TORONTO (Reuters) -- New Canadian labor contracts secured by the Detroit Three automakers in September are unlikely to lower costs enough to persuade the industry to make fresh investments in the country and reverse a decade-long contraction.
A strong Canadian dollar and cheaper labor elsewhere remain powerful forces discouraging Ford Motor Co., Fiat SpA's Chrysler Group LLC, and General Motors from making new commitments to assemble vehicles in Canada, industry experts say.
Unless there is an unexpected economic resurgence in North America, the best that the Canadian Auto Workers union can expect is for the industry to maintain current production levels over the next four years, auto analysts say. At the same time, the country will likely lose more market share to Mexico and the southern United States, where output is expected to rise.
"The sector in Canada is really suffering greatly. Not at the hands of the CAW, but at the hands of the loonie," said Kristin Dziczek, director of the labor and industry group at the Center for Automotive Research in Ann Arbor, Mich., referring to the Canadian dollar by its colloquial name.
"No matter what the CAW did, lowered costs, kept things the same, a dollar in the U.S. goes a little farther than it does in Canada. And it's not just for wages, but also for that investment dollar," she said.
Her remarks came as the CAW wrapped up six weeks of tough negotiations with the Detroit 3, sealing a tentative agreement with hold-out Chrysler late Thursday. Ford and GM workers have ratified their deals. Chrysler employees ratified their pact on Sunday.
The Chrysler deal largely mirrors the four-year pacts reached last week with Ford and GM. The deals freeze wages for existing workers for three out of four years, and cut pay and pension benefits for new employees.
While the union pushed hard to secure new vehicle production for Canadian plants, the companies held back such promises.
There were some new jobs promised, including 600-plus at Ford and 1,000 at GM, but at best that will only offset other losses. For example, GM's consolidated line, which employs 2,000 workers, is set to shut down in 2014.
The CAW did agree to allow Detroit's automakers to offer generous retirement incentives to thousands of eligible factory workers, possibly clearing the way for new hiring, union documents show.
The union has remained mostly silent about the retirement incentives contained in the labor pacts. A CAW spokesperson said the latest contracts contain early retirement provisions similar to previous deals. But some experts say the retirement incentive could be a key to closing the labor cost gap between Canada and the United States.
Under the terms of the Ford agreement, which set the pattern for the GM and Chrysler deals, eligible production workers would receive a lump sum payment of $50,000 Canadian and a CA$20,000 voucher for a new vehicle if they agree to retire, The Detroit News reported. The paper said eligible skilled trades workers will receive CA$60,000 and a CA$20,000 voucher as an incentive to retire.
About a quarter of the 21,000 CAW members employed by Detroit's three automakers are eligible for retirement, the paper said.
The News said if a large number of eligible workers accept the buyout offers, the automakers would be in a position to replace them with lower-paid workers under a two-tier wage system negotiated with the union.
With new hires earning less than traditional CAW workers, Ford, GM and Chrysler would substantially cut hourly labor costs in Canada.
The power of the dollar
Canada's auto industry reached peak employment and output in the late 1990s when the Canadian dollar was near record lows. A weaker Canadian currency reduced the cost of Canadian-sourced labor and materials when costs were converted back to U.S. dollars.
But a 50-percent-plus surge in the value of the Canadian dollar over the past decade -- on Friday it was worth $1.01 -- reversed those cost advantages and has made Canada the most expensive place in the world to assemble vehicles, according to the Detroit Three.
The companies insisted in this round of talks that Canadian labor costs had to fall to match those of employees in the United States, or there was a risk that production could exit Canada, particularly in the case of Chrysler.
With the new agreements fresh off the drawing board, calculations of future Canadian labor costs are hard to come by and the companies will not provide precise figures. But Ford chief negotiator Stacey Allerton said the pact gives the automaker significant cost savings.
While base wages for existing workers were unchanged at an average of $34 an hour versus an average of $28 for UAW members in the United States, some health benefit costs were trimmed. New hire costs are "in the ballpark" of the UAW's contract, Allerton said.
Even so, Tony Faria, an auto industry expert and professor at the University of Windsor in Ontario, said the CAW didn't go far enough to cut costs and level the field, even with the United States, where labor rates are much higher than in Mexico.
"We are not going to see investment from the Detroit Three in the short run. I would find it hard to imagine new investment in the long term," he said. "The companies can put any new investment elsewhere at a lower labor cost."
If Canada maintains production of 2.5 million-2.7 million vehicles a year, with North American production expanding, the country's share of the market would shrink to 14-15 percent over the next decade from about 15.7 percent now, said Dennis DesRosiers of Richmond Hill, Ontario-based DesRosiers Automotive Consultants Inc.
No game changer
Although labor costs are undoubtedly important, they are "not a game changer" for automakers' overall costs, said UBS auto sector analyst Colin Langan.
Analysts estimate that labor represents between 5 and 10 percent of the total cost of a vehicle.
Parts can contribute up to 70 percent, CAW economist Jim Stanford said. Although the bulk of these are imported, some are sourced locally, he said, comprising roughly 17 percent of vehicle cost.
"We've been talking for the last four months, non-stop, about how workers have to be competitive with other jurisdictions," he said.
"Now it's time to talk about how policy must be competitive with other jurisdictions, and that includes the Brazils and the Koreas and even the Americas of this world, where their governments are fully engaged in enhancing and motivating investment in the sector," he said.
Bill Pochiluk, CEO of Automotive Compass LLC, a consulting firm in West Chester, Penn., said that if Canada wants to halt a long-term auto industry slide, it should introduce a similar policy to Brazil. Faced with a strong local currency and a flood of cheap Mexican vehicle imports, Brazil insisted that vehicles assembled in Mexico have a higher portion of parts sourced from elsewhere in Latin America.
"I'm concerned about the pathway to the long term and what needs to be done. And I think improving Canadian content is the best way to get there," Pochiluk said.
The CAW has lobbied federal and provincial governments in Canada to adopt policies to better protect the auto sector, but the current government's track record of favoring free-market policies suggests little likelihood of success.