By R. Bruce Striegler
Less than two months after Chrysler Group LLC, a unit of Fiat Chrysler Automobiles announced it was seeking up to $700 million in public money to support its $3.6 billion investment in two Ontario auto assembly plants, the request was suddenly and unexpectedly withdrawn, causing as much political turmoil as the request itself. The focus of most of Chrysler’s planned development is the Windsor plant, which represents about 15 per cent of total Canadian output of about 2.1 million vehicles annually. At Brampton, the automaker produces the Chrysler 300, Dodge Challenger and Dodge Charger. In 2012, the automotive sector employed 115,000 persons in Canada, which represented 7.7 per cent of all manufacturing jobs in the country with about 8,000 of those at Chrysler assembly operations.
Chrysler’s request again ignited the debate of government subsidies or incentives to for-profit automakers and well-paid auto workers. Conservative economic commentators railed against the request, asking, not unreasonably, what net benefit the subsidies provided to Canada. Ontario’s Progressive Conservative Opposition Leader Tim Hudak had called for Liberal Premier Wynne to “get out of the handout business,” calling the subsidies “corporate welfare, extortion, and ransom.” Ontario’s Premier said she was “very taken aback” at Chrysler’s letter of withdrawal, saying her officials and Prime Minister Stephen Harper’s government had been working closely to ensure the company keeps its operations in Brampton and Windsor.
The Premier, like most in the industry, has reason for anxiety, because while Chrysler committed to its current minivan factory investment in Windsor, with no federal and provincial money, Chrysler is not bound by any job guarantees. Steve Rodgers, President of the Automotive Parts Manufacturers’ Association (APMA) says the association is also concerned about Chrysler’s withdrawal. “We knew that this wasn’t about Windsor specifically, we knew they were going ahead, so to call it a ransom was wrong. The issue is about the competitiveness of the facility and Chrysler’s long-term position in Canada. We believe at the very least, this will create a feeding frenzy with respect to U.S. and Mexican states who will jump forward with packages encouraging them over the long-term, to relocate.”
Do government subsidies still make the world go around?
The auto industry is Canada’s largest manufacturing sector, and Canada’s second largest exporting industry. With a production capacity of 2.3 million automobiles, Canadian production accounts for 16 per cent of North American vehicle production. In 2012 auto industries sales reached $82.6 billion. Parts manufacturing accounts for 64,300 jobs; 37,200 were employed in vehicle manufacturing and 13,600 employed in motor vehicle body and trailer manufacturing. The majority of the sector’s jobs were in Ontario (81.9 per cent) while the second largest employer is Quebec at 6.5 per cent.
Economics Professor James Brander of the University of British Columbia’s Sauder School of Business says, “My reading is that most large industrial subsidies have not been very successful. Usually they’ve been given because of political pressures and haven’t worked out well.” Prof. Brander does say, however, that the large subsidies to the auto sector in both Canada and the U.S. following the 2008 financial crisis might well have been successful largely for their macro-economic affect. “They helped sustain economic activity during a period when things were pretty bad, but I’d be very pessimistic about returns to continued subsidies. The great recession is behind us and companies should now be able to stand on their own.”
Via news release, Fiat Chief Executive Officer Sergio Marchionne said, “It is my sincere hope that all stakeholders involved commit to do what they can to preserve the competitiveness of the country, and in particular of the province of Ontario,” adding that the company was fed-up being used as “a political football.” Mr. Marchionne said Chrysler would move ahead with its development plans for the two assembly plants in Ontario, noting, however, that it will keep its strategic options open, stating that the auto manufacturer wants flexibility in the future. Marchionne also pointed out that auto jobs are highly competitive, and desired, in lower cost jurisdictions such as the U.S. or Mexico, both of which offer incentives for relocation.
Mr. Marchionne said that the reaction to the Company’s initial request reveals, apart from some political convenience for a few, a short-sighted view of industrial development and a somewhat restricted view of Canada as an industrial player in what has become a borderless economy. “As a Canadian, I regret my failure in having been unable to convey the highly competitive nature of markets that offer manufacturing opportunities to carmakers operating on a global scale,” said Marchionne.
During the 2009 North American auto bailout, the taxpayer, courtesy of the two levels of government contributed about $2.9 billion to Chrysler. The company ultimately returned $1.7 billion in principal and another $250 million in interest. The two governments recovered a further $125 million by selling their stake in Chrysler to Fiat, another $15 million was received through a side deal with the U.S. Department of Treasury. About $810 million remains outstanding, not likely to ever be recovered since part of the loan was made to the Chrysler entity that existed pre-restructuring, making these funds a permanent Canadian taxpayer gift to the company. In the end, the Canadian rescue of General Motors and Chrysler, two corporations “too big to fail” totalled US$13.7 billion.
