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Thank you very much, Mr. Chair.
Good evening, everyone. My name is Arturo Elias. I am the president of General Motors of Canada.
I am joined here by John Stapleton, GM Canada's vice-president of finance and CFO, and by David Paterson, our vice-president of corporate and environmental affairs. I will ask both of them to join me in answering your questions tonight.
I have just a few minutes of opening remarks concerning the current economic crisis and its impact on the automotive sector and GM Canada. We will suggest a few policy responses that would greatly assist our sector, and we know you'll be interested in our GM Canada restructuring plan.
Let me start with the 52-page restructuring plan we submitted to the Ontario and Canadian governments on February 20. Our plan is not simply a request for a loan, or a quick fix. Rather, it sets out what we believe is needed in the face of the current economic crisis to ensure a viable, leaner, and greener GM Canada for the long term, a restructured company able to fully repay Canadian taxpayers for any support it may receive from them.
It is an achievable plan. It's based on conservative market assumptions. Not only will it sustain GM's business for the benefit of tens of thousands of GM Canada employees and retirees, but it will also sustain our production of combined U.S.-Canadian vehicle production; our multi-billion dollar local purchasing and logistics leadership in Ontario and Quebec; and our research and development leadership, in collaborative work with universities across Canada, to help reinvent our industry and our products for the future.
GM Canada's submission is consistent with GM Corporation's viability plan, which was submitted to the U.S. Treasury on February 17. Both documents have been made available to the committee and the public at large.
Let me speak about the challenge we face. Like all companies operating in our large, complex, and highly capital-intensive sector, GM Canada is working hard to cope with the unprecedented declines in industry auto sales and the general unavailability of credit for our company, our dealers, our suppliers, and our customers. As you are no doubt reading, these challenges are being faced not just by our domestic auto companies but increasingly by all competitors around the world, from Europe to Japan to North America.
For GM Canada, a perfect storm of economic events hit us here in Canada in 2008, when we were already in the midst of an expensive business restructuring that saw us operating with lower-than-normal cash reserves. As industry revenues collapsed and private capital markets rapidly closed off, we were not able to raise funds by pledging our global assets and intellectual property to raise a large pool of restructuring funds. With capital markets essentially closed, we reluctantly found it necessary to seek financial assistance from governments in the U.S., Canada, and elsewhere.
You will recall that on December 20, the Ontario and federal governments made a most welcome and appreciated offer of financial support, proportional to what was being discussed between the auto companies and the U.S. government in the United States. This sent a very positive message to all levels of our company, the U.S. government, and GM's many stockholders. We began detailed discussions and due diligence with the Province of Ontario and the Canadian government. Those have continued well, under appropriate non-disclosure agreements with respect to competitive information.
In the United States, on December 31, 2008, our corporation reached an agreement with the United States Treasury. This financial support, together with our own efforts in Canada to conserve cash, has enabled us, up to now, to operate our business without having to draw support from the Government of Canada. While we welcomed the offers of support in Canada in December, I think we also agreed it was far preferable to take the approach we have in, first, developing a credible long-term restructuring plan that will enable GM to repay any loans and, second, reaching an agreement for support.
Our plan for Canada is based on significant shared sacrifices, and it respects the government's stated principles of maintaining our proportion of production in Canada in exchange for drawing support proportional to that offered in the United States.
Let me spend a few minutes talking about our restructuring plan. The plan we have developed and discussed, with considerable input and review by the governments, has three broad elements, which might be compared, if you will, to the need of a homeowner, facing a large mortgage and a severe cut in income, to first significantly reduce household expenses and then seek to refinance the mortgage.
Our plan does that in three elements. The first is to adopt a new, lower-cost contract manufacturing business model that will help ensure a more steady stream of income while taking all necessary steps to reduce our costs. This has included significant cuts in executive and salaried work benefits and wages.
The second element is a negotiated new contract with our Canadian Auto Workers partners to bring wages and benefits for our active and retired hourly workers to benchmark levels, and also the establishment of a new post-retirement health care structure similar to the U.S. VEBA model. This work remains under discussion and is very important, as the more we can together reduce our costs the less we will need to borrow.
The third element is the necessity to refinance GM Canada's balance sheet, to reduce our carrying costs and ensure a viable stand-alone business in Canada able to generate profits and repay loans from the Canadian taxpayer. We are working very hard to reach these necessary agreements in the month of March, as GM Canada will then start approaching the minimum cash levels required to sustain our business.
Let me also highlight a few things our plan would enable us to do in Canada. The plan would maintain our share of Canada-U.S. production in the 17% to 20% range. It would have no further plant closures or significant structural reductions in employment beyond those we have already announced. It enables the launch of five new product mandates in Oshawa and our CAMI joint venture, including Canada's first hybrid car production and new transmission investments in St. Catharines. It allows us to proceed in Canada with research and development work related to the electric car systems for future vehicles that would follow our new Chevrolet Volt, and we will build upon our collective university research and development relationships, including with four key universities in Quebec. It would allow us to sustain our auto supply chain and dealer operations across Canada. These have been mapped out for you in our submission.
Of course we will proceed with a very attractive new GM vehicle lineup, which now includes more available hybrid models than any competitor in Canada and will soon include the Chevrolet Volt extended-range electric vehicle.
Now, we also understand the committee is interested in what can be done to assist the auto sector through this difficult period. Let me conclude with just a few of the recommendations we have thought of, and then we will be pleased to take your questions.
On the credit front, credit is now critical for companies, suppliers, dealers, and consumers. The government has responded with an initiative to provide $12 billion in financial assistance for secured credit, and a consultation period is under way. This support truly needs to move fast and extend to groups like GMAC, who assist auto dealers to maintain their operations and finance their vehicle inventories. We were also pleased to see that Export Development Canada has extended receivable insurance to assist Canadian auto parts suppliers.
