Trouble Ahead?

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by Andrew Brooks

Uncertainty mars manufacturing outlook


There could be clouds on the horizon for Canada’s automotive sector. While segments of the industry are doing well –even extremely well–economic and political factors are combining to create uncertainty in the minds of industry members and observers.

But at the moment, Canada’s Tier 1 automotive suppliers are doing well, according to Jonathon Azzopardi, chair of the Canadian Association of Mold Makers (CAMM) and president of Laval International.

“They’re in a growth trend; they’re still adding new projects, trying to hire, still trying to sop up available capacity,” he says. “We aren’t seeing many greenfield projects, i.e. new plants; it’s mostly sopping up excess capacity or trying to maximize existing capacity.”

Tier 2 suppliers are probably doing even better, Azzopardi says, because here there have been greenfield projects and companies are also expanding their existing plants.

But on the OEM side, the picture is different. Greenfield investment is absent from the picture, Azzopardi says. That view is endorsed by Jean Francois Perrault, senior vice president and chief economist with Scotiabank.

“When you look at greenfield investments, they’re much less likely to occur in Canada than they are in either Mexico or the US,” Perrault says. “That’s been true for quite a while – and it’s been our expectation going forward that we won’t see a whole lot of new auto investment in Canada for a range of reasons.”

The volume of Canadian vehicle production is staying fairly steady, with no large-scale increases or decreases, says Azzopardi. “Some are seeing a slight decline, some are saying there’s a slight trend up. Basically it’s pretty well flat for vehicle manufacturing.”

The lack of new investment in Canada’s automotive production capacity is one of the clouds on the horizon. “We’ve got some plants that are looking for future vehicles, some where vehicles are being taken off-line, some that are trying to secure future production, so there’s anxiety for the future,” Azzopardi says. “That’s creating uncertainty.”

Lower labour costs in Mexico and in low-cost “right to work” states are intensifying competition for the Canadian automotive sector, which is one reason the OEMs are directing their greenfield investments largely to those areas.

Ontario’s minimum wage hike is posing a challenge–not in and of itself, Azzopardi says, but because he believes it’s being rushed and, more importantly, because it compounds some already existing challenges.

“On top of labour costs, you’ve got high energy costs, on top of new regulations, on top of new legislation, on top of now trying to negotiate NAFTA with potentially negative effects. Add it all up and this is where things start to get out of whack. Another thing: the US is now reducing corporate tax. They slashed it in half, whereas we’ve reduced it by 1 1/2 per cent.”

Mexico and Canada between them account for a high proportion of the number of vehicles produced in the NAFTA countries, and it’s essential that the Canadian industry remain as competitive as possible within that supply chain. That involves balancing demands for prosperity–represented by the wage hike–and being able to keep costs down.

“I think the [Ontario] government is being a little bit reckless with their decision-making process, making all these changes so abruptly, so quickly, without really measuring the effects today and five years from now,” Azzopardi says. “It’s going to have negative effects on Canada’s automotive industry over the longer term.”

A Fair Trade?
The globalization trend, which seemed unstoppable not too long ago, now looks to be in some trouble. While the closing decades of the 20th century saw a range of free trade agreements and other economic unions, such as NAFTA, the Trans-Pacific Partnership (TPP), the European Economic Community, the BRICS and Shanghai coalitions, a new, more isolationist mood seems to be taking hold in some places–notably the US.

President Donald Trump has taken the US out of the TPP and his negotiators are taking a hard line in the current NAFTA talks, claiming the agreement has only harmed the US, and threatening to abandon it too.

The implications of this threat to NAFTA for Canada’s automotive sector are obvious. The industry is extremely tightly integrated across the economies of Canada, the US and Mexico.

The irony is that, Trump’s rhetoric aside, the deal has been beneficial to the US no less than to Canada and Mexico. And this is recognized by many industrial sectors in the US, that have – in vain – tried to get that message across to the White House.

By CAMM’s own calculations, if the NAFTA agreement is scrapped, as the Trump administration has threatened if it doesn’t get its way in the current talks, the result will be a 2-10 per cent tariff on automotive products. Add to that the precipitous drop in US corporate taxes and it adds up–or subtracts–to a 15 per cent price drop for US competitors, leaving Canadian parts makers severely uncompetitive against their US and Mexican competition.

Abandoning NAFTA would be very negative for all three nations, says Azzopardi, who finds American accusations that Mexico and Canada have taken unfair advantage of the US especially frustrating. He believes Canadian manufacturers did their best to live up to the letter and the spirit of the free-trade pact.

“Our large manufacturers employed more Americans and Mexicans than Canadians. The Tier 1 suppliers, the Tier 2s and 3s, have reinvested in all three countries. Free trade is the idea that a rising tide raises all ships, and Canada has lived up to that. I don’t necessarily believe that the Mexicans and Americans can say the same thing.”

Whether or not Canada more than pulled its weight, outside the realm of political rhetoric, industry leaders seem to agree NAFTA has been a boon for all concerned. Upwards of 300 US chambers of commerce and industry representatives conveyed to the White House their belief that exiting NAFTA would be a bad idea, only to be stonewalled by the administration.

However not every free trade agreement is automatically positive for all participants. In December, Flavio Volpe, president of the Automotive Parts Manufacturer’s Association (APMA) of Canada, weighed in on the question of whether the Trans-Pacific Partnership stood to benefit vehicle parts manufacturers in this country.

Volpe issued a statement explaining that covering the cost of shipping Canadian-made automotive components across the Pacific would put those parts out of reach for Asian customers. Only the largest suppliers have the resources to overcome that challenge by opening factories in Asia, he said, and small and midsized suppliers account for more than half of the 96,000 jobs in Canada’s automotive parts sector.

That isn’t the only drawback Volpe sees. “…TPP allows for a significant majority of a part to be assembled in a country outside the TPP – advantage China–without including them in the reciprocating agreement on terms,” the statement said. “Furthermore, access to the low-cost supply chains of Asia on a volume basis is structurally out of reach for Canadian manufacturers and the advantage will fall solely to Asian-based assemblers of the TPP region.”

In a CP story on the APMA statement, Rob Wildeboer, executive chairman of Martinrea International Inc., backed up the APMA take on the TPP deal. “Putting parts on cars sold in Japan, I just don’t think that’s going to happen,” he said. Wildeboer was a TPP supporter when the agreement included the US. But he said that because the US walked away from the talks last year, it now makes more sense to finalize NAFTA negotiations before including the automotive sector in the TPP negotiations.

As far as the NAFTA talks are concerned, Azzopardi foresees catastrophe for North American auto manufacturing if the agreement is abandoned and the three countries’ automotive supply chains are disconnected from each other–specifically because NAFTA’s low-cost partner, Mexico, is essential to keep North American products affordable.

“Each of the world’s three large economic regions has low-cost partners that help them compete,” Azzopardi says. “Europe has Turkey, Asia has partners like Malaysia, Vietnam, areas of China. Ours is Mexico, and if you remove Mexico you change the ability for North America, specifically the United States, to compete on a global level. People will start buying cars that are 25 per cent less expensive in China. That’s what the US is staring at if they don’t take this seriously.

“And I hate to say it, but Mr. Trump doesn’t think about the repercussions of his actions over the long term.” SMT

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