This is the sixth in a series of export sector surveys authored by State officers supporting the President’s National Export Initiative (NEI) and the Secretary’s Economic Statecraft program. Ref A and I outline post’s NEI strategy and ways to strengthen interagency collaboration. This survey covers Ontario’s automotive market, focusing on current economic conditions and opportunities for U.S. exporters. The Ontario’s automotive sector is the largest vehicle-producing jurisdiction in U.S. and Canada, and a major component of Ontario’s economy. Though the industry is still in recovery mode, there are some export opportunities for U.S. businesses. Ontario’s competitiveness relative to the U.S. is eroding due to rising labor and electricity costs and a strengthening currency. After suffering major supply disruptions due to the disasters in Japan and Thailand, Japanese automakers in Ontario are looking to North American suppliers to diversify their components sourcing. Ontario’s push for green vehicle technology and investments in plants upgrades provide opportunities for U.S. suppliers of innovative auto and electronic parts and components, and plant equipment and machinery.
The automotive industry continues to be a key sector to Ontario’s economy, with five major vehicle assemblers and more than 400 parts manufacturing plants in communities across the province. Though the industry underwent a major crisis due to the 2008-2009 economic recession in the U.S., experts agreed that the industry is recovering and profitable. Ontario is still the largest auto-producing jurisdiction in Canada and the United States and is a major parts producer in North America.
Automobiles and auto parts, a sector which has become highly integrated between the Canada and the United States due to free trade, make up the largest sector of traded products between Canada and the United States. Motor vehicles, vehicle parts, and engines made up 16.9 percent of U.S. exports to Canada and 15.4 percent of U.S. imports from Canada for the period from January to October 2011, according to data provided by Global Trade Information Services (Global Trade Atlas). Although vehicles and parts flow in both directions, U.S. automotive exports to Canada consist mainly of parts for assembly (approximately 54 percent), while automotive imports from Canada consist mainly of vehicles (approximately 75 percent). The economies of the U.S. and Ontario are intertwined, and nowhere more so than in the automotive sector.
Despite gloomy economic forecasts due to global uncertainty, auto parts manufacturers anticipate an increase in Ontario vehicle production volumes for the foreseeable future. Suppliers expect increased output from Japanese automakers as they replenish their inventories, and from the Detroit Three (General Motors, Chrysler, Ford) automakers, which all have improved market share. The Ontario provincial government is keen on investing in the improvement and upgrade of the automotive industry. There are opportunities for U.S. companies to capitalize on export business as the Ontario’s automotive industry revamps itself.
Ontario’s Automotive Market Still Recovering
The Ontario automotive industry, the largest in Canada and the United States, will continue to rebound with modest growth, according to industry experts. Sales are recovering and the Detroit Three, which have operations in Ontario, have all shown positive increases in market shares and production in 2011 versus the same period in 2010, according to data provided by Industry Canada. A November 2011 report published by Scotiabank economist Carlos Gomes forecasts that yearly vehicle production in Ontario will exceed 2.1 million units for the first time since 2007. Employment in the sector advanced 2 percent in 2011 over the previous year and jumped nearly 10 percent since the mid-2009 trough. Despite production and sales numbers being far below the levels achieved before the 2008-2009 U.S. economic recession, the report said that Ontario will continue to maintain its historical 16 percent share of the North American assemblies.
… But it is in Stronger Position Than Before
Despite slow growth, the automotive industry is in a stronger position than it was during the 2008-2009 U.S. recession period, and the companies are in a position now to make profits at much lower volumes, according to industry researchers. According to public statements made by the Canadian Auto Workers (CAW), in the short term, the vehicle assembly industry in Canada is in good shape, considering what it has been through in the past few years.
The 2008-2009 recession in the United States sent General Motors and Chrysler into Chapter 11 bankruptcy protection in the United States and led to a sweeping transformation of their operations, with tens of thousands of jobs cut in the U.S. and Canada, dozens of factories closed and tens of billions of dollars in loans defaulted. General Motors and Chrysler in Canada accepted bailouts from the Canadian federal and Ontario provincial governments, and underwent massive restructuring. According to DesRosiers Automotive Consultants, Ontario’s auto industry lost 38,000 jobs in vehicle assembly and parts manufacturing between the end of 2007 and December 2009. The companies have paid back the loan portions of the governments’ investments.
The continued strength of the Canadian dollar and the rising electricity costs in Ontario are undermining Ontario’s manufacturing competitiveness, according to a 2011 study done by the Canadian Automotive Partnership Council (CAPC). Recent negotiations between the Detroit Three and United Auto Workers (UAW) have resulted in contracts that give profit sharing and bonuses instead of wage increases, and a two-tier wage system that allow the auto companies to hire a certain percentage of junior workers at a lower wage. These agreements reached by their U.S. counterparts are pressuring the CAW to consider similar arrangements ahead of the 2012 negotiations with the automakers. According to press reports, CAW officials said that they plan to fight for wage increases.
The shift in U.S. healthcare costs to a trust managed by the UAW has eroded the cost advantage that Canadian auto plants have enjoyed for decades over those in the United States. By some measures, Canada is now the highest cost country in the world in which to assemble vehicles. Hourly labor costs, including wages, vacations, health care, pensions and other benefits excluding profit sharing and bonuses, are about US$60 at the Detroit Three’s Canadian plants, compared to US$57 at the U.S plants, and less than US$40 at the Volkswagen factory in Tennessee, according the automakers themselves. The Canadian dollar’s continued strength and CAW’s unwillingness to make concessions could put pressure on vehicle and auto parts makers to send more jobs south of the border, stated a Conference Board of Canada Spring 2011 report. Chrysler and Fiat CEO, Sergio Marchionne, was reported in the press saying that Chrysler would be making product decisions based on economics going forward and that Canadian operations needed to be as competitive as the U.S. operations, where wages are substantially lower to win work. “You cannot have a strong currency, cannot have an uncompetitive wage rate and expect Chrysler or all the other car markers to keep on making cars in the country,” Marchionne publicly stated.
The 2011 CAPC report also examined electricity prices in seven cities in North America and found the highest costs were in Toronto at 9.65 cents a kilowatt-hour. That compared unfavorably with Houston at 4.52 cents and Nashville, in the heart of the growing southern U.S. auto manufacturing belt, at 7.57 cents.