Canada's Automotive Industry

Rev. Dr. John S. Niles, Victoria Park United Church and 3rd Vice-President, The Empire Club of Canada; Meg Choi, Grade 12 Student, North Toronto Collegiate Institute; Rev. Kimberley Beard, BA, BEd, MDiv, Incumbent, Christ Church, Brampton and Director, The Empire Club of Canada; Robert J. Dechert, Partner, Gowling LaFleur Henderson LLP and Past President, The Empire Club of Canada; Derek Hatfield, Skipper of "Spirit of Canada"; Verity Craig, Associate, Carmichael Birrell & Co. and Director, The Empire Club of Canada; Harry T. Seymour, PEng, FFAF, Executive Vice-President, GBC Asset Management Inc. and Past President, The Empire Club of Canada; and The Hon. Joseph Cordiano, MPP, Minister of Economic Development and Trade, Province of Ontario.

Introduction by John Koopman

Early in the Second World War a man named Tex Thornton recruited nine brilliant young men to the U.S. Air Corp. With dispassionate attitudes, strict accounting controls, and numbers-based analytic methods, this group built and organized the U.S. Air Corp. To many men the Second War was a lesson in doubt. To this group it was a lesson in truth.

As the war drew to a close, these 10 young men decided to sell themselves as a group. They would seek a needy company to save; it didn't matter which one, the weaker and needier the better.

In 1946 the Ford Motor Company had been poorly run for decades, teetered on the edge of bankruptcy and was losing the then astronomical sum of $10 million a month. So they sent a telegram to Henry Ford 11. The telegram said: "Terrific Young Managerial Team Ready to Modernize and Save Your Company." They were young, they were talented and they were sure of themselves. The oldest of the group, Tex Thornton, was all of 32.

The Whiz Kids, as they came to be known, were not automobile people. They were not fascinated by mechanics, nor in love with cars, nor awed by the lust of turning raw iron ore into wonderful machines. Their knowledge was about systems that they believed could be used to govern any organization.

The whiz kids were clinical and only facts mattered. They were distrustful of experience. For them experience was not expertise, it was just as likely to be bias. Numbers were more than a belief; they were a theology.

Of the 10, two later become Ford presidents and three became presidents of other major American corporations. Robert McNamara left the Ford presidency to serve in "Camelot" as Secretary of Defence for President Kennedy, and Tex Thornton founded Litton.

But as talented as they were, the whiz kids legacy is ultimately one of failure. Hubris was their Achilles heel. They embodied the perpetual Liberal conceit: "They knew better than anyone else." They spawned a post-war tidal-wave of MBAs who were slaves to numbers, cost control and centralized authority. For all their brilliance they never understood the human element in business.

Tex Thornton's Litton collapsed under the weight of too much expansion, another whiz kid committed suicide after his Mercury division profits collapsed, and Robert McNamara applied statistics and quantitative methods to the war effort in Vietnam with disastrous results.

Our guest today was made President of Decoma when he was only 32 years old. In 1999 he was named one of Canada's Top 40 under 40. So Mr. Power is a whiz kid--but he has a more enduring formula than the post-war whiz kids. The Decoma formula is built on people, not on paper. Business units are kept as small and entrepreneurial as possible. Plant managers run their own business, not the corporate centre. This dynamic corporate culture is the cornerstone of the company's success. Decoma, like Magna, its former parent, has a corporate constitution that mandates equity and profit participation for all employees.

Ladies and gentlemen, please join me in welcoming, a son of Cape Breton, Mr. Alan Power to the podium of the Empire Club of Canada.

Alan Power

Good afternoon ladies and gentlemen and thank you for the invitation to share some of my thoughts on the state of the automotive industry in Canada.

I stand here today as a concerned Canadian, one who has spent his entire career in the automotive business. As head of a Canadian auto-parts company, my interest is much more than personal. It includes the 7,000 Decoma employees in Canada--over 40 per cent of our total work force--whose livelihood is tied to a strong and sustainable automotive industry.

Decoma is a world leader in exterior automotive appearance systems. Since the company was founded, we have grown to 49 facilities worldwide--20 here in Ontario--and now supply virtually all the world's major vehicle manufacturers. We make parts such as bumper covers, running boards and lighting systems--the types of products that enhance the appearance of a vehicle.

I wish I could say that the Canadian automotive industry is in fine shape. But the truth is it's not--and we need to act decisively and urgently to repair it.

