A WARNING IN WINDSOR

Canada losing 'civil war' for auto jobs

Brampton Assembly
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WINDSOR, Ontario -- Chrysler Group shocked many Canadians when it abandoned potential government help to overhaul its assembly plants here.

Chrysler will stay, for now anyway, but CEO Sergio Marchionne's dire warnings about Ontario's "competitiveness" left many questioning the long-term fate of building vehicles in Canada.

That debate should be considered a canary in a coal mine not only for Canada, but for the unionized heartland of the United States as well.

Widening differences in labor, electricity, regulations, transportation, government assistance -- all the contributors to the final cost of producing an automobile -- have tipped the balance in what one analyst says has been a decade-old border battle.

But it's not the border you think.

"In the last decade, the automotive sector has been in a civil war -- it's Canada and the U.S. Midwest versus the U.S. South and Mexico," says Dennis DesRosiers, an automotive consultant in Toronto.

"And at this point," DesRosiers says, "the South is winning."

According to the Center for Automotive Research in Ann Arbor, Mich., automakers announced investments of over $51 billion in their automotive factories in North America from 2010 through 2013. That figure includes $5.2 billion invested by Chrysler.

Of that $51 billion, only $2 billion has gone to Canada. The majority has gone to expand automotive manufacturing in the southern United States and, to a greater extent, Mexico, where Japanese and German automakers are planning an additional $10 billion factory spending spree by 2020.

Mexico's manufacturing advantages are vast and varied: low labor costs; access to the largest worldwide automotive markets through free trade agreements; cheap currency; and, in mid-Mexico, the site of most recent automotive expansion, nearby direct access to two oceans.

Drug-related violence in Mexico remains a deep concern for automakers, but one that has so far not overshadowed their enthusiasm for the United States' southern neighbor.

The Chrysler-Canada controversy provides a window into the pressures that governments throughout the U.S.-Canada Rust Belt will feel as automakers weigh future production site decisions.

While Mexican auto manufacturing has grown, Canada's domestic industry has waned. Five car companies -- the Detroit 3, Toyota and Honda -- build cars in Canada, and the country is home to three of the largest 100 global auto suppliers: Magna International, Linamar Corp. and Martinrea International.

In 2004 Canada built 2.9 million vehicles, the vast majority for export, and was the world's fourth-largest auto-producing country. Last year Canada built 2.1 million vehicles -- 10th-highest in the world.

More worrisome for Canadians is corporate investment in its automotive manufacturing sector, according to a report compiled by the Canadian Automotive Partnership Council. In a report last November, the council said capital spending in the Canadian automotive industry last year was half the level it was in the 1990s and 2000s.

The council includes the five automakers that build light vehicles in Canada, as well as suppliers and Unifor, the union representing Canadian auto workers. It issued a dire report in November concerned that the nation's auto manufacturing sector was withering away.

It isn't that companies are anti-Canada, said Rob Wildeboer, executive chairman of Martinrea and a member of the council. "They're making business decisions in terms of where it makes sense to deploy their capital. Over the long term, the lack of capital spending is not sustainable" to maintain a Canadian auto industry.

Canadian auto plants
Ontario Map


• Chrysler Group
Windsor Assembly
Products: Chrysler Town & Country, Dodge Grand Caravan, Ram C/V Future: Chrysler confirmed it will build the next-generation Town & Country redesign in 2015. Grand Caravan will be replaced with another vehicle in 2016; Ram C/V production to end in 2015.

Brampton Assembly
Products: Chrysler 300, Dodge Charger, Dodge Challenger Future: All 3 vehicles will be freshened this year.

• Ford Motor Co.
Oakville Assembly
Products: Ford Edge, Flex; Lincoln MKX, MKT Future: Redesigned Edge is due this year, after Ford invested $700 million in Oakville in 2013. A redesigned MKX will appear in 2015. The future of the Flex and MKT is uncertain.

• General Motors
CAMI - Ingersoll
Products: Chevrolet Equinox; GMC Terrain Future: Redesigned versions of the Equinox and Terrain are due by mid-2015.

