By R. Bruce Striegler

In spite of Chrysler’s withdrawn request to the Ontario and federal governments to invest in, or as some would have it, subsidize the company’s improvements at its Windsor minivan factory, there remain unanswered issues. Often the real concerns of economic crisis when an industry of this scale and importance declines or fails are frequently obscured by political ideologies, reduced to ‘pro-con’ debates over subsidies. We asked the Government of Ontario what the province is doing to address the global migration of auto industry production to lower cost jurisdictions such as Mexico.

Gabe De Roche, spokesperson for Ontario’s Ministry of Economic Development, Trade and Employment, said, “It’s important to realize that the auto industry is still very strong in Ontario. In 2013, more than 2.3 million vehicles were produced in the province.” He added that about 94 thousand Ontarians are directly employed in the auto manufacturing industry and the sector also supports hundreds of thousands of indirect jobs. “While we believe that the auto sector will continue to be an important part of our economy, we recognize the importance of having a strong and diversified economy,” says Mr. De Roche, continuing, “That’s why we are building a climate to attract investment, grow businesses and create jobs.”

Jobs and factories have been disappearing in Ontario for years, and critics point to a decade of Liberal government as responsible for the collapse of the province’s manufacturing base. The auto sector has shrunk, electricity costs have mounted, and one after the other, companies have closed their doors. The 100-year old Heinz processing plant in Leemington announced last November it was closing, leaving almost 800 out of work. (Since then, Canadian Highbury Canco Corporation, has signed a letter of intent to acquire the facility, and for the company to act as a packer for Heinz. It intends to employ about 250, along with seasonal workers.) Kellogg shut its plant in London, Novartis ended operations in Mississauga, U.S.-based Smucker’s closed a pickle processing plant in Dunville, Lance Canada announced it was closing a cookie plant in Cambridge and Caterpillar has ended operations in London.

Hyping strong manufacturing resources or re-arranging deck chairs?

Economists agree that there are staggering costs, counted in lost jobs and lost tax revenue from not propping up the car companies. But Canadian policy makers seem not to acknowledge a rapidly changing auto manufacturing landscape, let alone implement policies which could turn lost auto jobs into new opportunities in more promising sectors of the economy. The auto industry is a complicated business requiring massive investments in purpose-built plant and equipment, rapidly changing technologies and costly labour inputs.

Mr. De Roche of Ontario’s Ministry of Economic Development, Trade and Employment says that steps Ontario is taking to ensure a healthy economy include maintaining competitive business taxes, providing tax relief to small businesses, supporting global trade, and making significant investments in research, commercialization and entrepreneurship. “Ontario has eliminated the capital tax, reduced corporate income tax and we’ve passed the Supporting Small Business Act, which increased the exemption for the Employer Health Tax for small businesses.” He points to the recent enactment of the Better Business Climate Act, which highlights the government’s commitment to reduce unnecessary burdens, modernize services and reduce time and costs for businesses and other stakeholders. “In addition to creating a better business climate, we are helping to strengthen existing sectors and grow new ones.”

On the federal level, a 2012 Industry Canada fact sheet proclaims, “With more than 1,300 establishments and annual revenues of $71 billion, Canada is a global automotive centre.” They point out that capital investment in Canada’s automotive industry has averaged $3 billion per annum between 2002 and 2011. Major companies such as Chrysler, Ford, General Motors, Honda and Toyota, along with other manufacturers such as Hino, Motor Coach Industries, PACCAR (manufacturers of vehicles under the Kenworth, Peterbilt and DAF nameplates) and Volvo Bus continue to invest in Canada’s automotive industry.

“Canada is home to many of the most productive light vehicle assembly plants in North America. Canadian assembly plants have earned a global reputation for exceptional quality,” says Industry Canada. The government agency touts Canada’s vibrant research and development (R&D) which offers “generous investment tax credits”, and noting that from 2002 to 2011, research and development has averaged more than $460 million annually. “Key focus areas include alternative fuel, mechanical engineering, engine and transmission design, advanced materials, emissions, biomechanics, and vehicle safety. Intensive R&D related to electric vehicles is currently underway.”

