The Threatened North American Automobile Industry Essay
The Threatened North American Automobile Industry
1.a. What is the Ontario Liberal Government’s strategy to attract auto investment in the province?
During the 2006 campaign, the highlight was to provide incentives that would improve the plants and allow the development of more environment-friendly automobiles; there is a plan to negotiate with Asian countries such as Korea and Japan in order to allow the entry of Canadian cars into their markets; research and development for better cars in the future and a national border infrastructure program that would provide protection to “just-in-time” production (“Megan Walker NDP Campaign”).
When asked about the steps that the Liberal Party would take in developing an Active Auto Strategy for Canada, Glen Pearson, answered that there had been an investment of $400 million dollars by the Liberal government, the Government of Ontario and some auto companies. In line with this, he said that this investment is done to improve the present plants and to encourage new plants as well as develop partnerships with relevant institutions that could augment research and development (Pearson 4).
Joe Cordiato stated in one of the news reports that the Ontario government planned to collaborate with the Canadian Auto Workers union and Ford Motor Co. to build a car assembly plant that promises an annual growth of 250,000 cars from its second to sixth year. Here, the government is said to be providing financial support of approximately $100 million (Keenan).
Auto investment was augmented by the Liberal Party’s Strong People Strong Economy campaign. According to this campaign, the Liberals strive to create competitive business environment which could then help the auto industry (Burns). The $500 million manufacturing investment strategy as well as the phasing out of capital tax was expected to attract auto investments. A 5% tax cut was implemented starting January 2007 (Burns). McGuinty, one of Ontario’s liberals said that the party is still actively seeking auto investments (Burns)
1.b. What is the ideological underpinning of this strategy?
The strategy of the Liberal politicians to provide corporate welfare and provide subsidies to investors was expected to increase the competitiveness in the auto industry. The phasing out of capital tax for the welfare of corporations reduces the limitations and allows more freedom to investors to become players in the industry and is another. These, are major characteristics of the Liberal ideology. In general, the liberalist ideology is characterized by limited power of the government, allowance for freedom of thought and ideas, welfare, market economy (“Liberalism”). These strategies, then, are meant to allow competitiveness within the industry, and possibly, reduce the prices.
1.c. Citing a specific example, assess the effectiveness of this government strategy.
The strategies of the liberal government had been successful in their immediate objective which was to attract auto investors. After the announcement of the corporate welfare policies, several investors had taken interest in taking advantage of the subsidy and tax cuts. Toyota was able to build a facility where RAV4 models would be produced. It was equivalent to an investment of $650 million (Janowitz). Toyota had invested $1.1 billion in a new facility as a result of the strategies (“Creating a Competitive Business Environment”).
There was also Greenfield auto manufacturing plant that was secured. There was about $6 billion of new auto investments that was created including DaimlerChrysler’s $758 million, Ford’s $1 billion and General Motors’ $2.5 billion (“Creating a Competitive Business Environment”).
While the strategies of the Liberal government seem to be a great way of improving the status of Ontario’s automobile industry, the statistics on annual car sales and production per country showed otherwise. The effectiveness of the government’s strategies on improving the auto industry seemed to end in attracting investors. Some of the investments had either slowed down or shut down. One huge van assembly plant of Chrysler was said to have closed while Navistar International Corp. shut down its heavy truck assembly plant (Justauto.com Editorial team).
Based on these statistics, the government strategy on augmenting the auto industry in Canada was not as effective as planned. Since 2001 until the start of January 2007, there had been no improvement in the auto sales. Approximately 1.62 million units were sold in 2001. This was relatively higher compared to the 1.54 million-unit sales record at the beginning of year 2007.
Sales in the whole of Canada surged at the end of year 2006 but according to researchers, sales were still expected to decline further in year 2007. The data at the end of 2006 indicated that assemblies must be slowed down because of very high inventories. It is said that Chrysler has temporarily idled its facilities early in January because of these high inventories. Shutdowns in Canada would reduce Canada’s output by 15% that could result to a significant decline in its vehicle production (Gomes, 1-2).
2.a. Assess Canada’s global competitiveness in the auto industry.
The tax cuts and subsidies imposed by the Liberals’ strategy to augment the auto industry, rising input costs, as well as Canada’s rising value over the US dollar seems to be harming its global competitiveness in the auto industry (Rajotte 1).
One, the rising input costs of automobiles, even with the government subsidy increases the price of the automobiles. Similarly, the rising value of Canadian currency over the US dollar means that the costs would be less competitive particularly in export deals. This is very critical since the major markets to which Canada is competing with include China, Japan, Korea and India. All these countries are considered more competitive in terms of price because of its relatively lower labor and production costs.
