome change in government policy which previously treated the automotive industry as a regional one that had reached its zenith and was in decline.

Before closing, I would like to define briefly some of the options we have before us. Given common commitment from labour and industry, the federal government and provincial governments can play a crucial role in ensuring a favourable trade and economic environment for manufacturers and workers. To ensure such an environment, we must recognize the multilateral nature of the industry. We need not only a comprehensive policy with the United States but also one with Japanese and European producers. Such a policy must have at least two broad goals: first, to support the resurgence of our domestic industry; and second, to encourage Japanese and European producers to manufacture in Canada and to buy Canadian-made parts.

There are several options available for developing an effective multilateral trade strategy, and I am of the mind that no one option will be suitable by itself. In the first case, we could impose some kind of Canadian content requirement that would force all companies sharing our market to purchase a certain percentage of their parts from Canada. Another option would be to use our tax system to achieve some of the same effects while also encouraging exports. A third option would be to renegotiate the Canada-United States Automotive Agreement to secure additional Canadian value added. To be successful, our trade policy must offer both carrots and sticks to all producers. If the object is to encourage Canadian production and employment, we must develop a careful mix of policies that will not shield our existing producers from competition, but will instead encourage our foreign competitors to participate in our manufacturing system.

Canada is blessed with many unique resources, abundant energy, and raw materials, productive and reasonably priced labour, easy access to the American market, and strong trade ties with Europe and Japan. With the proper mix of trade policies, would it not be possible to develop Canada as a major automotive manufacturing stage for export to Third-World countries? I think it would.

As Canadians, we have been late in realizing that wellconceived short-term protection of our domestic industry could be a lever for attracting new competitors to our soil, thus encouraging domestic competition and efficiency rather than diminishing it. Moreover, we have been late in realizing that to participate fully in the long-term benefits of fair trade, we must be prepared to take radical steps in the short term to ensure our own international competitiveness. Ensuring the automotive industry's competitiveness is something which ultimately will depend on the resources and talent of the industry. But given a clear commitment from management and labour to restore the industry to the highest international standards, government can do its part by fostering a favourable trade environment.

It would be irresponsible of me to argue that the government policies I have suggested would not have a cost. They do have costs in tax dollars and purchase prices. But they will have long-run benefits far outweighing the costs. Beyond the limited content arrangements in the Auto Pact, Canadian parts producers have had no protection for the past eighteen years. Aside from some patchwork, and federal and provincial assistance programs, there hasn't been a concerted program aimed at replacing outmoded plant and equipment as there has been in other jurisdictions. I believe the industry now has the potential of entering a new era of higher productivity, more stable employment, and new models of labour and management relations. It still has a long way to go, but all the competitive pressures are inexorably pushing it that way. If Canada acts quickly and with vision, I think we have the unique opportunity to internationalize our domestic industry and revitalize the linchpin of our manufacturing sector.

I am confident that the automotive parts industry is ready for the difficulties ahead. We recognize now that within our adversities there are great opportunities. I hope the Canadian people will recognize this too, and be ready to answer in the affirmative when we come forward with a strategy for building a new, more competitive, more internationalized Canadian automotive sector.

The appreciation of the audience was expressed by Brigadier General Stephen Andrunyk, Immediate Past President of The Empire Club of Canada.