Geoffrey Hale
Political Science 3170
The University of Lethbridge
November 9, 2010
Outline
 The automotive sector and Canadian trade policies
 Medium-term trends in the automotive sector
The automotive sector and
Canadian trade policies
(in $C billions)
Automotive trade
Exports
-- to U.S.
Imports
-- from U.S.
1993
1998
2002
2007
47.4
46.6
40.6
32.5
75.4
73.8
68.2
57.2
90.9
88.7
83.7
65.8
72.6
71.1
79.9
58.4
Sources: Statistics Canada [http://www.ic.gc.ca/eic/site/auto-auto.nsf/eng/h_am01618.html]
The Canadian automotive sector - 2007
Employment
 Automotive
Vehicles
Value of
shipments
Export
%
2.5 mm.
75 k.
$ 53.2 bn.
$ 6.6 bn.
90%
86%
47,600
assembly
 Car/light truck/van
 Heavy truck
 Auto parts
92,300
 MV body,trailer 18,500
 Dealer networks 173,300
 Aftermarket
162,900
$ 31.7 bn.
62%
$ 3.9 bn.
29%
$ 74.8 bn. (new) -$ 17.8 bn. (cars / parts)
Key success factors for Cdn. auto sector
 Duty-free access to N. American markets (subject to 62.5%




NAFTA value-added rules)
Positive fiscal environment (including medicare)
Supportive government policies for human resources,
regulation
Cohesive North American industry, but also government
openness to growth of transplant sector (b0th foreignowned)
Heavy investment in R&D (still small share in N. America)
Major industry trends
 Globalization
 Rising number of major auto producers, internationalization
of industry (e.g. Japanese, Korean transplants in Canada)
 Canada world’s 4th largest producer (1996), 9th largest (2006).
 Maturing Industry declining competitive position
 Annual sales relatively steady as share of “units in operation”
(20-21% - 2000-07) – but new car production declining share.
 Japanese / Korean market share growing significantly in all
market sectors, especially most profitable
 Big 3 market share down from 66% (2000) to 52% (2007)
 Japanese, Korean auto makers up from 28% (2000) market
share to 42% (2007)
Major Industry Trends
 Growing production share of North American “transplants” and related
parts suppliers
Big-3
 Auto production
 Parts
2000
2007
74.7%
69.6%
59.6%
51.1%
Transps. 2000
2007
23.3% 38.4%
19.9% 33.6%
 Canadian share of North American market fairly stable (16-17%) but
domestic production to sales ratio volatile
 1990 – 148.2% 2000 – 186.7% 2004 – 138.7% 2007 – 152.5%
 Employment in Canadian assembly (10%), parts (11%) sectors in decline
since 2001.
 Transplants in both U.S. / Canada have relative competitive advantage
from lower “legacy” costs of pension (and US health) benefits from
retirees, who now outnumber active workers in Big-3 plants.
 BUT – Canadian share of new auto sector investment growing relative to
U.S. since mid-1990s.
The auto sector crisis of 2008-09
 Key factors in auto sector collapse
 Financial crisis  collapse of short-term financing market for
big-3 automakers  undercut most profitable part of
business
 reinforced by U.S. sub-prime mortgage crisis undercutting
consumer demand
 Steady decline in market share vs. Transplants

Reinforced by Chrysler’s excessive dependence on mini-van / SUV
markets
 Market shock for high end products resulting from record oil
prices (2008)
 Cash flow crisis  impending bankruptcy for GM, Chrysler
(Ford mortgaged virtually all assets before financial crisis)
Canada as policy-taker in auto sector crisis
 Bush Administration viewed GM, Chrysler as “too big to fail”
despite widespread public opposition to bailout
 Congressional “rescue” likely to have strings attached to keep
U.S. tax dollars in United States.
 Canadian auto sector centered in swing ridings in Ontario
 2008 federal election held before worst of crisis, but federal
Conservative government heavily dependent on Ontario, esp. auto
sector dependent ridings.
 Shared interest with Ontario government in shoring up
employment, allowing for “orderly transition” for industry
 $ 4 billion interim bailout in Dec. 2008 – GM $ 3 bn.; Chrysler $ 1 bn
 Price-tag – 20% of bailout in return for undetermined share of
industry  2/3 federal – 1/3 Ontario.
Auto sector bailout as multi-level game
 Three sets of overlapping negotiations
 Ottawa + Ontario with Bush / Obama Administrations



Auto sector only one of several crises facing incoming administration
(sub-prime crisis / U.S. recession / Wall Street bailouts)
Canadian dimension marginal to broader U.S. political processes in
executive branch, Congress
Canada bought a seat at the table, not a “microphone”.
 Ottawa + Ontario with GM / Chrysler (separate negotiations)


Chrysler negotiating with Fiat as key component of bailout
GM, Chrysler also negotiating with unions for “competitive” contract
 Ottawa + Ontario with Canadian Auto Workers


CAW position undercut by negotiating position of UAW
UAW position strengthened by union influence in governing
Democratic Party, Obama admin’s willingness to discount bondholders,
dismiss GM management.
Outcomes
 GM, Chrysler declare bankruptcy in both countries
 New firms have minority government ownership, plurality
(GM), majority (Chrysler) ownership to union pension,
benefit funds
 Total Canadian funding
– Chrysler $ 3.8 bn. for 2% of equity in restructured company,
20% production guarantee
– GM - $ 10.5 bn. for 11.5% equity in restructured company,
16% production guarantee.
Major policy challenges for governments
 Maintaining neutrality among individual corporations
 Too-big-to-fail sets dangerous precedents
 Ongoing turbulence likely in industry – governments can be seen to
play favourites
 Production guarantees hard to enforce
 Federal lawsuit against U.S. Steel possible warning signal to GM,
Chrysler about political risks
 Fostering efficiency, competitiveness critical, especially with prospect
of high exchange rate environment
 Investment promotion to get new technologies for Canadian plants
 Infrastructure  $ 550 mm. loan offer to Michigan for new Detroit-
Windsor bridge (on hold pending state-level political deal)
 Human Resources  investments in specialized skills to shift into
“high wage / high skill” global market niche.
 Taxation  commitment to CIT rate reductions