The debate over handouts vs economic benefits
In an interview prior to Chrysler withdrawing its offer, Matt Marchand, President and CEO of the Windsor-Essex Regional Chamber of Commerce argued that it isn’t just a matter of handing out money to auto companies. “Historically, Ontario’s auto industry has been a driver of economic wealth. It has contributed significantly to our health and education programs, it has been one of the single most important industries in Ontario.” He says that auto assembly and auto parts manufacturing are highly valuable due to the immense spin-offs they provide. “I think the term subsidies is a misnomer. It’s a public investment. If a manufacturer is going to put down billions for a plant, they need local infrastructure such as power, roads, rail lines, water and sewers. This public infrastructure investment benefits local economies.”
“In Ontario, we have eight assembly plants with a combined shipment of 2.5 million vehicles per year which is about 16 per cent of NAFTA production. The value of those car shipments alone is more than $50 billion and 85 per cent is exported. That’s a huge wealth generator.” He continues, “That’s just vehicle assembly, on the parts side, we’ve got 700 parts and supplier plants in Ontario.” Marchand explains assembly plants can have more than 100 parts suppliers, emphasizing, “There can be as many as seven to nine jobs for each assembly job.”
He suggests one of the reasons there is such intense competition in worldwide auto manufacturing is because of these ‘value-added’ jobs. “On the parts side, we produce a significant volume for export.” Do the two sides of the industry provide a net benefit to Canada? Marchand says, “Absolutely, there’s no question that the automotive industry has contributed hundreds of millions over the years of net benefit to the Canadian treasury,” noting that jurisdictions around the world are also aware of the local benefits.
APMA’s Steve Rodgers says the automotive parts manufacturing sector employs just under 90,000 people and the Canadian facilities produce $23.5 billion worth of goods. “About 85 per cent of our production is exported largely to the U.S. and Mexico.” A majority of parts manufacturers are located in Ontario along the Montreal to Windsor corridor, although there are a handful of suppliers scattered across Alberta, the Maritimes and even B.C. Rodgers notes that in the changing world of automobiles, B.C. has the only serial production of hydrogen fuel cells in the world.
Redefining subsidies as economic investment
Rodgers rejects any notion that the auto industry globally is in decline, as some opponents of subsidies have suggested. “The automotive industry globally is one of the fastest growing industries in existence. We’re very proud of the fact we’re in a growth industry.” Illustrating his point, Rodgers says that in the downturn year of 2009, global auto production reached approximately 60 million vehicles but 2017 projections are for 100 million. “Every year we’re increasing production and by 2020 that number will be somewhere between 107 and 109 million vehicles yearly.”
In response to the question of subsidies providing net benefit to Canada, Steve Rodgers says, “On an ongoing basis, the industry does not need subsidies to survive.” On the other hand he says it is also true that if you look at growth in the North American auto industry between 2012 and 2020, about 65 per cent of that growth will occur in Mexico, about 32.5 per cent the U.S. and only about 2.5 per cent in Canada. “In fact it is true that our share of NAFTA production declines every year from 2010 to 2020. We had an all-time high of about 18 per cent in 2010, and by 2020 that will be down in the 13.5 per cent region.” The impact of Mexico’s growth is reported in Scotiabank’s March Auto Report which reports that each vehicle built in the U.S. now contains more than US$4,000 of Mexican-made parts while each American-built car and truck has an average US$1,500 of Canadian-made parts.
Rodgers says the declining production is not so much about lack of competitiveness but about burgeoning growth in Mexico. “It’s about new plants going into Mexico, but even so, Canadian plants remain very competitive. Even with a weakening Canadian dollar, as it has gone to 90 cents, or even if into the 85 cent range, we’d still be competitive.” Mr. Rodgers says the subsidies being talked about for the Windsor plant are not subsidies in the true sense of the word. That is, they were not required to keep the plant alive. He points out that the BRIC countries and Mexico, along with many U.S. states, have developed sophisticated economic models where government dollars are considered a real investment in economic development.
“Governments recognize that assembly plants will be there for 20 or 30 years, they recognize the return from taxes, the growth or development of supporting industries and the jobs that come with it. For them, it is not subsidization, it is an investment.” Auto manufacturers know these jurisdictions are willing to invest, and Rodgers says, “They look at their cost structures and if Canada, for example, doesn’t see this as investment, they’ll do the math and make decisions accordingly. It is about recognizing that this is what the competitive world requires for an automotive assembly industry, a growth industry and a central market.”
According to the Scotiabank March Auto Report, in 2013, North American vehicle production attained its highest level in a decade, but at Canadian assembly plants it fell by three per cent, compared with a seven per cent increase at American plants and two per cent increase at Mexican plants. This means that Canada’s share of North American vehicle production hit its lowest level since 1987, and was the third straight decline. Michigan produced more cars and trucks than any other state or province last year, knocking Ontario out of the top spot it has claimed since 2004. According to Scotiabank analyst Carlos Gomes, Mexico’s auto industry has emerged as the “clear winner” from the North American Free Trade Agreement (NAFTA).