Oshawa Consolidated
Products: Chevrolet Equinox, Impala (fleet only)
Future: GM plans to run the previous Impala version into 2016. It is unclear whether Equinox production will remain after that.

Oshawa Flex
Products: Buick Regal, Cadillac XTS, Chevrolet Camaro, Impala Limited
Future: A redesigned Camaro is expected in 2015, but it's unclear whether it will remain in Oshawa. The next-generation Regal isn't expected before 2016. It is unclear whether there will be a redesigned XTS.

• Honda
Alliston Assembly
Products: Honda Civic, Honda CR-V
Future: Redesigned Civic due in 2016; redesigned CR-V due in 2017.

• Toyota
Cambridge Assembly
Products: Toyota Corolla, Matrix; Lexus RX 350
Future: Corolla redesigned in 2013; Matrix likely to remain 1 more year in Canada only; redesigned RX expected in 2015.

Woodstock Assembly
Product: Toyota RAV4
Future: Redesigned in 2013.

Sergio Marchionne's pique was apparent when he ended incentive talks with Canadian officials.

The factors


Measuring manufacturing costs across national boundaries can be tricky because some costs are specific to individual locales. One example is compliance with Ontario's Toxics Reduction Act, which requires a factory to issue an annual report of the toxic substances it uses, creates and releases. But some areas -- labor costs, taxes, utility rates, government incentives -- are easier to compare.

Labor costs are a key driver, especially to Mexico. The Center for Automotive Research puts the average Mexican auto worker's compensation, including wages and benefits, at about $8 per hour, in comparison to about $39 in Canada and $37 for union workers in the United States under the UAW's two-tier wage system. (All figures are stated in U.S. dollars.) The numbers can fluctuate, however, with fluctuations in the Canadian dollar and Mexican peso.

Canada's wage rates used to be comparable to U.S. rates before the introduction of the controversial two-tier wage system in the United States in 2007. Now 40 percent of Chrysler's U.S. work force earns the lower-tier wage, while all of its Canadian workers are at the full pay scale.

Canada also had an advantage because of its national health care system and the way it paid for retiree health care, but that slipped away as well with the retiree health care trusts, or VEBAs, that the UAW established in 2007. The VEBAs shifted financial responsibility for retiree health care from the automakers to the UAW in return for large payments used to establish each trust.

Sean McAlinden, chief economist for the Center for Automotive Research, draws a comparison between manufacturing difficulties in Canada and those in Australia, where automakers are also scaling back or shutting down.

"Many of Canada's problems are very similar to Australia's, but the saving grace for Canada is its location next to this very large, contiguous U.S. market," McAlinden said.

Electrical costs in Ontario have risen dramatically in recent years as the province has invested in wind and solar renewable energies and gone from subsidized to market rates.

Chrysler minivan line in Windsor

Federal reports in Canada and the United States put the average industrial rate paid for electricity at 10 cents (U.S.) per kilowatt hour in Ontario, compared with 6.23 cents in neighboring U.S. states. Rates in the southeastern United States average 5.73 cents, according to the U.S. Energy Information Agency.

DesRosiers says Canada has an advantage over U.S. states in terms of taxation rates and infrastructure, though there are differences in what is taxed and how.

But government incentives remain a key dividing line. Tennessee gave Volkswagen an estimated $578 million in incentives to build its $1 billion Chattanooga assembly plant, without preconditions. But Ontario and Canada balked at a request of about $700 million, according to news reports, for a $2.3 billion investment from Chrysler in its two Canadian assembly plants.

"Labor to infrastructure, taxes, trade policies, currency, energy costs -- all of those are pretty key variables," argues Reid Bigland, the Canadian who heads Chrysler Canada, as well as the automaker's U.S. and Canadian sales. "A government that's deficient in four or five of those things, the ultimate trump card is a government loan or financing that can mask a huge amount of those variables."

A Chevy rolls off the line Oshawa.

Important plants


Chrysler makes some of its largest and most distinctive vehicles in Canada. And its two assembly plants in Ontario are economic bulwarks of their communities.

