DETROIT (Bloomberg) -- Canada is missing out on the U.S. auto industry's recovery, and the reasons point to automakers' new financial discipline as well as the strengthening loonie.
Automakers led by Ford Motor Co. are planning to invest $13.3 billion in U.S. plants over the next four years, which will leave little left for Canada.
Ford this year closed an Ontario factory that had made the Ford Crown Victoria police cruiser and Lincoln Town Car.
Investment in Canada's auto plants may fall to $1.2 billion this year, the lowest since the mid-1980s and 62 percent less than the past decade's average, according to Bank of Nova Scotia.
The United States and Mexico are leading the rebound after a 35 percent drop in North American auto investment since its 2007 high, according to Carlos Gomes, a Scotiabank economist.
"You have stabilization in the U.S., you have plants in the next couple of years for Mexico and you're not really seeing anything with respect to Canada yet," said Gomes, who is based in Toronto. "We could become somewhat of a laggard in the sector."
Ontario, Canada's largest province by population, became the biggest North American producer of vehicles in 2003, taking the spot from Michigan, the home base for General Motors Co., Ford and Chrysler Group LLC as those companies cut jobs and production capacity.
Declining investment in Canada stems from the U.S. companies cutting U.S. labor costs and Canada's surging currency.
The lower spending in Canada precedes the Canadian Auto Workers contract negotiations with GM, Ford and Chrysler next year.
The Toronto-based CAW has resisted the givebacks the United Auto Workers union has provided.
Ford already has retrenched to one assembly plant in Canada after its St. Thomas, Ontario, factory shut in September.
GM plans to make two models in the United States that are built in Canada beginning next year.
"We're sitting really on the edge of our chairs wondering how the CAW negotiations will play out," said Dennis DesRosiers, president of Toronto-based DesRosiers Automotive Consultants, which specializes in the Canadian auto industry.
GM said Dec. 16 it will continue to assemble its Chevrolet Impala sedan at its Oshawa, Ontario, complex, investing C$68 million ($65.6 million) and securing 350 jobs.
The automaker announced in May that Impala output would be added to its Detroit-Hamtramck plant, which also produces the Chevrolet Volt plug-in hybrid car, next year.
Last month, the company said its Spring Hill, Tennessee, factory will start making Chevy Equinox SUVs, which also are made in Oshawa and Ingersoll, Ontario.
Commitments for U.S. plant investments by 2015 include $6.3 billion by Ford, $4.5 billion by Chrysler and $2.5 billion by GM, according to the UAW, which ratified contracts with the companies in September and October.
Honda Motor Co., Nissan Motor Co. and Mazda Motor Corp. also are adding capacity in Mexico through 2014 as they seek relief from the strong yen.
Canada has maintained production of between 15.5 percent and 17 percent of vehicles assembled in North America since 1995, including plants owned by Honda and Toyota Motor Corp., according to DesRosiers Automotive Consultants.
The country contributed to the bailouts of Detroit-based GM and Chrysler as part of their 2009 bankruptcies.
Terms of the rescues included GM's commitment to keeping at least 16 percent of its North America production in Canada and Chrysler's agreement to maintain at least 20 percent of its output and product-related investments in the country.
GM's Canada operation accounted for 18.9 percent of the company's North American output last year while Chrysler was 30.2 percent.
Pressure on CAW
"I don't think I've ever been at meeting where the company actually congratulated us for our productivity, our quality, or meeting their sales objectives," said Ken Lewenza, president of the CAW. "It's always about 'You know, you're not the most favorable place to invest today.'"
GM, Ford and Chrysler production workers are paid about C$33 ($31.78) an hour while skilled-trades workers receive about C$40 an hour, said Jim Stanford, a CAW economist.
Canada's manufacturing sector no longer enjoys favorable exchange rates compared with the United States. Canada's loonie has appreciated to near-parity with the U.S. dollar.
One Canadian dollar bought 96 U.S. cents at the end of last week, up from 64 U.S. cents a decade earlier.
The UAW agreed in 2007 to a two-tier wage system with U.S. automakers that paid new workers about half the hourly rate of senior laborers.
The union negotiated raises for those new members this year.
The CAW's Lewenza has called such a system "divisive" and said he won't support a similar arrangement in Canada.
"You cannot have a strong currency, you cannot have an uncompetitive wage rate and then expect Chrysler or all the other carmakers to keep on making cars in this country and be disadvantaged," Sergio Marchionne, chief executive officer of Chrysler, told the Globe and Mail on Nov. 22 in Toronto.
Chrysler is majority owned by Fiat SpA, which Marchionne also heads.
Canada's superiority in health-care costs for hourly workers relative to the U.S. also has diminished since 2007, when the UAW agreed to establish Voluntary Employee Beneficiary Association funds, which removed the cost of retirees' medical benefits from GM, Ford and Chrysler.
The CAW is "faced with a stark reality," DesRosiers said. "If you don't agree to two tiers, you slowly hollow out your membership base. If you don't play the game, we've got a global auto industry that can go anywhere around the world."
Canada may contract to 10 auto plants that will have capacity to make 2.2 million vehicles by 2017, less than the dozen factories capable of making 2.58 million this year, according to IHS Automotive.
The 2.58 million figure includes the now-closed Ford plant in St. Thomas. The United States will maintain its 56 auto plants in that span while gaining capacity, and Mexico may add five factories and boost capacity by almost one third, according to the Lexington, Massachusetts-based researcher.
In part because of Canada assembly workers' higher wages, automakers have been reluctant to make smaller vehicles in the country, DesRosiers said.
Most of the models produced are larger vans and sport-utility vehicles such as GM's GMC Terrain, Chrysler's Town & Country minivan and Ford's Flex wagon, which have larger price tags and can better absorb higher labor costs.
President Barack Obama has proposed fuel-economy standards that would require the average vehicle sold in the United States to be rated 54.5 mpg by the Environmental Protection Agency.
The regulations should "scare the bejesus out of both the U.S. industrial north and Canada," because those regions aren't competitive with Mexico in making small cars, DesRosiers said.
"If we do see that Canada's auto sector begins to lag behind, then it obviously has significant implications for the growth potential of Ontario," said Scotiabank's Gomes.
In a Nov. 29 research note, Gomes called auto-investment trends in Canada a "red flag."
The auto industry accounts for more than 20 percent of manufacturing in Ontario.
The province may fall behind Michigan in annual vehicle production next year, Gomes said.
"It will be a dogfight going forward in terms of who ultimately is the largest vehicle-producing region," he said.