Output of assemblies and parts in Mexico’s auto industry have advanced at an annual rate of nearly six percent since the introduction of NAFTA, triple the growth in the remaining manufacturing sectors. As a result, autos have doubled Mexico’s share of manufacturing activity over the past two decades to more than 15 percent, and have accounted for nearly one-third of the increase in overall industrial activity since 1994. By way of comparison, autos have declined in Canada to 10 per cent of overall manufacturing, and are even lower in the United States. Despite recent expansion in the U.S. South, the sector’s importance in America has dropped to nine percent of manufacturing output.
A little history of the Canadian auto industry
Canadian auto production began in 1904 at the Walkerville Wagon Works near Windsor, where a handful of workers produced Model C Fords. By 1923, driven by the demands of World War I, Canada’s automotive industry had grown into the second largest in the world, although comprised of relatively inefficient plants producing many models behind high tariff walls. By the early 1960s, Canada had a massive auto trade deficit with the United States, which resulted in the January 16, 1965 signing of the Canada–United States Automotive Agreement, commonly referred to as the Auto Pact.
This trade agreement transformed the North American car manufacturing landscape, becoming the model for ‘managed trade’ and setting a precedent for broader free trade between Canada and the United States. The Auto Pact eliminated tariffs between the countries, creating a single North American manufacturing market. Tariffs were eliminated on cars, trucks, buses, tires and automotive parts. The single market allowed Chrysler, Ford and General Motors to rationalize production in Canada and the United States to form a single integrated production and marketing system.
Most conclude the agreement was of great benefit to Canadian workers and consumers. Market efficiencies lowered prices and provided a larger selection of cars. Higher production created thousands of jobs in the automobile industry. Between 1965 and 2002, the number of people employed in the automobile industry rose from 75,000 to 491,000. The number of vehicles manufactured in Canada over this same period jumped from 846,000 to over 2.6 million. The value of vehicle shipments from Canada in 2002 was $66 billion and parts shipments, $33 billion. The Canadian automotive industry accounted for 12 percent of manufacturing GDP in 2002.
The Auto Pact was superseded by the 1987 Canada-United States Free Trade Agreement (CUSFTA) which took further steps to eliminate or further reduce trade barriers and tariffs. Finally the North American Free Trade Agreement (NAFTA) came into effect on January 1, 1994. The previous trade agreements essentially integrated auto trade between the U.S. and Canada, and so it is generally conceded that NAFTA’s greatest contribution to the auto sector was to bring Mexico into the picture.
NAFTA phased out purely national content requirements, but as a political price, it tightened the CUSFTA rules of origin and associated North American content requirements. NAFTA also phased out so-called trade-balancing requirements (a Mexican policy device) as well as tariff and nontariff barriers within the finished auto and parts trade. Phase-out periods of up to ten years were granted to give the Mexican industry (including foreign-owned assembly plants) time to adjust. Importantly, the elimination of trade barriers and investment incentives has not prompted huge segments of the automotive industry to shut down in one North American location and move to another. Instead, there has been an acceleration of the ongoing process of specialization and intra-industry trade, which is what happened in the wake of the 1965 Auto Pact.
Job losses inevitable in a changing new world order
According to economics Professor James Brander, in recent history the international auto manufacturing sector has survived several big changes. “One of those, which dates from shortly after the Auto Pact, was the emergence of the Asian producers. It was during this time that Japanese and South Korean companies became a major competitive threat to the traditional big North American automakers and of course, we ended up with Honda, Toyota and others producing in Canada and the U.S. This added greatly to the competitive pressure on the traditional big North American automakers, but I view that as good for all the economies of all the countries involved.”
“More recently we’ve had a new competitive threat, the so-called BRIC countries (Brazil, Russia, India and China) and I’d throw in Mexico, all of which have increased their auto production enormously since 2000. Although it has changed the competitive landscape considerably, it’s just a matter of the development of those countries and is no different than all the other manufacturing industries, making it harder for Canada and the United States to compete. If anything, I think it is noteworthy that the Canadian auto sector has held up as well as it has.”
He says that the readjustment of the world economy over the last several decades has seen manufacturing moving out of North America and Europe into the lower-cost BRIC (and Mexico) countries. “The group that has lost, of course, are the relatively high wage, but not necessarily high-skilled workers. That’s an issue.” Prof. Brander says that taken over time, one sees that younger people are not going into those jobs, they are ending up in better-paying, higher education occupations. “But it is certainly true that the older work force in those traditional industries has lost. When we add up the gains and benefits, the total gains far exceed the total loss, but I agree that doesn’t make it any easier for those who have lost.”
He says that economists have argued that displaced workers need to be compensated in some way, not just by giving them money, but preferably helping them through retraining and new job search assistance. “Certainly, some of that is done, but not that much, and not enough.” The bottom line is that there are net gains when an industry moves production to more efficient places, huge gains for the jurisdiction involved, but even net gains to Canada. “The consumers will have benefited considerably more than the workers have lost, but there is no disputing the workers have lost something.” With Chrysler having withdrawn its request for public money, the issue of auto subsidies becomes moot, but in a tumultuous economic world, the issue will surface again soon enough.