How Do We Drive Ontario’s Auto Sector Forwards?

By Mitchell Davidson 

The Canadian International Auto Show returns to Toronto on February 14th for patrons to see the latest and greatest in the automotive industry. Despite the excitement around the show, there will be fewer Canadian made cars on the floor than in recent memory. General Motors in Oshawa has officially closed its doors, laying off nearly 3,000 workers and ending production, while the Ford Motor plant in Oakville has recently laid off 600 workers while halting the production of its Ford Flex and Lincoln MXT models. Moving forward, the question becomes what is the future of the auto sector in Canada and what can be done to stop the worrying trends highlighted by Ford and General Motors?

The State of the Auto Industry in Canada:

Currently, Ontario is the only province in Canada that produces automobiles – nearly 2.2 million of them annually (2017 numbers). The Canada-US Auto Pact of 1965, the 1994 North American Free Trade Agreement (NAFTA), and the proximity to major Original Equipment Manufacturer (OEM) headquarters like General Motors and Ford nearby in Michigan made Ontario an attractive physical jurisdiction. Add in benefits like an educated workforce, a universal health care system that alleviated employers of the need to pay for health insurance, and a rare tool and die cluster and Ontario became a logical place for investment.

However, over recent years, Ontario has started to lose out on a regular basis to the cheap labour of Mexico and the impressive grants and incentives of the Southern United States. Since 2006, 16 new auto plants have come to North America. 10 of them went to Mexico and the other 6 went to the Southern US.

When Ontario most recently had 11 assembly lines, it produced a vehicle every 13 seconds. With the loss of assembly lines in Oshawa and production mandates in Oakville, that number will only increase. Since 2000, auto production in Ontario is down 25%. Ontario is losing out on new mandates, but to be able to fix the problem, we must first explore why it is occurring.

Why is Ontario Losing?

Labour:

Ontario’s competitive advantage is slowly being chipped away at on all fronts. Mexico’s labour pool, though not as educated, is vastly cheaper. The Canadian government has done its best to address this by including provisions in the new United States-Mexico-Canada Agreement (USMCA) that at least 40% of a vehicle must be made in plants that pay workers make at least $16 an hour or they will be subject to U.S. import tariffs (Listen to former Canadian Ambassador David MacNaughton reveal this was a Canadian idea on our StrategyCorp Podcast here – http://podcast.strategycorp.com/).

Energy:

Next, Ontario’s energy prices have increased drastically. The current industrial conservation initiative only benefits companies that can shut off production during the five highest electricity demand hours of the year. Most auto plants cannot afford to shut down production at any time, meaning they can miss out on the benefits provided. Some companies have been creative, with Honda doing annual maintenance cycles during the peak of summer heat, and others have pursued their own co-generation facilities so they can divert as much electricity usage to natural gas as possible. Still, energy is estimated to be worth 2% to 3% of the cost of car. When competing for mandates, that can make a sizeable difference.

Timing:

Lastly, Ontario unfortunately became a victim of timing. With NAFTA under serious threat for the past few years, most OEMs approached further investment in Ontario with caution. If NAFTA re-negotiations fell apart, section 232 tariffs that were temporarily in place became permanent, or a settled agreement did not protect the free trade of automotive parts and vehicles, then a plant in Canada would be useless since 85% of all Ontario made vehicles and parts are exported. As decisions on future production mandates were being made, Canada was largely off limits.

Worse yet, the vehicles being produced in Canada were not in demand. Sedans, a once popular family choice, would not sell. Instead, virtually all profits were coming from sport utility vehicles and pickup trucks. Lawrence Ulrich of the Wall Street Journal recently summarized it writing:

In 2019, S.U.V.s and pickups are grabbing a record 70 percent of the market, with 5.9 million sales through June versus 2.5 million for cars. Sales of midsize sedans have nose-dived, from 3 million in 2012 to 1.9 million last year. One of every five cars sold was a midsize sedan in 2012; today it’s barely one in 10.

The Chevrolet Silverado and GMC Sierra being produced in Oshawa were the only pickups made in the province. Now that the Oshawa plant has closed, Ontario no longer produces a single pickup truck. Ontario’s sport utility vehicle production is better, but the assembly lines it has designed for sedans are especially problematic.

For example, General Motors’ Oshawa facility historically made the Chevrolet Impala, a typical 5-seater sedan. In 2011, the next-generation Impala mandate went to a facility in Michigan, but Oshawa would still make the Impala to the end of its existing contract. In 2013, the Chevrolet Camaro production was moved to the U.S, leaving Oshawa’s future resting on the Impala’s success. The Globe and Mail wrote “It’s becoming increasingly clear that the future of several thousand jobs at a General Motors Co. assembly plant in Oshawa, Ont., depends on the success of the redesigned Chevrolet Impala.”

Things got so bad in the sedan market that later versions of the Chevrolet Impala never even hit the lot for retail sale to American and Canadian families. Instead, General Motors only sold them as fleet vehicles to governments and companies. There was no market demand for the Impala. Production ended in 2016 and General Motors Oshawa’s fate was essentially sealed.

What’s Next?