Relative to consumer stimulus, around the world governments are now providing new direct forms of stimulus to help consumers with the purchase of new vehicles. This help comes in many forms, ranging from targeted income tax credits or sales tax reductions to scrappage programs like Germany's offer of approximately $4,000 in assistance for consumers who retire old, higher-polluting vehicles from the roads and buy new ones. It would be equally beneficial to start removing some of the outdated federal and provincial taxes or levies that remain in place on automotive manufacturers, dealers, and Canadian new buyers. Clearly, all action to accelerate the return of the consumer to the new car market would be welcome.
Finally, relative to regulations, we must recognize, as I believe the federal government clearly understands, that Canada enjoys a significant amount of automotive investment, employment, suppliers, R and D, and related spinoffs because we are fortunate to be part of the largest integrated auto market in the world in North America. In Canada, we have approximately 10% of the North American market sales, yet we have 20% of the production here. It is, therefore, critical that Canada not regulate its way out of the integrated market through the tyranny of small differences in automotive regulations. You would be hard pressed to find a more regulated industry in the world than the automotive industry. We can cope with regulations, but we cannot cope with a patchwork of disharmonized regulations that generally offer little or no incremental benefit, but do add massive incremental costs that we must ultimately pass to the consumer.
Mr. Chairman, with that overview, let me turn it back to you for guidance. David, John, and I would be pleased to take your questions.
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I'll just pick up on the comment where scrappage was mentioned, for example. This is an area that General Motors Canada perhaps has more experience in than anyone else in the industry in Canada because of a relationship we've had with the Clean Air Foundation over the last several years. We offered our customers a $1,000 credit toward the purchase of a new car if they demonstrated they had removed a car that was 10 years or older and made sure it was scrapped from the road.
In Canada we still have over one million vehicles registered on our roads that are over 10 years old. The degree of technological improvement that has happened in terms of not just fuel economy but particularly in terms of reduction of all kinds of other emissions, particularly emissions that are health related, is extraordinary. Every time we get an old vehicle off the road and replace it with a new one, we automatically get an environmental benefit.
We found this program that we offered together, called Car Heaven, was extraordinarily positive. We were able to retire over 30,000 old vehicles from the road and we were pleased to have been awarded a Canadian Environment Award for climate change for the work, together with our partners at the Clean Air Foundation.
Around the world, in Germany we cited a program that is doing effectively the same thing, but they are providing quite a significant benefit to someone who does this trade-in, trading in the old and making sure it's scrapped. It must not come back as a second-hand vehicle. The German government is offering the equivalent of about $4,000 Canadian, and that incentive is clearly working in the German marketplace.
One lesson we would underscore is that the more straightforward and simple these programs are, as was the GM program, the more effective they are. That is one mechanism that really does help bring consumers back into the marketplace, but we have suggested a number of other ones.
You asked about regulations as well. I'd say we have seen some very positive change, with the current government taking on issues such as the bumper regulations, which had been disharmonized for a long period of time, but we still have a list of over 30 different regulations, which are often safety regulations, or others that are just slightly disharmonized in various ways. Progress is being made toward taking away that tyranny of small differences, as we call it, and it's very important because even though these differences can have no appreciable difference in terms of safety, they can cost hundreds of millions of dollars in terms of design changes that are required just to be able to bring a vehicle into the Canadian marketplace.
Again, removing some of those taxes, those barriers, are all things for the longer term that can really help the auto industry.
Thank you, gentlemen, for appearing here this evening. I appreciate that. I know that Ford and Chrysler were invited also and have yet to come before the committee. Hopefully, they will come at some point.
Today was a particularly bad day for Chrysler. I am very distressed, as is the community, about the families. There were 1,200 people fired today. That's very difficult, not only for them but for the tier one and tier two suppliers. There is also the philanthropic work that's been done for the United Way and what not. It's a very serious issue that is compounded when one auto job contributes several others.
I want to correct one thing, and that is the interpretation concerning the banks. It's interesting. I hear about how they are so strong here today because we didn't do similar things. I remember, in this room, in these halls, in the chamber, stopping the deregulation of the banks a few years ago when it was originally proposed.
I want to touch on something that's interesting in terms of credit. In your opening statement you talked about loans being available and about GMAC credit financing, which I would agree is critical. I just downloaded something from the site of a major bank in Canada. They are proposing car and truck loans for new vehicles for 8% to 9% for up to seven years. I think that's part of the problem we have right now. That is beyond the life cycle of the vehicle, and it seems like a high profit margin for getting somebody into the market right now with interest rates being so low.
I'll turn it over and hear from you as to what can be done about that. I would prefer to see a much lower rate. There are actually some credit unions out there--they are very few and far between--that have 0% to 1% rates for fuel-economy vehicles.
Is there something creative that can be done here? I just don't accept the fact that with interest rates so low, and the banks reporting profits again.... I can tell you that I've watched tier one suppliers with profitable parts go out of business because they couldn't actually get bank loans when they were supplying cars that were selling.
I still have a problem with the banks in regard to this current situation. Perhaps you can shed some light on what needs to be done with interest rates for consumers.
I appreciate the opportunity to ask some questions. Thank you to our guests. I'm not sure whether I spend my time trying to correct some of the factually incorrect things I'm hearing in the politically charged questions across or whether I spend my time asking questions about the restructuring plan.
Let me start first with, I would suggest, some of the hopeful news. Of course, you're probably aware that tonight the economic action plan of the government did pass third reading in the House and it is on its way to the Senate. So after a gruelling process in the House, I think we're making some progress, and we'll certainly keep the pressure on. That of course has the fully repayable loans in it, the money you spoke of for the parts sector, as well as the important money to restart the automotive credit.
I think you've touched on this a little, but to set the stage, there are actually two problems facing...shall we call them the Detroit three companies. One problem is a structural issue. All of the companies were in varying degrees of restructuring their business operations when the second problem, which was the cyclical problem, an economic downturn, hit. That's obviously the bad storm to occur, but it's somewhere a little more ahead of the others in terms of restructuring. But that's essentially the nub of the issue here and why we're talking about this.