The Windsor plant, south of Detroit, directly employs almost 4,700 people on three shifts building the Chrysler Town & Country and Dodge Grand Caravan, as well as tens of thousands of others in supplier plants across the province and neighboring areas.

Brampton Assembly, near Toronto, and a nearby stamping plant employ 3,250 workers on two shifts and support many supplier jobs. The plant makes the Dodge Charger and Challenger and the Chrysler 300.

Chrysler has been designing successors for all of its Canadian vehicles for several years. Last summer, according to Marchionne, Chrysler applied for incentives from the federal and provincial governments -- just as it had in Ohio when it overhauled Toledo Assembly to build the 2014 Jeep Cherokee, and in Illinois, when it invested to build the Dodge Dart in Belvidere.

Production moves south
Production of light vehicles in Canada and the U.S. Midwest has fallen since 2000, but totals in Mexico and the Southeastern U.S. have risen.

The company planned to spend more than $2 billion overhauling the Canadian plants and their products. But just as rival Ford Motor Co. learned when it waited two years to receive $127 million (U.S.) in government assistance in 2013 for a $700 million investment into its plant in Oakville, ice isn't the only thing that can move at a glacial pace in Canada.

In Chrysler's case, though, the slow-moving process turned political. Tim Hudak, leader of the opposition Progressive Conservative party in Ontario's legislative assembly, accused the company of holding Canada for "ransom" and seeking "corporate welfare."

With an intense debate swirling around Chrysler, Marchionne abruptly shut down the process, withdrawing the request for assistance.

"We found the process lengthy and the outcome unsatisfactory for our needs," Marchionne told reporters at an event on March 14. "What I found fundamentally distasteful is the fact that this issue, which involves the investment by a private organization in the country, was treated as a political matter."

Interestingly, the enigmatic CEO reacted in nearly the same way that he had two years earlier, when Chrysler abruptly withdrew its request for $3.5 billion in low-interest loans from the U.S. Department of Energy to fund research for improved fuel economy after that process developed political overtones.

Sean McAlinden, chief economist for the Center for Automotive Research: "Many of Canada's problems are very similar to Australia's, but the saving grace for Canada is its location next to this very large, contiguous U.S. market."

Currency advantage?


One of the factors that has most damaged Canada's competitiveness in the recent past is now swinging back again to an advantage: its currency.

Traditionally, a weak Canadian dollar made it cheaper for U.S. companies to manufacture in Canada. For example, a Canadian worker being paid $20 (Canadian) per hour would cost a U.S.-based employer only $16 per hour if the Canadian dollar was trading at 80 cents to the U.S. dollar. But if the loonie is above par with the U.S. dollar, as it was early last year, the Canadian equivalent of that wage rate would more than $20.

Since May 2013, the Canadian dollar has been consistently falling, and that's good news for efforts to keep auto jobs in Canada. Late last week the Canadian dollar was worth about 90 cents.

"Anything below par is advantageous to Canada. It becomes critically advantageous at anything 90 cents or lower," DesRosiers says.

Canada's falling dollar likely made Chrysler's strategy to forgo government incentives easier to afford, DesRosiers says.

"I think as part of that decision, Marchionne would look at a 90-cent dollar and the advantage of that blows away [the size of] any government investment," DesRosiers said.

The future


Michael Robinet, managing director of IHS Automotive Consulting, grew up in Ontario and believes that the province should band together with its Great Lakes neighbors.

"Ontario, Michigan, Ohio and Indiana ... should start to think a little bit more as a Midwest cluster," says Robinet. By improving logistics for automakers -- such as removing delays in crossing the national border, the region could compete better economically.

"As a cluster, we are stronger together. There's a lot of joint destiny," Robinet said.

But the factors working against Canada's auto industry may be too great to overcome, says Tony Faria, co-director of Canada's Office of Automotive and Vehicle Research. If that's true, Canada -- and the rest of the Great Lakes states by extension -- may have hit their manufacturing zenith.

"It's unlikely that we will see, within my lifetime for sure, a new assembly plant built in Canada," says Faria.

"It's not going to happen."

You can reach Larry P. Vellequette at lvellequette@crain.com.


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