By Alan M. Field

The bad news about Ontario’s economy continues to accumulate: After a decade of steady government spending increases, the government of Ontario has managed to virtually double its debt from $132 billion in 2000-1 fiscal year, to an estimated $288 billion during 2013-4, according to the Ontario Financing Authority. The result of Ontario’s growing debt is that interest payments will cost the provincial government $11.01 billion in 2014-5, consuming some nine percent of its government revenues.

This is only one of the ways, charge critics, that Ontario is transforming itself from the engine of Canada’s manufacturing economy to still another “have-not” province of the East, eligible to receive billions of dollars in ‘equalization payments’ from Canada’s federal government.

Ontario’s unemployment rate rose to 7.9 percent in 2013 – higher than the national average – in part because Ontario has lost its leading role as a manufacturer of vehicles and automotive parts. In part, because none of the costly alternatives to its traditional dependence on that sector have yet to pan out in terms of significant job generation.

How does Ontario intend to dig itself out of that hole? What might a reborn Ontario look like? What strengths might Ontario build on, to reassert itself, especially as a center of manufacturing? Or is it too late for Ontario to reestablish its position as a manufacturing center, thanks to the rise of emerging nations such as Mexico?

The automotive decline

Focused in Ontario, the auto industry is Canada’s largest manufacturing sector, and Canada’s second largest exporting industry. Canadian production accounts for 16 percent of North American vehicle production and has 2.3 million units of installed production capacity. In 2012 auto industries sales reached $82.6 billion – and 81.9 percent of all automotive sector jobs were in Ontario.

Yet Canada’s share of the North American automotive industry market has steadily declined during the current century, dragging Ontario down in the process. In 2000, Canadians held 8.4 per cent of all North American auto industry jobs, but by 2012 that figure declined to 7.5 per cent. Over the same period, Mexico’s share of North American auto jobs increased from 27.1 per cent (2000) to 39.1 per cent. Thus, Mexico went from having just over three times as many automotive jobs as Canada in 2000 to nearly six times as many in 2012. Along the way, Canada lost about one-third of its automotive industry jobs from 2000 to 2012; that is, from 172,000 workers in 2000 to only 111,000 workers in 2012.

Canada’s relative strength in this sector is set to decline even further, as BMW, Toyota Motor and Daimler AG’s Mercedes-Benz are expected to announce at least $2 billion of investments in Mexico in the next year or two, according to supplier and other industry sources. That’s on top of nearly $6 billion to be spent on other Mexican plants by Nissan Motor, Honda Motor Co, Mazda Motor and Volkswagen. Although Steve Rodgers, President of Toronto-based Automotive Parts Manufacturers’ Association, has noted that the automotive sector is still a growth industry worldwide, he has also acknowledged that about 65 percent of the growth in the North American auto industry between 2012 and 2020 will take place in Mexico; about 32.5 percent in the U.S., and only about 2.5 percent in Canada. Thus, Canada’s share of NAFTA production is projected to decline every year from 2010 to 2020.

Ontario’s future as an automotive manufacturing center is severely limited by its lack of market diversification. On the one hand, Canada has the most export-intensive auto industry in the world, with nearly 90 per cent of overall production geared for export. But Canada is the only country that relies almost exclusively on one market for its auto exports – the U.S. vehicle exports from Mexico to the United States have jumped 22 per cent since 2000, while the combined exports of South Korea and Germany to the U.S. have increased by nearly 50 per cent. But Canada’s share of global vehicle exports has fallen to only 6 per cent, down from a double-digit share as recently as 2002.

Given lower costs of production in Mexico, and easier access of plants in that country to markets and manufacturing supply chains in both the southern and western U.S. states, it is impossible to imagine that any of the major global automakers that operate subsidiaries in Canada — but do not call the country their home base – would opt to relocate any of their assembly operations to Ontario from their current sites in Mexico – or from southern U.S. states such as Tennessee, Kentucky and South Carolina. Although auto industry sources note that Canadian-built cars are among the best in the world, there is little or no difference in quality between vehicles made in Canada and those produced in Mexico or the U.S.

Another factor working against Ontario’s long-term prospects are Canada’s limited array of free-trade pacts. Canada has free trade agreements with just a handful of nations apart from its NAFTA partners – that is to say, with South Korea, Panama, Peru, Costa Rica, Israel, Jordan, Chile and the tiny European nations of the EFTA pact. But Mexico has free trade agreements with more than 40 nations worldwide, providing Mexico-based automakers with duty free access to more than one billion people across the globe. Finally, the demographics are also working against Ontario. Mexico’s population – 117 million in 2013 – is not only much younger than that of Canada, but is growing more affluent, generating a significant middle class of workers finally capable of purchasing automobiles, electronics and other high-value items that are increasingly manufactured at home in Mexico or in neighboring U.S. states. Why import them from Canada, at greater cost?

Today, Canada’s economy is larger than Mexico’s, but within a few decades, the two countries’ relative positions will switch, according to a recent study by PricewaterhouseCoopers. On a purchasing power parity basis, Mexico’s GDP will be $6.6-trillion by 2050 – the seventh-largest economy in the world – or twice Canada’s projected GDP of $3.3-trillion.

Substituting for the automotive sector

What role will Ontario play as the North American economy transforms itself in coming decades? If Ontario is to remain the leading location for Canadian manufacturing, it seems clear that it will have to find substitutes for its declining position in the automotive sector.