Of course, in December the government, with our and the Government of Ontario, announced that there would be fully repayable loans available. First, for the record, of course, the discussion back then was that the lights were going to go out at General Motors, that the clock was ticking, and yet it's not. Can you answer what happened to your day-to-day credit situation for GM Canada in light of that announcement? Why didn't you take the Canadian loans initially?
Thank you for coming tonight on short notice.
My name is Terence Young. I represent the riding of Oakville, which is, as you know, Ford of Canada's head office location. So I've been very, very aware and have spent a lot of time on this, how important it is not just to my community and the surrounding area, which has 4,000 jobs in this sector, but also to Canada. I understand the figure is that there are about 500,000 spin-off jobs related to the big three manufacturers alone.
The auto caucus met with the import manufacturers, the 13 companies that manufacture primarily outside of Canada—although some of them manufacture in Canada also, but it's primarily outside—and I have to tell you they supported loans to Ford, GM, and Chrysler. They're supporting the continued existence of their major competitors, the reason being, of course, that they share the same parts manufacturers, and the parts manufacturers' survival is key to their survival. So this is an existential issue.
I think back to 1957, when I was six years old and playing in a field behind the house, when I heard thunder. I ran home to tell my mother, and my mother said, that wasn't thunder, but the Avro Arrow breaking the sound barrier. It sounded just like thunder. That was my first lesson in science. A short while later, the government of the day cancelled the Avro Arrow to save money. It cost 50,000 jobs overnight, and about 30 of the most brilliant aerospace engineers in the world left Canada, went to the United States, and later put a man on the moon. Arguably, our aerospace industry has never recovered.
So I understand the importance of this issue for the Canadian auto industry. I applaud your efforts to become competitive with Toyota, Nissan, Honda, and the others that don't have the legacy costs, etc., and I wish you every success.
I'm trying to understand worldwide overproduction. In 1998 I was parliamentary assistant to the Minister of Finance for Ontario. The auto industry folks came in and sat around the table, and they all said that by 2001 we would have worldwide overproduction. And I thought, well, who's going to walk away and stop making cars? BMW, Chrysler, Ford? Nobody. Everybody is going to keep going until.... Now we have a recession, the catalyst that has put us in this situation.
My concern is that we've been making, probably for seven years, 17 million cars a year in North America, with over a million in Canada, and this year it's going to be around 11 million. Where is General Motors going to be over the next few years in terms of numbers of units produced?
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In our submission we have outlined the industry outlook and our outlook for volume as well as production.
I'd like to build on your comment that the current crisis being faced in the automotive industry is not just limited to North America. It is spreading around the world, and we are seeing it in all regions of the world.
Secondly, here in Canada we feel a great deal of responsibility to our communities where we operate, to our employees, our suppliers, our dealers, and all the other stakeholders who work with us. We have, as I indicated, more than 3,000 suppliers. That's about half the suppliers here in Canada. We have 700 dealers who employ more than 33,000 people. Then, of course, as you correctly point out, that has a multiplicative effect.
We feel a great sense of responsibility. The support to be provided by the Canadian taxpayers really extends far beyond General Motors, indirectly. It allows us to maintain our operations, support our suppliers, dealers, communities, the universities we're working with, and maintain a research and development centre here in Canada, which is very important.
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Thank you, Mr. Chairman. From speaking with a few of your colleagues earlier, I understand and obviously I can see tonight that you're working late hours, so all I can say is that if your constituents all were aware of how many hours you put in on their behalf and on behalf of the country, some of the election campaigns might be a little less stressful. We certainly commend you for that.
Good evening. My name is Richard Gauthier. I'm president and chief executive officer of the Canadian Automobile Dealers Association. CADA is the national association for franchise automobile dealerships that sell new cars and trucks. I would like to point out that we represent dealers of all brands, and all manufacturers manufacturing and selling vehicles in Canada are represented through our association.
So our 3,500 dealers represent a vital sector of Canada's economy. Through our dealers, we are represented in nearly every community in the country. With me tonight I have our director of public affairs, Huw Williams, as well as our chief economist, Michael Hatch.
Mr. Chairman, tonight I'll outline the key issues facing our dealer network in these most challenging times. To begin with, let me provide a few facts about the automotive industry in Canada. Canada's auto industry is more than a hundred years old and in Ontario alone is the leading jurisdiction for auto production in North America and is the tenth largest globally. Each of Canada's assembly jobs provides seven to 10 spinoff jobs, and this is the highest such ratio of any manufacturing industry sector. Tax revenues from the auto industry to all levels of government in this country exceed $10 billion annually, and since 2002, Canadian vehicle assemblers and parts manufacturers have invested over $10 billion in production and research and development. Canada's auto industry exports--you heard some of that earlier--85% of all its production, roughly $100 billion annually, and every $1 million in exports creates or sustains five jobs.
Canadian automotive companies are global leaders in R and D, in lightweight materials, alternative fuel technologies, and occupant safety. We should be very proud of that fact.
Canada's auto industry procures more than $40 billion annually from Canadian suppliers, which is more than twice the total annual amount of the Canadian federal government's procurement, and it also accounts for over 10% of Canada's manufacturing GDP and over 20% of Canada's total yearly merchandise trade, in excess of $150 billion annually. The industry also accounts for over $30 billion in parts and components shipments annually and conducts over $500 million in R and D related to assembly, innovation, new vehicle development, alternative fuels, and vehicle safety every year.
Now, I cannot emphasize enough that the current automotive downturn will have a ripple effect in every community in Canada. The cold reality facing decision-makers today, you yourselves, is that if Canadian-based manufacturers are not provided a bridge across the current economic crisis, then Canada's 3,500 small business dealers located in every community of the country will bear the brunt of that downturn.
The retail automotive sector employs over 140,000 people in Canada and directly contributes a huge portion of its gross domestic product. As economic cornerstones of almost every community in the country, the pain of auto dealers will be felt on main streets and in other small businesses and households from coast to coast.