Despite the negative outlook of recent months, Ontario still has 5 major OEMs in the province, a highly educated labour force, and a base of auto parts manufacturers that are incredibly valuable. In order to revive the auto industry, a variety of solutions are necessary. The Ontario government has started down this path, releasing a $40 million auto strategy in the wake of the Oshawa plant closure, but more action is required.

Embrace the Future:

First, the Canadian auto sector has rightly identified that Canada’s biggest advantage is its talent. Ontario alone has 24 college and 11 university programs directly related to the auto sector and one of the most educated workforces in the world. When this is combined with projections that the autonomous vehicle market could be worth as much as $1.3 trillion by 2035, Ontario could have a real role to play.

The Automotive Parts Manufacturers Association is playing the long game too. Recently, they announced their membership would be joining forces to create Project Arrow, Canada’s first all-Canadian zero-emission concept car for a 2022 release. Embracing this future fits well with recent investments by OEMs into engineering hubs in Ontario and investments by technology driven automotive companies like Uber.

Ontario recently invested $3 million in December of 2019 to help auto workers upskill and stay with the times. More investments like that will be needed if Ontario wants to be at the forefront of automotive skilled labour in the move to electric and autonomous vehicles.

Government Co-Operation and Municipal Empowerment:

In order to lure new investment – either on the technological side or in the form of new mandates – will require multi-governmental cooperation. The Ontario government is tackling automotive red tape by streamlining approvals for new plants and allowing on-road autonomous vehicle testing. That is an important step, but new plants likely require both federal and municipal approvals as well as provincial. If all three levels of government are not aligned and do not coordinate their efforts, they will not be able to attract significant new investment.

Further to the point of increased co-operation, many of the incentives used in the Southern United States to lure new OEMs or new mandates are inherently municipal. These can range from gifted municipal lands, property tax breaks, subsidized water rates, and even guaranteed upgrades to local infrastructure to meet a company’s needs. However, in Ontario, municipal bonusing is largely illegal. Municipalities do not have the freedom to provide incentives due to the Municipal Act in most cases, even if they wanted to.

For example, if an Ontario municipality wanted to give a property tax holiday to a new major OEM, they would not be allowed. Even though property taxes are municipal jurisdiction, the rules around how they can be reduced and tweaked are provincial law. The province could re-evaluate these restrictions – as history as shown they can lead to bad investments – and undertake conversations with Ontario municipalities to consider exemptions for major OEMs or at least a process for Ministerial approval to offer incentives.

All that being said, municipal involvement would only be the cherry on top. Any investment packages or offers would need considerable provincial and federal backing and real efforts to reduce red tape and approval timelines. All three levels of government need to work together, but the province likely needs to take the lead both in effort and in terms dollars or subsidies.

Go After New Mandates:

One of the hidden benefits of the new USMCA is that companies must make 75% of their vehicles in North American plants and 40% of their car must be made in North American plants with $16 an hour wages or higher. If not, those companies will face U.S. import tariffs. To most, that appears to be a play to take back some Mexican based manufacturing. However, it also has massive implications for European and Asian OEMs. If they do not produce in North America they too will be hit with difficult tariffs.

Companies like BMW, Mercedes-Benz, and Volvo all opened plants in places like South Carolina in recent memory. Now, those considering a North American facility have even more reason to do so: do it or be priced out of the market by domestic competition. That means OEMs that currently do not have North American locations are more likely to consider the idea while those who make some, but not all, of their product line here may also be in the business of considering North America.

Therefore, as difficult and contradictory as it may sound, the real play for Ontario may be to lean on new manufacturers rather than the ones already here. Each level of government should consider what it can afford to offer new companies, such as: corporate income tax breaks, provincial employer health tax holidays, guaranteed property tax rates, free land, expedited approvals, lower WSIB premiums, and guaranteed talent pipelines through post-secondary institutions.

The easiest solution is to throw millions of dollars at these companies, but that is neither politically nor economically feasible. In order to avoid the much maligned “corporate welfare” play, governments could pursue tax holidays or interest free loans instead of grants. Given the lack of commitment by auto producers to the jurisdictions that saved the industry with a major fiscal infusion after 2008, including Canada and Ontario, any direct or indirect financial assistance needs to provide protection to the taxpayer, in the event of business reverses or corporate strategies to court plant locations in erstwhile, more favourable jurisdictions.

The reality, however, is that these companies will receive “corporate welfare” from other jurisdictions, meaning Ontario has likely no choice but to offer some of the same. However, by offering a variety of different benefits – as listed above – it could mean the total amount of cash included can be reduced. Though it may be politically undesirable, some investment in exchange for thousands of good-paying jobs for struggling communities outside of the Greater Toronto-Hamilton Area may be worth it.

Conclusion

All in all, the Canadian auto sector is facing more challenges than ever before. With aging plants in Brampton, for example, the news could get worse before it gets better. However, with more than 100,000 direct jobs in the auto sector and an estimated nine spin-off jobs for every direct job, our governments cannot give up the fight.

In order to secure new mandates or attract new OEMs altogether, all levels of government must pursue a dual strategy of being technological leaders and providing aggressive investment packages. If all three levels of government put forward significant effort, the future of the automotive sector in Canada can be bright. If they do not co-ordinate, all governments will be forced to deal with the consequences.