One possible alternative would be to revive Ontario’s long tradition as a center of aircraft design and manufacturing. An important thread in that history dates back to 1976, when the Canadian government acquired Canadair Ltd. from General Dynamics, the U.S.-based aviation manufacturer. Canadair operated as a federal crown corporation until 1986, suffering losses during its development of the Challenger business jet. That year, the government of Prime Minister Brian Mulroney sold Canadair to Quebec-based Bombardier. Over the years, Bombardier has used the company to acquire several existing aircraft manufacturers and product lines – including Gates Learjet, and Boeing’s de Havilland Dash-8, as well as to design its own lines of Regional Jets and C-series aircraft. Canadair has recorded a series of its own aviation firsts including the CL-89 and CL-289 — the first surveillance drones to be put into service in several countries’ armed forces; the CL-84, the first aircraft that rotated its wings to achieve vertical lift-off, and the CL-215, the first purposed-designed water bomber.

Could that tradition now be leveraged? Many observers believe that this transition from contract manufacturer under foreign ownership into an independent developer of new families of passenger aircraft has greatly benefited the Canadian economy, and helped create a significant new industry with global product mandates. Could this model be adopted to Ontario’s benefit in the creation of a large new industry that is not subject to the competitive pressures of low-cost global competitors?

Another possibility would be to revive the legacy of the Avro Arrow –a delta-winged interceptor aircraft designed and built by Avro Canada as the culmination of a design study that began in 1953. Viewed as an advanced technical and aerodynamic achievement for the Canadian aviation industry, the CF-105 held the promise of near-Mach 2 speeds at altitudes of 50,000 feet (15,000 m), and was intended to serve as the Royal Canadian Air Force’s primary interceptor in the 1960s and beyond. Although the Avro Arrow was a cutting-edge military aircraft developed in the 1950s, the project was cancelled in 1959 before production began, sparking a longstanding debate that has continued to this day. Unfortunately, Avro’s highly skilled team of engineers wound up working in other advanced projects elsewhere, including NASA’s manned space programs in the U.S. Within two months of the project cancellation, all aircraft, engines, production tooling and technical data were ordered scrapped, in an official effort to destroy classified and “secret” materials used in the project.  

At the time, Avro Canada was developing a wide range of advanced variations on the Arrow. There was much talk about building an Arrow that could have been capable of Mach 3, similar to the Soviet MiG-25. Rather than the cancelled production version, this plane would have been a greatly modified version of it. In 2010, in the context of ongoing controversy surrounding the Lockheed Martin F-35 Lightning II CanaAmbroof individuals lobbied the Canadian federal government to consider domestic production of an updated version of the Avro Arrow, using modern materials and engines but preserving the Arrow’s proven “basic design.” Although this group argued that a modernized Arrow would outperform the F-35 in speed, range and maximum altitude, the Harper government publicly rejected such a plan in 2012, saying the redesigned Arrow program was too risky, would take too long to develop, and would be too expensive.

Meanwhile, fourteen of the top 26 global aerospace firms have significant operations in Ontario, employing close to 17,000 workers, and generating an annual impact of $3.01 billion on the province’s GDP, according to the Ontario Ministry of Economic Development, Trade and Employment. To achieve these goals, the province has provided the aerospace companies with more than $86 million in repayable and non-repayable support. “This has helped leverage over $845 million in total investment, creating over 1,100 jobs and retaining over 1,700 jobs,” said ministry spokesperson Gabe De Roche. Overall, he added, the sector directly employs about 250,000 people in Ontario, with a yearly payroll of $14 billion.

Betting the farm on clean tech and the bio-economy

Despite its mounting provincial debt, Ontario is also investing substantial resources in the development of clean technologies and the bio-economy. Since 2003, over $436 million has been committed, via the Ministry of Economic Development, Trade and Employment, to over 1,100 research and commercialization projects in those sectors. The sources include the Eastern Ontario Development Fund, and the Southwestern Ontario Development Fund.

A spokesperson of the same ministry said that these spending programs are “creating a positive business climate,” while supporting our existing industries and “attracting new investments and new business to the province.” It remains to be seen, however, to what extent the new design and engineering jobs created in the clean technology and bio-economy will be able to substitute for the massive losses of well-paying blue-collar jobs, as Ontario’s automotive sector continues to decline in the decades ahead.

To get Ontario back on track, Sean Speer, Associate Director of Fiscal Studies and Charles Lammam, a resident scholar in economic policy at the Fraser Institute, suggested recently that Ontario Finance Minister Charles Sousa announce a series of spending reforms to balance the budget and create the room for tax relief that improves Ontario’s competitiveness. They wrote, “A good starting point is to tackle the largest component of spending: the compensation of government employees. Government workers in Ontario currently enjoy a 14-per-cent average wage premium compared with similar positions in the private sector. This comes on top of more generous pensions, an earlier average age of retirement, and much greater job security. A phased-in plan to bring government employee compensation into line with private sector norms would be a major source of savings.”

Speer and Lammam also called for spending restraint in healthcare, which already consumes over 40 per cent of total program and faces further cost pressures as the population of Ontario ages. “Sousa might consider adopting policies common in other countries with universal access healthcare (like the Netherlands and Switzerland) that promote greater competitive pressures between suppliers and better incentives for patient decisions, while producing better quality care.” In addition, they wrote, Sousa could “also eliminate special subsidies to businesses and particular industries such as green energy; the evidence clearly shows that corporate welfare doesn’t help economies grow.” They added that “such reforms are necessary because a solid fiscal foundation must be the basis for a plan to revive Ontario.”

None of these suggested solutions is a panacea. The breadth of such criticisms – and wealth of alternative strategies — reveals how much needs to be accomplished if Ontario is to reverse its manufacturing decline in the decades ahead.