Parliament needs to remember that dealerships are not company stores. Dealers are independent businesses that make significant investments in land, buildings, equipment, and personnel and provide manufacturers with a retail presence in thousands of communities across the country. Dealers do not take cars or parts on consignment from their manufacturers. Dealers assume the risk of financing that inventory. No manufacturer has the resources to internalize the costs that dealers bear every day.
It will come as a shock to no one in this room tonight, I'm sure, that given the huge costs of financing dealer floor plans and operations that can run into tens of millions of dollars per store, predictable and accessible credit is the oil in the retail auto industry's motor. In my daily contact with dealers from one end of the country to the other, without a doubt, the number one problem facing their businesses today is the deterioration in credit conditions. Not only is this happening to dealers on the brink, but this is happening to sound, solvent businesses, often with decades-long relationships with their financial institutions and the very communities represented at this table this evening.
Given what's going on in the credit markets in the past year, I'd like to congratulate the government on the $12 billion Canadian secured credit facility announced in January's budget. CADA communicated the need for such a facility in the pre-budget period, and the government delivered.
But as parliamentarians, you will know that the easiest part of any program is announcing it. Dealers across the country are still facing tight and unpredictable credit conditions from captive finance companies and chartered banks. While we recognize the need for diligence in designing any program that allocates tax dollars, we must stress the urgent nature of the problems facing Canada's auto dealers as we speak.
The government has to find a way to get credit flowing again and to do so as soon as possible. Credit is the biggest problem facing our dealers, and the government has recognized this. We will continue, as we have to date, to work closely with the government in its implementation of the $12 billion secured credit facility, but there are also other ways to stimulate the industry and, with it, the entire economy.
Canada's car fleet is older than that of its American counterpart. As you all know, old cars are much less efficient, more polluting, and less safe than new vehicles. This committee is charged with addressing the crisis in the auto sector. Drastic times call for bold measures and bold but targeted economic stimulus. This is the approach taken by other G7 countries. Vehicle scrappage or vehicle retirement programs have been adopted by several countries throughout the world, including Canada, over a number of years. In recent months, these programs have taken on added momentum as economic woes cripple vehicle sales worldwide.
Scrappage programs have existed in this country in one form or another since 1996. Simply put, a scrappage program offers cash incentives to consumers who retire old vehicles and purchase new ones. These incentives serve a much sought-after dual economic and environmental policy objective, since on average a 20-year-old car pollutes 37 times more than a new one. Providing incentives for purchasing new cars drives the economy and helps the environment.
The current economic challenges facing the automotive industry present an opportunity for an effective national vehicle scrappage program to complement other economic stimulus initiatives. With roughly five million vehicles on the road that were built in 1996 or before and with new car sales in decline, there exists today a powerful opportunity to enact a scrappage program that has real teeth. Today's program, worth only $300 per vehicle, does not provide enough incentive to get any more old cars off the road than would occur anyway through natural attrition.
Canada can look to other countries for models in designing such a program. In fact, it was mentioned a little earlier in previous testimony that in Germany, for example, consumers are given incentives worth €2,500, or roughly $4,000 Canadian, for retiring old cars and buying new cars or cars that are less than one year old. The program works on a first-come, first-served basis. Funding for the program is capped. Once the cap has been reached, the program will be terminated.
This measure is expected to increase light vehicle sales by 200,000 units for 2009 and should push the German car market just above three million units. Now, applied to the Canadian market, which is about half its size, a similar program could increase sales by more than 100,000 units this year.
Let me add that the members of this committee should also recommend that the government take a very simple step to stop the dumping of high-polluting older vehicles into the Canadian market. This is an easy common-sense fix. Members may not be aware that we have seen a recent rise in the number of older right-hand-drive vehicles on Canadian roads. These vehicles are imported under a current loophole in the Canadian regulations allowing vehicles more than 15 years old to enter the country without complying with the Canadian motor vehicle safety standards or national environmental standards. These vehicles pose a risk to Canadian citizens and undermine the pursuit of our country's safety and environmental goals. We urge government to close these loopholes in order to ensure safer roads, stronger new vehicle sales, and not further undermine our collective desire to clean up the environment.
Now let me turn to another issue of great concern to our dealer network, the so-called right to repair issue. As you are aware, is currently before Parliament. This bill would effectively require auto manufacturers to share all diagnostic and repair information as well as equipment with the aftermarket. This is unacceptable to CADA. This information represents intellectual property developed by manufacturers at a cost of billions of dollars. Forcing them to disclose this information on a non-voluntary basis would destroy the value of this property and inhibit the innovation that drives the country.
There's currently healthy competition for car owners' non-warranty service work, with aftermarket repair facilities receiving the bulk of the business, even after the introduction of proprietary onboard diagnostic computers almost two decades ago. The aftermarket has the lion's share of the business with 75% of that market, and this is due to the fact that, for all but the newest of vehicles, repair information is readily available from a variety of sources, be it for a small, independently owned garage, a national aftermarket chain, or even do-it-yourselfers.
I understand that you're trying to move this along, so I would just like to address one final consumer concern. We must not let the current market conditions facing manufacturers and dealers distract consumers from the fact that it is a very good time to buy a car in Canada. In fact, the two sides of this situation are closely related. Cars have not been as affordable as they are today in a generation. In fact, Statistics Canada has just reported that the price to buy or lease a car has declined to its lowest point in 24 years as a ratio of disposable income. Add this to the fact that all manufacturers are aggressively seeking new business, and the end result is a very favourable set of conditions for consumers in the marketplace. Quite simply, there's never been a better time to buy a car, and I have been in this business for 40 years.
I'd like to thank the committee for giving us an opportunity to speak with you this evening.
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Thank you for your attention. I will be happy to answer your questions, if time allows. Thank you.
I have appeared before the full committee a few times and certainly have represented suppliers. We represent the suppliers for the assembly of new vehicles, so we are not related to the aftermarket problem. So don't ask me questions about aftermarket--I have no idea what's going on.