A sober view of the North American auto manufacturing sector

Meanwhile Scotiabank’s March 2014 Global Auto Report paints an unadorned picture of the North American auto parts and assembly business. It shows that Mexico surpassed Canada in 1998 to become the largest auto parts exporter to the United States. Over the past decade, investment in Mexico’s auto industry has shifted to auto assembly as the U.S. Big Three (Chrysler, GM and Ford), along with European and Asian producers began searching for lower cost jurisdictions from which they could export vehicles globally.

With labour costs of more than $40 per hour and increased transportation costs, both Japan and Germany found Mexico an ideal location. Japanese and European automakers are now the main drivers of the rapid expansion of vehicle assembly in Mexico. These automakers have consistently produced more vehicles in Mexico than the Detroit Three since 2007, and now account for more than 60 per cent of overall vehicle output.

Growth of investment in Mexico’s auto industry climbed to US$2.9 billion last year, nearly double the average of the past decade. Nissan opened a new assembly plant in Mexico late last year, while Mazda and Honda will begin production at new facilities early this year. Audi is also building its first plant in Mexico, a US$1.3 billion assembly facility that by mid-2016 will be the sole global source for the luxury Q5 SUV. BMW is also in advanced talks with Mexican officials to build a US$1.5 billion factory to assemble Series 1 and Series 3 models.

Mexico has free trade agreements with more than 40 nations, providing automakers with duty free access to more than one billion people across the globe. As a result, while the United States remains the largest destination for Mexican-built cars, trucks and auto parts, Mexico has become a low-cost production base from which to export globally. More than half of Mexico’s vehicle output is shipped to its northern neighbour, but exports outside of North America are growing at a faster pace than shipments to its NAFTA partners, and now account for more than 20 per cent of Mexico’s overall auto exports. This is in sharp contrast to the Canadian auto industry which still remains almost exclusively focused on the United States. Ninety-seven per cent of Canada’s auto exports are destined to its NAFTA partners, primarily the United States.

Ontario Commission finds subsidies inefficient

In February 2012, the Commission on the Reform of Ontario’s Public Services (Drummond Commission) concluded that “Ontario’s hodgepodge of direct and indirect programs is fragmented and lacks clear and coherent objectives.” The Commission found that in 2011 the Ontario government spent over $1.3 billion in direct business subsidies through 44 programs across nine ministries. This did not include another $2.3 billion of indirect support to businesses through tax credits and lower corporate income tax rates for small businesses and manufacturing income.

The Commission argued that all business subsidies, both direct and indirect, are generally inefficient because they can distort normal business decisions and risk analysis, and that the lack of reliable data on outcomes makes it difficult to evaluate program costs and effectiveness. They recommended that the provincial government wind down all of its direct business support programs and pool the funds into a single envelope to fund programs which focus on productivity growth in the private sector, rather than job creation. Similarly, if one reviews federal documents of subsidy programs, there are hundreds of corporate welfare items in Ottawa, too many to list or even count. Programs are buried within programs, with grants and loans vying with tax credits and direct subsidies, all designed to shift business risk from corporate owners to individual taxpayers (Income tax collections from individuals constitute by far the single largest component of federal and Ontario revenues).

How is Australia dealing with manufacturers packing up for lower-cost locations?

Statistics show that Australia’s auto and auto parts manufacturing industries employed nearly 80,000 people in 2003 falling to just under 50,000 in 2013. Thirty-eight per cent of Australian production in 2012 was exported to the Middle East, 13 per cent to NAFTA partners, and the rest to various Asian and South American markets and “the rest of the world.” Parts manufacturing hit a high just under $9 billion in 2004, dropping to slightly more than $5 billion in 2012.

Auto manufacturer Holden, originally an Australian saddlery firm, moved into the automotive field in 1908 and became a subsidiary of General Motors in 1931. Holden announced in December 2013 that it was ceasing production by the end of 2017, closing its testing grounds and reducing staffing in product development. Ford Australia is due to stop making cars in 2016, and there are concerns that Toyota will pull out as well. Mitsubishi closed its Australian factories in 2008. The auto parts industry is expected to be hard hit by Holden’s decision. Up to 2,900 employees at Elizabeth in South Australia and in Melbourne will be affected by the decision. An Australian Manufacturing Workers Union spokesperson says Holden’s withdrawal will be devastating and lead to 50,000 job losses and a $21 billion hole punched in the economy.

