INDU Committee Report
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CHAPTER 17:
THE AUTOMOTIVE SECTOR
Economic Contribution and Industry Structure
The automotive manufacturing sector comprises motor vehicle assemblers and parts and accessories manufacturers; it also includes retailing, vehicle servicing, and other similar service-based functions. Together, these industries make up Canada's largest manufacturing sector, accounting for 13% of manufacturing GDP, 2.2% of GDP, and 25% of Canada's total merchandise exports in 1999.
Canada's automotive sector, consisting of six light-duty vehicle assemblers and over 650 parts establishments, is regionally concentrated throughout southern Ontario and part of Quebec. In 1998, Canada's automotive assembly industry was the sixth largest in the world; from 1990 to 1999, automotive shipments grew 152%, reaching $103.6 billion and manufacturing employment grew 12.7%, reaching 160,000 jobs.
| We had a record production of ... almost 2,988,000 light trucks and cars, which was about 18.5% more than 1998 levels and we also had the highest sales volume in Canada since 1988 at 1,501,000 units. Our production in Canada was 19.2% of the total Canada-U.S. production, while our sales were only about 8.8% of the total Canada-U.S. production. [David Adams, Canadian Vehicle Manufacturers Association, 27:9:20] |
Canada has had a trade surplus in motor vehicles for the past 31 years. More impressively, this surplus position has improved dramatically in recent years. For the first 11 months of 1999, the automotive industry, including motor vehicles and parts, had a trade surplus of greater than $6 billion.
Productivity and Competitiveness
Canada's automotive assembly industry is very competitive. It produces for North America and competes with the U.S. and Mexico for new North American assembly investment. Since 1983, vehicle production in Canada has increased on average more than twice as fast as that in the United States. While Canada accounts for 16% of North American production of light-duty vehicles, it accounts for only 8% of North American sales. Factors contributing to the strong performance in this sector include competitive wage rates, high productivity, a competitive business environment and favourable economic conditions.
The key competitive factor is, of course, labour costs:
| Several studies cite, including some from Industry Canada in 1998, that the labour costs in Canada are 30% lower than those in the United States, on a common currency basis, and although the lower dollar certainly has helped ... So the cost-competitiveness feeds into and encourages investment ... [Bill Murnigham, Canadian Auto Workers Union, 25:9:25] |
This labour cost advantage can be broken down into two parts: labour productivity and labour wage rates. In terms of productivity:
| When we're talking about levels of productivity in Canada versus the United States, it's always confused by exchange rates ... But when you examine a range of different assumptions ..., what you'll find is that the productivity in Canada ... has been 15% higher than the United States in the auto assembly industry. [Bill Murnigham, 25:9:20] |
And
| [I]n terms of productivity, Mexico is 60% lower in productivity than in Canada, and though it's gaining fast there's still a long way to go when you look at labour productivity. So that talks about absolute levels, and ... studies show that the growth of productivity, the absolute growth from 1992 to 1998 has gone up by 26.5% in Canada, versus 18% in the United States ... [Bill Murnigham, 25:9:20] |
This labour productivity advantage results from extensive investment and retooling of Canada's automotive assembly plants that are estimated to have improved Canada's labour productivity in the automotive sector from being 61% of such productivity in the United States in 1986 to being 5% higher by 1998.48
In terms of the second part of the competitiveness equation, for the period 1986 to 1996, Canada's motor vehicle industry wage rate at US$36 an hour remained lower than that of the United States at US$55. In 1996, Canada's motor vehicle industry wage rate was US$41, 68% that of the United States.
A key determinant of productivity and competitiveness for the future will be the extent to which the industry continues to outsource non-core activities:
| Under this approach, assemblers focus on their core competencies and outsource other elements to lower cost producers. This leads to the further development of a hierarchy among parts producers: more design, development and systems validation functions are outsourced to Tier One suppliers, and further consolidation is triggered in upstream Tier Two suppliers. The approach also entails joint product development and has led to the creation of successful platform teams. |
| The evolution of the tier structure will also require Tier Two companies to develop a new set of business relationships. In the past, most parts suppliers dealt directly with the assemblers; however, the changing structure of the industry will necessitate greater linkages with Tier One producers. Tier Two suppliers will also be faced with strong competitive demands, as they are competing almost exclusively on their processing ability. This increases business risk and necessitates a continual focus on more productive manufacturing processes.49 |
Other notable competitiveness developments include:
| One of our members teaming up with United Parcel Service, better known as UPS, to try and take time out of the delivery process that it actually takes getting the vehicle from the factory to the dealership. That time is now currently about 15 days. We're trying to get that down to six days. That will translate or could potentially translate into productivity at the dealer level as well, meaning that they wouldn't have to have as much inventory on hand and building in some better predictability for consumers who are actually going to purchase a car in terms of when that vehicle is going to arrive. They will have the capability to track the vehicle when its shipped on the Internet using the vehicle identification number. [David Adams, 28:9:30] |
The auto parts sector, including manufacturers producing parts for both the original equipment and aftermarket sectors, accounted for 1.2% of total GDP in 1998, with annual shipments of $28 billion. The strong growth of this sector, where shipments increased by over 500% from 1980 to 1998, can be attributed to several factors: a strong quality record; favourable exchange rates; investments in leading-edge technologies; and, the emergence of some Canadian-based multinational enterprises as major world players (Magna, Woodbridge, Linamar, etc.).