Most of our facilities are in Ontario and Quebec. About two-thirds of the parts that are manufactured in those facilities are exported directly as parts, and one-third are consumed by the assemblers here in Canada.
First of all, I want to say we do appreciate the measures that have been taken to stabilize the assemblers—they are our customers. Also, the liquidity provisions in the budget, which have not quite been passed yet, are very important to us. We really look forward to that being passed, because we need to deal with that. Since our first presentation to the government over a year ago, when we were starting to face difficulty, things have gone from bad to worse. Even over the last couple of months, things have deteriorated even more. The February statistics released today, simply put, are another disaster.
So I have to say we have three requests of the government, and we don't usually come asking very often. Usually we're simply contributing billions of dollars in taxation to government, either through the companies or the highly paid employees who work for us.
Our first is simply to ensure that our customer, the assemblers, are around to pay us in the normal course. Financial assistance to them is the first lifeblood of suppliers, and we support what is necessary to make sure all the assemblers are healthy. As is well known, our industry supports one job in seven in Ontario, and about 10,000 employees in Quebec.
Our suppliers are the web of the spider web, and what I mean by that is that they are the connecting links between all of the suppliers.
I was going to hand this out, but I'm told I can't because it's not bilingual. You don't have to read the writing anyway, because the picture says everything. For the Chevrolet Equinox, which is assembled in Ingersoll, Ontario, it shows where the parts come from, where the modules come from that feed into that. It has a number of flags. Some of the flags are Canadian, and some of the flags are American. The Equinox is assembled in Ingersoll, and then about 80% of them are sent to the United States. So this web of parts makers is involved in that.
If one of our major customers, such as General Motors, goes down, it will take a number of suppliers with it. When those suppliers go—and those suppliers also supply almost everybody else in North America as well—they then take all the other OEMs down. In about a week's time, all North American production of vehicles comes to a grinding halt. That is simply a fact; it's not a doomsday scenario. That is the way the industry works. That's how integrated we are. It will then take months and months for the ones that still survive to be able to get back up and running again, and some that could have survived by that time have lost so much money that they fail as well. So you end up with a huge cost then of rehabilitating suppliers, if you can, or else importing more vehicles from overseas. The end result is that you've spent way more money resuscitating the industry than you ever would have spent if you put the money on the table in the first place to keep the original companies alive and healthy. That's why I'm here--because we are the ones who will suffer.
The other part that we need is to have good suppliers, but what's happening is that our good suppliers are running out of cash. We were practically shut down in North America from mid-December until the end of January because of a lack of sales and therefore inventory adjustment. Our payday is the second day of the month, so for January production, we were paid Monday of this week. That was an awfully slim paycheque for most suppliers, because there was no production in January. We were paid everything that we were supposed to be paid--almost nothing. Come April 2, we're going to be paid for February, and February was a very low month, so again there will be a very slim paycheque in April, which means that now things have gotten very poor. So now we have suppliers in the same position as our assemblers: they're simply out of money because they've had no cashflow. So if they have no cashflow, they have to close their doors.
An example is Bauer Industries in Kitchener. It has been around since 1886. It had up to 300 employees a few years ago, and then it went down to 30. Now it has closed its doors. I know those people. They are good operators. They just couldn't survive this lack of production.
We have lots more examples of those. I'd able to pull them out from all over. You people from the communities of Guelph and Kitchener, you can see them too. They're in the record; they're just there, unfortunately. A lot of smaller guys are going under because they don't have the wherewithal to continue.
We can say to the bank, well, maybe we could use our receivables. But the bank won't take the receivables as collateral. They don't trust it. They don't know if it's going to go on. So we need receivables insurance. Then at least we could take those receivables to the bank. That could come from government, EDC and BDC. We would very much like them to have the ability to put receivables insurance in place.
Then we have the good suppliers. Our latest production figures list 9.5 million units for 2009. It's usually around 16 million. Next year it may be 10.5 million to 11 million. So this is a very low ebb in the stream. Most companies could never have predicted it would get that low.
We have to get through 2009. We need some patient capital to get good companies through 2009 and the beginning of 2010. Without that patient capital, even for companies that do survive, when things start to pick up they won't have enough money left to buy raw materials and pay their people in order to take advantage of the increased production. We need some patient capital for that. Again, we believe the money is available through the government program of EDC, the Canada Account, administered by BDC. Out of that will come the ability for viable companies to survive.
In terms of giving companies money, we've always said to simply look at that exactly as you've looked at the assemblers. The simple question is this: can the company emerge from the current market crisis as a viable, sustainable company and repay the Canadian taxpayers the funds lent to it? If it can do that on the longer term, then it deserves to be considered for a patient capital loan. If in the longer term it doesn't have the business plan to do that, we cannot ourselves support government funding to that company.
But we believe there is a position to do that. We also believe EDC and BDC have the capacity, the financial wherewithal, and the ability to analyze companies to be able to make that decision on behalf of government. Certainly they have been in the auto industry for a long time. EDC currently has a couple of billion dollars in outstandings, so they are experienced lenders in this industry and are the perfect vehicle. We certainly would not want to see a new agency set up. By the time it got set up to lend money, no suppliers would be left to lend the money to.
So that is what we really are looking for. We need to be able to re-emerge.
The other thing is to take a look at the industry as a whole. I have to say that people in North America are not changing their transportation habits. They will continue to buy and use personal transportation. There will be many changes in how that transportation is powered, but there will be very few changes in the actual vehicle. Right now 90% of the vehicle is still the same, and it will continue to be the same for many, many years.
The motor power might change in some cases, but even that will be only fractionally changed. After all, a hybrid car is a smaller gasoline engine with an electric motor. It is not a brand new form of transport. Even if we get into doing more advanced electric cars, everything is the same except for the fact that they have a very large battery, or maybe a fuel cell to power the battery. It still has windows and doors and headlights; it still has a steering wheel, air bags, and all the other things that parts suppliers make.