Australia’s Productivity Commission concluded that “Decades of traditional assistance have forstalled, but not prevented the structural adjustment now being faced by the (automotive) industry,” and in early 2014 called on governments to adopt a measured approach to the development of their adjustment assistance plans for the automotive manufacturing industry and its employees. The Commission’s Deputy Chairman, Mike Woods, stressed that government policies and programs should aim for a stronger economy at the end of the journey.

The Commission considers that the arguments supporting public subsidies for automotive manufacturing are weak, and that the wider community would be better off from ending those subsidies. “Our draft proposal is that there should be no further industry specific funding beyond 2020”, Mr.Woods said. “The Commission opposes a supplementary rescue package for Toyota and component manufacturers. Governments could better assist firms by undertaking broad-based economic and regulatory reforms and removing impediments to greater workplace flexibility”.

Prime Minister Tony Abbott said the government would not offer anything beyond what was promised in the September 2013 election, a total of $500 million in car industry assistance for 2016-17. In December 2013, the Prime Minister announced a wide-ranging manufacturing industry initiative which included targeted support for regions impacted by the wind-down of Holden’s manufacturing operation, reviews of the impacted regional economies, and development of a National Industry Investment and Competitiveness Agenda which will “focus on our strengths, create jobs and exploit our competitive advantages.”

The Prime Minister’s announcement said, “Transitioning from heavy industrial manufacturing to higher value-added production calls for a national, strategic response rather than a piecemeal one based on hand-outs and subsidies,” adding that Australia’s manufacturing industry faces challenges across the board. “Industry policy in Australia must become proactive to ensure that our manufacturing industry is competitive and incentivised to create jobs and investment.”

Abbott created, and is chairing, a task force which will report recommendations to government by June 2014 on economy-wide measures to boost Australia’s manufacturing competitiveness, increase investment and lower the cost of doing business related to energy and regulation. Additionally, the task force will provide options to encourage business innovation, research and development as well as how to accelerate productivity enhancing infrastructure.

Ontario turns to aerospace and digital technologies to back-stop autos

Turning again to Ontario, Ministry spokesperson Gabe De Roche says the province has a thriving aerospace industry. “Fourteen of the top 25 global aerospace companies have key operations in Ontario, employing close to 17,000 with an annual GDP impact of $3.01 billion.” He notes that since 2006, the province has provided more than $86 million in repayable and non-repayable support to aerospace companies. “This has helped leverage over $845 million in total investment, creating over 1,100 jobs and retaining over 1,700 jobs. De Roche continues, explaining that Ontario’s ICT (information and communications technology) sector is also particularly strong.

“Our government has made it a priority to develop a renewable energy and clean tech industry because it is creating jobs in the province. Since 2003, we have, through the Ministry of Economic Development, Trade and Employment, and through the Ministry of Research and Innovation, committed over $436 million in over 1,100 research and commercialization projects related to clean technology and the bio-economy.” Mr.De Roche explains that the province has created two funds, The Eastern Ontario Development Fund and the Southwestern Ontario Development Fund, to support economic development initiatives to businesses, municipalities and not for profit associations. “We have committed over $100 million to these funds, leveraging a total investment of over $995 million.  More importantly, these investments are helping to create and retain over 24,400 jobs, most of these in the manufacturing sector.” He concludes by saying that while the province still sees the auto sector as strong in the face of challenges, “We are creating a positive business climate; we are supporting our existing industries while attracting new investments and new business to the province.”

As to the auto manufacturing industry, which Ontario has economically relied on for the last century, there are new worries. Premier Kathleen Wynne is warning the trade deal Prime Minister Stephen Harper signed with South Korea could be a double-edged sword for Ontario. “We are very supportive of opening up opportunities for Ontario and Canadian business. In terms of the agri-food sector, we are very optimistic about the opportunities that a Canada-Korea deal might provide, but we are of two minds, we are optimistic and at the same time we are cautious on the auto sector. We will be looking for the appropriate protections and framework around the auto sector.”

Ironically, most democratic governments around the world, whether liberal or conservative, find ways to spend public money in extended support of selected economic sectors, covered by labels like incentives, grants, or loans. But they’re still mostly subsidies. The government of the day looks good to an electorate when ‘saving jobs’, but the real question is whether pet subsidy schemes merely delayed the inevitable collapse of an industry or whether they helped fashion a new economic foundation for a country’s future.