First, let's consider what's at risk--a leading, knowledge-based industry that has been a mainstay of the Canadian economy for many years. When I say Canada, I'm referring mainly to Ontario, which is home to over 95 per cent of the country's vehicle production.

The automotive industry has a long and storied history in Ontario. The province is now home to 14 vehicle assembly plants and more than 450 auto-parts manufacturing facilities. In 2002, Ontario's vehicle production represented more than 15 per cent of the North American total--or basically one in every six vehicles built. This output means Ontario is second only to Michigan in North America and, remarkably, seventh worldwide. However you measure it, the economic impact is significant. The auto sector is Canada's biggest contributor to manufacturing GDP and its largest manufacturing employer. The automotive industry, in fact, generates about one in every seven jobs in Canada. In Ontario, the industry employs close to 210,000 people directly--about 83,000 in assembly and 127,000 in parts.

As you might expect, a major portion of what we produce--90 per cent to be exact--is exported south. This has helped Canada consistently post a surplus in finished vehicle and parts trade. Canada-U.S. automotive trade is big business--$150 billion annually--which is over 20 per cent of the total number.

While there is no denying that we have built a solid foundation over time, recent trends have intensified the debates about the long-term health of our industry.

A look back at the past five years reveals a fairly steep decline in vehicle production since its peak in the late 1990s. Not coincidentally, Canada's trade surplus has dropped by some 40 per cent since 1999.

Now to some degree this is simply a reflection of tougher times for the industry overall, but it's not the full explanation. For a more complete picture, it helps to go back a bit farther.

The decade or so leading up to the late 1990s was a prosperous period for the Canadian automotive industry. Our competitive standing was perhaps never better. Choosing Canada made perfect sense.

A skilled work force, high productivity and a low dollar helped Ontario attract substantial new assembly capacity in the late 1980s and early 1990s. Naturally, suppliers benefited from this rise and during the 1990s, the auto-parts business took off. Parts shipments climbed from $8 billion in 1992 to over $20 billion by 2000.

So why is the industry in trouble now? What's changed? Well, a lot.

The biggest change--and the most disturbing trend--is that we've lost out on every major new assembly plant investment in North America.

Consider this: in the first half of 2003 the world's automakers earmarked more than $11 billion for new investments. Canada won't see one dollar of it.

Go back a few years and you'll see similar numbers. That's not to say Canada hasn't had its share of sizeable investments, but ours have been predominantly refurbishments or capacity expansions rather than new "greenfield" projects.

To make matters worse, three assembly plants have been closed or are now slated to close--two in Ontario and one in Quebec.

The interesting thing is we're not losing new business to the regions that for many years were our primary rivals. We're losing to upstarts like Alabama and Tennessee.

Since 1989, there has been only limited new assembly development in Ontario. During the same time, 19 new assembly plants were located in the U.S., mostly in the south. That's a success rate the Canadian industry could not match even in its heyday. And clearly we haven't responded to what these states are offering today.

Given the choice between all the advantages offered by other regions, the car companies continue to choose the Southern U.S. The number-one reason is not good infra-structure or a skilled work force; it's purely economic.

In addition to labour costs that are among the lowest in the U.S., governments of these states have been aggressively courting vehicle manufacturers with often huge incentive packages. Subsidized loans, land purchases, tax concessions--all have been used to great success to lure investments.

So why is the industry in trouble now? What's changed? Well, a lot.

The biggest change--and the most disturbing trend--is that we've lost out on every major new assembly plant investment in North America.

Consider this: in the first half of 2003 the world's automakers earmarked more than $11 billion for new investments. Canada won't see one dollar of it.

Go back a few years and you'll see similar numbers. That's not to say Canada hasn't had its share of sizeable investments, but ours have been predominantly refurbishments or capacity expansions rather than new "greenfield" projects.

To make matters worse, three assembly plants have been closed or are now slated to close--two in Ontario and one in Quebec.

The interesting thing is we're not losing new business to the regions that for many years were our primary rivals. We're losing to upstarts like Alabama and Tennessee.

Since 1989, there has been only limited new assembly development in Ontario. During the same time, 19 new assembly plants were located in the U.S., mostly in the south. That's a success rate the Canadian industry could not match even in its heyday. And clearly we haven't responded to what these states are offering today.

Given the choice between all the advantages offered by other regions, the car companies continue to choose the Southern U.S. The number-one reason is not good infra-structure or a skilled work force, it's purely economic.