We want the Canadian parts suppliers around to be able to make all those for us.
Thank you very much.
:
Thank you very much, Mr. Chairman.
Bonjour tout le monde.
I represent a company called Maxtech. It's an automotive parts manufacturer...[Inaudible--Editor]...over the last 31 years in the country. We have interests in Ontario and Quebec.
I want to make three fundamental points, if I may, to this august committee. Thank you very much for this opportunity.
The first is that there are two major acquisitions one makes in life, as you all know--a home and a car. When you build a home, the wealth typically remains within the community. That is commonly understood, it's logical. When you buy a car that is not made in the country or you buy parts for a car that are not made in the country, a lot of money is being thrown out of the country. It is very important, therefore, that this industry be protected, because otherwise a lot of wealth will leave our Canadian shores.
The second point I want to make is please appreciate, as Gerry was pointing out, that the real innovation and value-added in our country lies with the parts manufacturers more than with the assemblers of cars. It is a very important point.
In a technology park in Quebec, there is a company that pioneered the stainless steel exhaust systems used in cars worldwide today. In a small town, Waterloo, Ontario, is a company that pioneered a yearly saving of $50 million in the exhaust systems for leakage of greenhouse gases, which are used in cars today. Our country, through the University of Waterloo and the University of Laval in Quebec, has really pioneered innovation in the automotive sector. So protecting the parts suppliers who are innovative and have demonstrated innovation comes from two areas: their SR and ED credits, and the number of utility patents they have to their credit. These are vitally important.
The third and last point I'd like to make to the point you just made, sir, is the following. Yes, Linamar has diversified. Linamar can afford to diversify. We know them very well; they're our neighbours. The more important point is, can these smaller tier two suppliers manage to diversify? Do they have the engineering beachhead? They sure want to diversify, but there are two things holding them back. One is having engineering services provided. They don't have a beachhead left anymore, with the erosion of equity in these companies. The second is market access for new products that will be marketed with diversification.
We were very honoured that Minister Clement gave us time during a breakfast meeting. We showed the Honourable Minister Clement, the Honourable Minister Flaherty, Alison Tait, and Deputy Minister Louis Lévesque in the Department of International Trade a very interesting innovation that we've created for the APMA. It's called the facility of redeploying assets to fundamentally reduce the dependence on one sector.
If you consider February, ladies and gentlemen, you will see that North America produced fewer than 700,000 cars. China produced nearly 800,000 cars. The installed capacity, as Gerry points out, is 16.5 million cars. You have 9 million cars chasing 16 million capacity, so the critical mass doesn't exist to sustain the parts manufacturers anymore.
I'd just like to say that there are three very practical suggestions we've made. There is a $5 million pilot that we want to get funded. It will help the smaller companies, the innovative companies, to remain alive by redeploying their assets. It's called FRAES, the facility to redeploy assets, engineering, and market service. We request that you look at the number of utility patents that the automotive parts manufacturers have and give dollars, holding patents as security—it could be about $250,000 per patent—as bridge capital or patient capital to take care of the 2009 and 2010 distressed times.
The last point we'd like to make is to think about how to consider the whole idea of using patient capital if a company is viable. And BDC, which is our own national bank, actually has made a template available, through working with the APMA, that understands the viability and the feasibility of parts manufacturers. If they declare a company to be viable based on their diversification plans for reducing dependence on the automotive sector, give them bridge capital of $1 million for every $10 million of sales, for example, as patient capital to overcome their immediate tooling needs, etc.
These would be our three suggestions.
Thank you.
:
But, sir, money needs to flow very quickly, and that's the reason for our idea of using patents as collateral, or of looking at BDC's feasibility template that we've developed together. There needs to be an immediacy, a sense of tremendous urgency. Last week in Kitchener-Waterloo-Cambridge alone 600 people lost their jobs, and this is recurring every hour of every day as we speak.
So you need to have the budget passed, of course, as Gerry pointed out. And we need to have something simple to monitor; we need to have a program that is not cumbersome, for which is easy to look at performance metrics. And you must create this patient capital to protect Canadian innovation.
In Mississauga, a company with 400 people has decided, because it's a foreign-owned company, to close powder metal plant. That company uses home-grown Canadian technology to create gears out of our metallurgy, for example. They gave the world the first ever cost-saving gear, saving General Motors $82 billion in one year, in transmission technology.
So the point is that you cannot afford this. If any technology is leaving Canadian shores, you must step up quickly on a case-by-case basis and get BDC involved—if it's viable—and get the competitors among the APMA membership in Canada to carry on with that technology.
So using patents, using the viability report, and giving patient capital of maybe $1 million for every $10 million in sales, and getting this redeployment of assets created are three immediate priorities. They are easy to monitor, simple to implement, and there's not too much money involved, at the same time.
So we really request that you understand this. I'm from the trenches and have no prepared speech here. We honestly are struggling every single day in this country.
:
The pilot project, sir, has been created by the University of Waterloo, Conestoga College, and five automotive parts manufacturing members. We are one of them. We've spearheaded this. For example, golf carts are not made in our country. Did you know that? Golf carts are used by you—I'm sure by us as well—every single summer, but not one golf cart is made in our country. Why not? There's a Bauer automotive plant right where we are, and it's going to close down. The same stamping presses could make golf cart side cars, for example. You have to redeploy your assets to products that were not thought of before.
This pilot project is to show people how an automotive company in Guelph or in Cambridge...for example, the stamping houses.You need stamping for trusses in warehouses. Why don't they make those?
We've shown a complete presentation of how we can create 120,000 jobs in Canada by December 2010. This pilot concerns 1,000 jobs just in this area of Brampton, Mississauga, Cambridge, Waterloo, and Kitchener. So we need to show the government that the pilot works.
Alison Tait from Industry Canada, surface transportation, spent an hour with me this morning to walk through this pilot. They're all very excited. wants to put up money for it. The issue is that we need to implement it; we can't just talk about it.