Industry Outlook and Policy Issues
A good deal of Canada's competitiveness in the automotive sector comes from low wages and a low Canadian dollar vis-à-vis the U.S. dollar, neither of which factors is conducive to prosperity over the longer term. Moreover, the sector, in particular the big three North American companies, has also relied on tariff and non-tariff protection under the Canada-United States Automobile Pact. However, certain aspects of this agreement have recently been struck down by the WTO as a violation of Canada's obligations under the GATT. Thus, the future of this sector increasingly impinges on economic forces outside the policy control of either the sector or Canada.
In particular, Mexico is emerging as a strong competitor for North American automotive manufacturing investment. These attractive investment features are: (1) low-cost production factors (i.e. wages); (2) improving infrastructure; (3) improving quality; (4) improving productivity; (5) potential for strong economic growth; (6) increasing domestic demand for vehicles; and (7) enhanced market access through free trade agreements.
Motor vehicle assemblers are consolidating. For example, Chrysler and Daimler-Benz are now DaimlerChrysler, while Volvo, Jaguar and Mazda are under the Ford umbrella. Consolidation means that there are fewer easily identifiable investors and that plants with underutilized capacity have renewed prospects in the assembler's broader product lines. However, the trend will also bring consolidation in production and therefore make fewer investment pools available. Additionally, we see a "hollowing-out," where decision centres are geographically removed from operations, key decisions are made outside Canada and most R&D is performed at head office.
| New automotive technologies are bound to trigger further structural change. Large-scale commercial implementation of machine vision, multimedia, and intelligent design and manufacturing systems may transform the industry dramatically by the year 2000. Already, these technologies have reduced model development lead times from 57 years to 34 years. It is predicted that product life cycles will be further reduced to 24 months for a facelift and 48 months for a new platform.50 |
Generally, automotive assemblers build where they sell, seeking to position their manufacturing operations in key trading blocks. However, they are increasingly focusing on strategies that will allow them to achieve economies of scale in production on a global basis. At the same time, assemblers are downloading design responsibilities to parts and accessories manufacturers on which they are placing increasingly stringent cost demands. Devolution of design and R&D will provide greater incentive for the parts sector to improve in the shift from parts makers to systems integrators. Currently, the Canadian parts assembly base would have difficulty in meeting this challenge, given that little design and R&D is conducted in Canada. Canada's automotive expenditure on R&D is 25 times less than that in the United States and 4 times less than that of the Canadian manufacturing sector as a whole.
The resolution of the Scientific Research and Experimental Development tax issue is, therefore, an important policy issue for the Canadian automotive sector:
| Regarding scientific research and experimental design, I think although Canada has a very good R&D tax credit system, in recent years there have been issues around project definition as well as the certainty of actually receiving the credit. In the Canadian industry as a whole and in particular the auto industry, we've been working with Revenue Canada and the government in general to ensure that we have the best program in the world. In the globalized industry, the R&D quickly becomes diffused through a company regardless of where it's undertaken and I think that's probably why traditionally we haven't seen a lot of automotive R&D actually take place in Canada ... For us to attract R&D projects we have to have the tax credit system that's not only comparable to other countries ... but it needs to be much better than that in order to draw the research and development away from the home jurisdiction. [David Adams, 28:9:30] |
The Committee agrees with these comments and recognizes that Canadian automobile companies have research mandates in selective niche areas, such as alternative fuels, fuel cells, aluminum castings and engine design. The Committee believes that Canada's success as an automobile builder must be further leveraged to include such R&D. The Committee, therefore, recommends:
31. That the Government of Canada provide incentives to gain a greater percentage of the automobile research and development activity for Canada.
A key knowledge-intensive sector such as the automotive industry faces a major challenge in developing, attracting and retaining highly skilled workers. In the assembly sector, and in the larger parts companies, the labour shortages are in the design and R&D activities, and are impending in a range of production-related specialties. Large numbers of skilled trades and production specialists will be needed to replace those likely to retire over the next two to seven years.
In the smaller parts companies, the challenge is to maintain and raise the level of technological sophistication and design capability so as to ensure a continuing flow of supply contracts from the larger assembly and parts companies. For small and medium-size parts companies, such tools as long training or apprenticeship programs are not appropriate responses since companies do not often have the necessary resources to develop and execute a special training tool or program on their own.
Parts and accessories suppliers are increasingly pressured to develop electronic data integration (EDI) capabilities. According to Canada's Connectedness in Manufacturing survey reports that 87% of companies in the automotive sector have collaborated electronically (80% across all sectors). The potential inability of Canadian parts suppliers to operate costly and difficult EDI links would seriously impede the productivity of the industry.
48 Labour productivity is measured as real gross domestic product per hour and comparisons are based on the 1992 purchasing power parity. Sources: MicroEconomic Policy and Analysis, Industry Canada and Stanford, Jim (2000), A Success Story: Canadian Productivity Performance in Auto Assembly.
49 Industry Canada, Sector Competitiveness Frameworks: Automotive Industry, Part 1 Overview and Prospects, p. 55.
50 Ibid., p. 36