In addition to labour costs that are among the lowest in the U.S., governments of these states have been aggressively courting vehicle manufacturers with often huge incentive packages. Subsidized loans, land purchases, tax concessions--all have been used to great success to lure investments.

This erosion of market share has had a major and lasting impact on the North American industry. In Canada, the fallout has been a decrease in new investments from the Big Three, cutbacks at some existing plants, and the loss of critical assembly jobs. While this news has been offset to some degree by investments and capacity additions from Toyota and Honda, the net effect has been negative.

On the plus side, the pendulum appears to be gradually swinging in the right direction for the domestic automakers. The quality of their cars has improved dramatically over the past few years and we are seeing them appear more frequently at the top of influential consumer surveys on vehicle quality and reliability.

Many of their assembly plants are getting high marks as well. In the 2003 Harbour Report, which measures manufacturing efficiency and productivity, the Big Three had six of the top-10 facilities in North America.

The Big Three are also fighting back with an aggressive schedule of new product launches. For the 2004 Detroit Auto Show, for example, the Big Three will display a record 80 new products.

It will take time to change consumer perceptions and regain positive momentum, but like many others I'm optimistic that a series of competitive vehicles will help them slow the decline and should eventually reverse it.

So what else has changed in Canada since the mid- to late-1990s?

An obvious answer is the upward move in the Canadian dollar. While this is a recent trend, it just makes the current situation more critical. The full impact, though, will not be felt for a while. In our industry, we generally see a three- to five-year lag, meaning the full impact of the strengthening Canadian dollar will not be felt for a while.

This should be cause for concern for an industry that, historically, has relied too heavily on a low dollar. To illustrate the long-term hazards of this strategy you can analyze the recent history of the United Kingdom. Production in this once-buoyant automotive market has been declining steadily in recent years. Currency is not the only factor, it never is. But the pound was keeping the industry afloat for many years and in my view has hastened its decline.

I'm not suggesting that's where Canada is headed; it's simply one potential outcome. However, the parallels should concern us.

As if these issues aren't daunting enough, our industry has other challenges to address, like the overcapacity that is plaguing many of the assembly plants in North America. Emerging markets such as China also pose an immediate threat to parts suppliers and, in the future, possibly to vehicle manufacturers themselves.

Sound discouraging? Perhaps. But the good news--yes, there is good news--is that the government has awakened to industry concerns and is committed to action. We have a long way to go but we're seeing many positive signs from both levels of government, particularly from our provincial government.

Earlier this year, the Ontario government pledged an investment of $625 million--$500 million for the Ontario R&D Challenge Fund, which will support innovation activities, and another $125 million for skills training. Although industry is still understanding how to benefit from these investments, the government's announcement did indicate a willingness to address the problem.

In addition, we're currently in discussions with the new provincial government on the development of other programs specific to the automotive industry.

Another important development was the formation last year of the Canadian Automotive Partnership Council or CAPC. The group is composed of representatives from provincial and federal governments as well as industry, labour and academia.

Its mandate is to identify and prioritize the actions needed to ensure that the Canadian automotive industry continues to develop and remain innovative.

The council gives a voice to all key constituent groups and recognizes that this is truly a partnership and that despite our differences we share a common goal and need a common vision.

CAPC has classified all the issues facing our industry under eight major categories. An encouraging sign is that we're already seeing significant progress in all eight areas. I'll touch briefly on two that I believe are especially vital to the future of the automotive industry in Canada.

The first category is innovation. As the co-chair of the CAPC Sub-committee on Innovation, this is a topic that's near and dear to me. It's also something we're very passionate about at Decoma--so much so that a minimum investment in R&D is written into our corporate constitution. Our management team wisely recognizes that new products and technologies help us maintain our leadership position and open up new market segments.

A hallmark of the Canadian automotive sector, innovation, is one of our country's best hopes of remaining competitive and attracting investment, especially as it becomes more difficult for us to compete on a platform of lower cost.

Unfortunately, it has taken us a while to get the message. In 2001, the World Economic Forum ranked Canada's performance as weak, with a "current competitiveness" ranking of 11th in the world. Canadian automotive R&D spending significantly lags the national average.

It will take more than just increased government R&D spending. We would also like to see further tax changes to encourage industry-driven research and development. And we'd like to see an innovation fund specific to our industry and aligned with our needs because the programs currently available are either insufficient or difficult to access.