The next phase of that, then, encompasses every municipality in this country, so the pilot can mushroom itself, with the fundamentals being created for training, for sales training, market research for new products, and redeploying of assets.
The way it works, very simply, sir, is this way. I have plastic injection moulding equipment making plastic bumpers for cars. My plant is 30% occupied today. I now look at rain barrels instead, for rain water collection. The exact same equipment is needed. In our industry, $1 million in capital investment creates $2 million in sales, which creates 10 jobs. In this example of redeploying assets, no capital investment is required and $100,000 for new tooling will create the same 10 jobs. So you've tenfolded the use of the taxpayers' dollars.
This is the idea of redeploying assets with the University of Waterloo's engineering service.
:
Yes, thank you very much for your question.
I certainly echo what my colleague is saying. I have been in this business for almost forty years as well, and the single biggest issue for our dealers right now is the ability to access capital to floor plan their product. Those are the vehicles that you see on the lot when you drive by your local dealership, and they need to obtain the necessary working capital to be able to run their businesses.
Our dealers right now are caught between a rock and a hard place. This has never occurred before, but what we have is a situation where the dealers right now have absolutely nowhere to go. The captive finance companies, which are the manufacturer-affiliated finance companies, are unable to access the capital markets that they would traditionally access in order to be able to fund their own operations. Therefore they literally do not have the capital to lend to their customers, their customers being the car dealers, and this does not apply solely to the Detroit three. The Toyota credits of the world, the Honda finance of the world, are feeling the credit crunch that we are experiencing worldwide right now. What we're seeing now is that our dealers are unable to obtain the kinds of capital they need to carry their inventories.
The average dealer in Canada carries a debt load of about $7.5 million at any given time. It's not unusual for a dealer to have, in new cars alone, anywhere between $5 million to $10 million in inventory, and those are typically financed through the manufacturer-affiliated finance companies or typically the banks. But what we're seeing now is that the finance companies don't have the capital. They're imposing terms on dealers that they cannot live with. They're pushing the dealers away, and the dealers are going to the banks, and the banks are literally saying--and I have met with senior bankers who have told me this--we are not open for business. They're saying, when it comes to car dealers, we're not open for business, end of conversation.
This is not limited to Detroit three dealers. This is any dealer right now. If you're related to the auto industry the banks don't want to deal with you, and if you're a Detroit three dealer you really don't have a place to go. These are dire times for us. We expect that we are going to see dealers start to close in rapid succession if we don't address this very quickly, and this $12 billion fund is a welcome solution to this. We urge government to move this through the House--where in fact it has been passed--and now through the Senate quickly.
I know quick access to capital is important. I wonder if I might ask a question to the researcher. In terms of Industry Canada, how much money wasn't spent in the last allocated budget in different departments? The minister himself has actually said, previous to the budget passing, that there was money available for the auto manufacturers immediately from the past budget. He said that very explicitly, publicly, a number of times before the budget was actually even brought forth.
So why we would have to wait for the Senate is one thing I would like to inquire about. And also regarding other departments, I know there has been some discussion in public about a number of different programs that haven't fulfilled their full mandates of the money that was allocated in a previous budget.
To Mr. Bali and Mr. Fedchun to start, with regard to the credit issue, do you feel confident with the EDC and the BDC? We've seen this coming down the road; in Ontario there have been 300,000 manufacturing jobs lost in five years. This latest chapter really heightened things even further, but we were going down that road; there's no doubt about it.
We would run into problems. For example, one plant in Essex County, a tier two supplier, had wages of $13 an hour, modest benefits, and they brought in robotics. They were selling parts for the Ford Escort, and it was selling well. But they were going to go bankrupt and had to turn away business because they couldn't get a bank loan at the proper rate. The bank increased its rates in a series of percentage points and actually took up the profit margin entirely. They went to the BDC, and the BDC said, “You know what? We'll give you the money. We'll back up the bank loan.” But they couldn't get the bank loan.
Do you feel confident that this problem can be solved? There has to be some accountability there. Once again, they were making a profit, a modest one, had modest wages—those wages are comparable to the United States and other jurisdictions—and robotics, and were very much a responsible company, and once again the bank profit level was taking up their entire business profit zone.
:
We had made a two-part recommendation to this effect. As you rightly pointed out, the erosion in terms of balance sheets is not looking very good. It started about three or four years ago with the dollar depreciation first and the price of steel and so on. Today's debt-equity ratios look pretty miserable for most parts manufacturers. A normal bank, so to speak, wouldn't even touch an automotive parts company, as our friends here are talking about.
Our recommendation is twofold.
Some foreign non-banking financial institutions came into our country about three or four years ago and lent a fair amount of money against capital equipment as collateral. Today those same institutions, being U.S. based essentially, are withdrawing from Canada. The other peril for the parts manufacturers who have borrowed against such institutions is that they are now working more for the bank than for their own businesses. A tremendous amount of government pressure is being exerted with one strategic objective in mind: they want to withdraw, make life miserable for us, call in their loan, and get out of this place because the U.S. is demanding that from them.
Our first recommendation is this. In EDC one of their products, as you know, is the loan guarantee system. Whenever EDC steps up to the plate and gives a loan guarantee, our suggestion to the minister is to ask EDC to take over that loan for a limited period of time, until such time as things normalize, then again bring in the regular banking channels. Let the instrument of public policy be mandated to take over the loans they have guaranteed in order to at least let these parts manufacturers have some liquidity access in these critical times.
The second aspect of this issue is an interesting one. For maybe two years you need to change the mandate of an instrument of public policy like BDC. They've been registered in our country as a bank, but they do not have to report the returns of a bank for giving patient capital. That is a very important second suggestion we have made.
The first one is going to be limited to certain parts manufacturers, but very critical ones, of course, where EDC is the loan guarantor, if you will. The second one, even more importantly, is to get BDC into the act. If a company is viable, go ahead, give it patient capital, but don't seek the same level of returns for the next two years. If the Canada Account is the vehicle to use for that, so be it, but that is an important suggestion to try to help the industry at this point.