In addition, according to Ed Kanters, from Accucaps Industries, Ltd., most auto products that are manufactured in Canada, about 80-85%, need to go across the United States where in turn, it becomes more expensive. This happens because of the additional costs it requires for the products to get across the border as well as the infrastructures required for the product to cross the border. These add to the reduction in profits and the ability to invest in the product development (Rajotte 22). Also, imports have been increasing, which creates more disadvantages (Rajotte 5).
Although the tax cuts and subsidies could increase the competitiveness of the industry within the country and thus be able to reduce the prices, these prices are still considered as relatively less competitive compared to other countries. In other words, the auto-industry in Canada is not competitive when seen through the global context. The tax cuts and subsidies by the government, surely could improve Canada’s competitiveness—but only within the country and in short-term. In the long-run, deep cost-cutting measures cannot sustain the industry’s profitability, which produces more harm than good (Rajotte 3).
2.b. What are the current threats facing the auto industry in Canada?
Canada’s non-competitive status, despite the government subsidies has left investors looking elsewhere for cheaper automobile parts. Automotive companies are moving to China (Pau Woo 21). In particular, the CEO of Chrysler, Tom LaSorda implied looking towards China for import in automobile parts (Rajotte 5). This is according to Mr. Gary Parent, President of the Windsor and District Labor Council.
The number of newly industrialized exporter countries is increasing. These include China, India, Taiwan, Korea and Japan. This change reduces Canada’s share of the automobile market (Hargrove and Stanford 7).
It is for sure that other countries that at present, have more competitive advantages over Canada are also applying strategies to continue having these advantages. China and other Asian countries are becoming serious competitors in the export market (Pau Woo 21). China, in particular, is said to be aiming the full-effect of its export-oriented production as early as year 2010 (Pau Woo 2). There is also a plan to focus efforts on obtaining and accumulating overseas market knowledge and experience particularly in the field of auto parts, in areas where there is little difference in competitiveness (Pau Woo 2).
Also, unlike the current state of Ontario, there is a continuously growing statistics in the Chinese vehicular and automobile parts export. In 2000, China had only $187 million worth of car exports and $1130 worth of automobile parts export. The values increased to $353 million and $2291 million respectively in the first seven months of 2004 (Pau Woo 3). Using a linear regression analysis, and judging from the competitive advantages of the country, these values are expected to increase in the years to come.
Based on the results of the Survey of Canadian Auto Parts Manufacturers, the other major threats to the automobile industry of Canada include its strong currency compared to the US, the impossible demands from the customers, the continuing decline in the profitability, US protectionism as well as the reduction in the attractiveness of Canada as investment location (Asia Pacific Foundation of Canada 6). Canada has not been considered as good investment site for assembly plants by any automaker (Stanford 7). In addition, according to the same survey, there are some considerations by majority of the members of the Auto-Parts Manufacturer’s Association to do business with Asian companies (Asia Pacific Foundation of Canada 6).
The strong currency of Canada compared to the US allows only competitive disadvantage over exports which as a result decreases profit margins; The impossible demands from consumers increases the costs and reduces the demand of Canadian auto products and the US protectionism increases the exportation costs for Canada. The trade surpluses can also be considered a threat as this decreases profitability.
2.c. What are the current competitive advantages facing the auto industry in Canada?
The competitive advantages facing the auto-industry in Canada are based mainly on its ability or limited ability to export relative to its competitors. Export capacity is dependent or factors of exchange rates, production costs, labor costs, tariffs and protectionism policies, and technology. Among these, the competitive disadvantage of Canada lies on its high exchange rate or strong currency as well as its high production and labor costs.
As it is said, the value of the Canadian currency has been growing stronger relative to the US dollar. This puts the country at a disadvantage not only with respect to US trading but also to the other countries, particularly its major Asian competitors, China and Japan. Chinese and Japanese currency have always been lower in value compared to the US and thus to Canada.
Applying this to the automobile industry, one report on the global auto industry states that the lower value of the Japanese yen has created a subsidy of $2760 to $8280 for economy and luxury cars (“Missed Opportunity: Auto report details policy flaws, but short on industry data” 2). As a corollary, Japanese auto products are kept relatively low in price compared to its Canadian counterparts (“Missed Opportunity: Auto report details policy flaws, but short on industry data” 2). Other countries do not allow floating of currencies and have specific measures to remain low to remain competitive (Rajotte 4).
With this higher valuation of currency, Canada also experiences high cost of living which accounts for higher labor costs compared to the competitor countries. With China’s and India’s lower labor costs, the financial costs of producing auto products are kept low in these countries. In addition, more investors are attracted, turning their interest to these countries as possible locations for assembly sites (Rajotte 4)..
