Sectoral Trade Issues The Automotive Sector

1. Sectoral Trade IssuesThe Automotive Sector Geoffrey Hale Political Science 3170 The University of Lethbridge November 9, 2010

2. Outline • The automotive sector and Canadian trade policies • Medium-term trends in the automotive sector

3. The automotive sector and Canadian trade policies (in $C billions) 1993 1998 2002 2007 Automotive trade Exports 47.4 75.4 90.9 72.6 -- to U.S. 46.6 73.8 88.7 71.1 Imports 40.6 68.2 83.7 79.9 -- from U.S. 32.5 57.2 65.8 58.4 Sources: Statistics Canada [http://www.ic.gc.ca/eic/site/auto-auto.nsf/eng/h_am01618.html]

4. The Canadian automotive sector - 2007 Employment Vehicles Value of Export shipments % • Automotive 47,600 assembly • Car/light truck/van 2.5 mm. $ 53.2 bn. 90% • Heavy truck 75 k. $ 6.6 bn. 86% • Auto parts 92,300 $ 31.7 bn. 62% • MV body,trailer 18,500 $ 3.9 bn. 29% • Dealer networks 173,300 $ 74.8 bn. (new) -- • Aftermarket 162,900 $ 17.8 bn. (cars / parts)

5. 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 foreign- owned) • Heavy investment in R&D (still small share in N. America)

6. 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)

7. Major Industry Trends • Growing production share of North American “transplants” and related parts suppliers Big-3 2000 2007 Transps. 2000 2007 • Auto production 74.7% 59.6% 23.3% 38.4% • Parts 69.6% 51.1% 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.

8. 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)

9. 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.

10. 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.

11. 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.

12. 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