I met with one of the auto dealers in Oakville recently who had the exact problem you're talking about. This was a winning automobile dealer, right on the business plan, whose sales, by the way, were right where they should have been until November. Like the Canadian automotive industry, until November, sales were right where they should have been. They started to fall in December.
It was December when it became quite evident that there was a problem. He had a $7 million loan guarantee to build a brand new dealership. He was on his business plan. He had $1 million cash. The bank came back to him and said, “Okay, we'll still give you the deal, but we want a point and a half higher”, which is understandable. But then they said, “Oh, by the way, we want another half a million dollars cash.” So he basically had to go home and tell his wife that he had to put a mortgage endorsement on their house to build this dealership.
The real problem is that it got worse for him, because he then went to the other banks and they said they wouldn't be doing business with anyone who didn't have a prior business relationship with them. It's effectively a monopoly.
So we've introduced this $12 billion credit facility, and it's my impression from what you said tonight that it's absolutely critical to get it up and operating as soon as possible. Is that correct?
:
This is an interesting meeting for me—the two meetings back to back. The average Canadian looking at this situation, when hearing from the manufacturers and the dealers, would assume that the challenge is identical or very much related, and they are related to an extent. But if I'm hearing correctly, what the manufacturers face is as a direct impact of what's happening in the U.S. and the global market, in the sense that Americans stopped buying cars made in Canada. This had a direct impact on the business and on the parts business as well, whereas CADA and the dealers are dealing with the Canadian situation—with an indirect situation wherein Canadians who have jobs or had jobs have faced economic hardship because of what happened in the U.S. situation. When those Americans stopped buying Canadian goods, Canadian employees were affected and stopped buying cars from the dealerships here in Canada.
And there is an important distinction. We're helping the manufacturers with the loan program we're putting together and everything else, and of course that's going to have an impact on the parts manufacturers. But for the dealers, it's an entirely different situation. It's that credit situation. Canadians aren't buying cars because they can't get the credit to buy the cars—or because they've lost jobs and income and can't buy the cars, but the credit side of things has seen a significant impact.
I want to go to something Brian was saying, if I may. He used the phrase “best in the world”. He used it in a little different context, but one of the things that are important to note is that the Canadian banking system is the best in the world. We've had a lot of conversations and we hear different ideas on tinkering with the banking system—maybe doing some fairly significant tinkering with the banking system—but we have to remember that according to the World Economic Forum, our banking system is the number one, the most secure banking system in the world, whereas the American system was ranked number 40.
The Economist noted in an article from the fall that “in a sinking world, Canada is something of a cork. Its well-regulated banks are solid.... The big worry is the fear that an American recession will drag Canada down with it.” That is what The Economist noted in the fall. Newsweek , about a week ago, noted that “Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize.” They went on to say, “If President Obama is looking for smart government, there is much he, and all of us, could learn from our quiet...neighbor to the north.”
I want to ask this question. We're dealing in the short term with the EDC, the secured credit financing, the loan to the manufacturers, and the impact that it's going to have. But in the long term, how important is that solid banking system at the core to the business you have, to the long-term success of the organizations you represent?
Mr. Gauthier, I appreciate the suggestion of a voluntary agreement. Unfortunately, that's really not up to dealers to decide; the problem is with the manufacturers, who won't provide that information because it's proprietary information. As you heard from General Motors, they also don't oppose it. It is important as well to note that in the United States it is legislation. The environmental protection act is part of the recipe in the agreement they have, and there is legislation working through the courts too.
Perhaps we can move to something we agree on, so that we can spend some productive time together and maybe agree to disagree on this issue later, at some other date.
You did mention a suggestion about what Germany is doing with respect to $4,000 per vehicle purchase, which sounds good on the surface. I agree that some of the incentive elements can be very important and popular. Unfortunately, this government's past practice with the ecoAUTO feebate program saw the Yaris, for example, receive a significant amount of cash from Canadians for a vehicle produced overseas. That really didn't help our economy here. It helped get the Yaris on the streets and it provided Toyota with a competitive advantage, but it hurt other Canadian manufacturers who also paid a tax and continue to do so on certain vehicles, because the tax element is still there. The industry estimates that around $40 million to $50 million a year was paid on the tax when the vehicle sales were at their normal level.
To get right to the heart of the question, if we could find a model that was sufficient in terms of an incentive to get there, there would be cynics who would say that's good for the dealers, because they would get the cash. You'd go and buy a new vehicle and then you'd have the servicing agreement that comes with it for the next number of years to get that vehicle on the road.
I agree with some of the environmental arguments you've made, though, and I don't necessarily think that's a bad idea.
What some people might be concerned about is how we guarantee that there isn't a gouging on the price, whereby it goes up because of the $4,000 available. I know that with the government's new home renovation program, whereby you get the money to fix your home, some contractors have already admitted they're going to raise their prices; they've done so right in front of the cameras. I worry about that aspect.
Second, how do we guarantee a low-interest loan similar in level to where interest rates are right now? We all understand that there could be a profit in borrowing; I think people are reasonable about that. With the banks, in terms of their credit card issues and their percentages on loans, we've heard here tonight how difficult it's been to even access credit during profitable times. How do we guarantee that consumers are going to get a low-interest loan for a car?
Yes, there's a win-win: we get new vehicles on the road that become servicing models for your dealerships and provide a credit stream coming in; the production of vehicles is maintained, and hopefully they'll be domestic vehicles. I think that's very important, because I certainly don't want to subsidize Toyota if they're not producing here in Canada. I don't need to subsidize Japan anymore.
Maybe you can respond to that. How do we make that model work really well, or what would you be willing to do to see that it's practically applied here, so that our people who are producing parts for those vehicles are going to have jobs; and as well, to maintain the value for the consumer, if the public's going to expend money to make this happen?