The protectionism policies of some Asian countries, particularly Japan and Korea, also contribute to the competitive advantages faced by the Canadian auto industry. Such countries are less open or provide much limitation in allowing imports from foreign countries (Rajotte 5). In addition, Canada itself imports significantly from the said countries. In 2005 alone, there is a 2246% growth in import to Canada from China, amounting to $86 million, and 1586$ increase in import from South Korea, amounting to $8.6 million (Rajotte 5).
To add to this, according to Mr. Bill Storey, Director of Midwest Precision Mould Limited, it seems that China in particular provides special economic area incentives that attract more investments (Rajotte 22). Based on his statement, the country is focusing on export efforts. This is by providing reductions in corporate income tax for startups, special income tax refunds, tax reliefs, exemption and reduction in land use fees, reduction on the prices of goods from state-owned companies and most importantly, reduced taxes for companies dealing in exports (Rajote 22).
- Mexico has supplanted Canada as the leading parts supplier to the United States auto manufacturers and China is rapidly gaining market share. Identify an interest group with a position on Canada’s deteriorating ranking as a parts supplier. Explain how the interest group advocates to both the federal and provincial governments (Do not use an interest group representing trade unions).
The Automotive Parts Manufacturers’ Association (APMAa) is an interest group, a Canadian national association that represents automobile parts, tools and equipment, supplies and services producers who cater for the global automotive industry (APMAa).
APMA is involved in many key initiatives. Most of which involve advocacy of the automobile industry in relation to globalization and investments. Among these initiatives are: Providing efforts in presenting and lobbying automobile issues to the government; initiating policies, lobbying and relating to the government; suggesting the investment of the government in the auto industry.
With the government, they tackle issues on globalization and the production of new investments, as well as maintaining existing ones. They lobby on innovation and developing technology that could help improve the status of the automobile industry and providing more functional designs to equipment manufacturers or OEMs (APMAa).
The most recent Policy Paper of APMA highlights the main initiatives of the association in lobbying and policy-making. The title of the policy paper is “A Global Industry in Transition,” and just by reading the title, it can be assumed that the group is advocating the role of the Canadian auto industry in global integration.
The policy paper tackles the problems and issues being encountered by the Canadian automobile industry and how these affect the supply sectors that operate in Canada. In addition, government action is being advocated, as well as industry participation in order to allow stability and growth of the industry particularly the supply sector (APMAb 4). The policy paper also has assessments of the initiatives that had been undertaken or are currently being undertaken to address the issues that the industry is facing (APMAb 4).
In general, the Policy Paper advocates the need for a more competitive infrastructure, greater efforts on providing innovation and technology to allow a more prosperous economy, increased or improved government support for the sector, improved bureaucratic border crossing in the United States, better transportation infrastructure that would enhance “just in time” inventories as well as manufacturing, strategic positioning and changes in market shares, improved human resource management, and lastly, environmental safety and health (APMAb 1-25).
APMAa. n.d. 26 Feb 2007. <http://www.apma.ca/client/APMA/APMA.nsf/web/APMA+Annual+C&E!OpenDocument>.
APMAb “2007 APMA Policy Paper.” 2007: 28.
Asia Pacific Foundation of Canada. “The East Asian Automobile Industry: Opportunity of Threat?” Results of a Survey of Canadian Auto Parts Manufacturers. Jan 2005: 32.
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“Creating a competitive business environment”. N.d. Ontario Liberal. 26 Feb 2007 <http://ontarioliberal.ca/en/Policies/Policy.aspx/creating_competitive_business_environment>.
Gomes, C. “North American vehicle production—Double-digit cutbacks will continue through mid-2007.” Global Economic Research: Global Auto Report, Scotiabank Group. 2007
Hargrove B and Stanford J. “The Auto Industry and the Future of the Ontario Economy.” Ontario Pre-Budget Hearings. 27 Feb 2002: 22.
Janowitz, M. “Auto Parts Industry Booming in Ontario.” 2007. Business Facilities. 27 Feb 2007 <http://www.automotivedigest.com/view_art.asp?articlesID=12228>.
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Keenan, G. “Ontario to join drive for new Ford small-car plant.” TheGlobeandmail.com. 27 Feb 2007 <http://www.theglobeandmail.com/servlet/story/LAC.20060830.RCORDIANO30/TPStory/Business 2007>.
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“Missed Opportunity: Auto report details policy flaws, but short on industry data.” N.d: 5.
Pau Woo, Y. “Canadian Auto Parts Manufacturers and the China Threat/Opportunity.” Survey Results. Nov 2004: 21.
Pearson, G. “Federal By-election candidate questionnaire.” 2006. London.ca. 26 Feb 2007 <http://london.ca/Mayor/gpearson.pdf>.
Rajotte, J. “Standing Committee on Industry, Science and Technology.” 23 Nov 2006: 30.