For many in our industry, the capacity to innovate is closely tied to developing human resources. There is no disputing the overall skill and education level of Canada's work force; we continue to place at or near the top in most studies. The bigger issue is the disconnect between the education system and our industry's needs. We have great technical resources in Canada but they are not set up in a way to service manufacturing.

I believe we have a real opportunity to modify our education and training systems, to strengthen the competitive advantage we claim in labour and encourage more young people to consider a career in the automotive field.

Among other ideas, we should look at the following:

• Ways to promote high school science and technology programs, coop education and apprenticeship training;

• A strategic immigration policy and improved recognition of foreign credentials; and

• Further subsidies and tax credits for apprenticeships.

There has been an increased focus on several of these issues over the past four years, and we are seeing decent results. However, one area that needs attention immediately is what we call classic trades training. High school classic trades and shop courses are declining at an alarming rate in Ontario. The situation is such that some are calling the 70 per cent of kids that do not attend post-secondary education "the lost 70." This trend needs to be reversed.

An ideal education system would improve the knowledge flow in both directions so that we are better equipped to draw on the untapped potential resident within our colleges and universities, especially the incredible scientific resources.

In my view, we should also take a hard look at the process for awarding research grants. A good solution might be to tie a portion of university research funding to industry sponsorship and the real economic advantage of a new technology or product.

Fortunately, both the provincial and federal governments have moved human resources to the top of the agenda. A number of these issues and questions were discussed at length at the most recent CAPC meeting and I'm pleased to report the group emerged with several good answers that should have an immediate impact. The biggest step is almost $15 million in annual funding from the provincial government for automotive education at our universities.

When it comes to the future of the automotive business in Canada, one of the most active subjects of debate is government fiscal and investment policy.

Should we compete in the subsidy war? Should we match the incentives being offered by the southern states?

Our past governments have been reluctant to do anything that would appear to be a cash incentive. More recently, our governments have begun advocating a "Team Canada" approach that will focus on doing a better job of marketing the government programs and resources already in place.

Certainly marketing our existing advantages is a big part of the solution. There is no doubt we have work to do to raise awareness of Canada as an investment destination for automakers, particularly foreign ones.

In my view, an important part of this process is to assign a dollar value to the huge advantages of doing business in Canada, and then get vehicle manufacturers to recognize that value.

To put forward a truly competitive bid, we still need to make up the difference--the gap between what Canada is offering and what our competitors are offering. And we may need government investment to help close that gap. Industry has made it clear that we're not asking for one dollar so we can turn it into 20 cents. We're saying: "Give us one dollar and let us turn it into two." Any support we receive has to come with a well-defined payback, it has to have a sound business case.

These funding issues will not be resolved overnight. However, one thing that industry and government have already agreed on is a jointly developed strategic vision for the industry, a roadmap for the future.

In addition to these short-term issues, any plan for our industry should consider how to address longer-term issues such as the potential shift to alternatively fueled vehicles. It should also look at ways to capitalize on the many growth opportunities within our reach, such as strengthening our ties with the car companies from Asia and Europe. The award of the highly anticipated Lexus RX 330 to Toyota Cambridge--the first plant outside Japan to manufacture a Lexus vehicle--is an excellent example of what Canada can achieve.

The success of this roadmap is critical, because there is no denying our industry is facing some very stiff challenges.

Protecting our existing assembly plant jobs and investments should be our first task because if an assembly job goes, eventually so too will the other jobs and economic benefits tied to it.

We also need to attract new assembly capacity to Canada. While the dual advantages of a low dollar and free health care may have worked in the past, they are being decisively trumped today. The simple fact is the country can't compete without government investment.

The future of the industry in Canada is also strongly tied to our ability to innovate. From a supplier perspective, we must continue to turn out unique products and technologies on a low-cost basis if we are to maintain our status as a global leader.

This objective relies on a determined effort to address the shortage of skilled trades and other labour market concerns I outlined. As with all key issues, this will require the close co-operation of industry and government.

The positive news is the wheels are in motion. We have strong public commitments from both levels of government and momentum for reform, led by CAM

What we need now is a much greater sense of urgency and, more than anything, results if we are to insure long-term prosperity for our industry, for our province and for our country.

Thank you.

The appreciation of the meeting was expressed by Rev. Dr. John S. Niles, Victoria Park United Church and 3rd Vice-President, The Empire Club of Canada.