Canadian Plastics

Canada not getting enough auto investment: report

December 8, 2014   Canadian Plastics

Automotive manufacturing in Canada has rebounded to near pre-recession levels, but capital spending has fallen dramatically, a new report says.

The report, from the Canadian Automotive Partnership Council (CAPC), notes that capital spending for auto production in Canada is now half of what it was in the 1990s and 2000s, and has dropped to levels not experienced since the 1980s.

“Of the 3.5 million units of assembly capacity that will be added to the North American auto industry between 2011 and 2015, Canada will receive just three percent … despite having 16 percent of production and 10 percent of sales,” the CAPC study said. “The longer the Canadian industry is starved of investment, the older and less productive its capital base will become. The less productive Canadian plants get, the more difficult it will be to justify new spending; a cycle of spending deferral that, left unchecked, will eventually send the industry to irrelevance.”

The report outlines several cost disadvantages felt in Canada, including:

• Manufacturing is being directed to the Southern U.S. and Mexico because of the relative cost advantage. The cost differential between Canada and the U.S. South and Mexico results from higher costs in Canada related to labour, logistics and outsourced parts.

• All automakers employ some form of lean manufacturing and sharing of best practices, a condition which limits productivity divergences between assemblers’ facilities on one side of the border versus another, so a single automaker’s plant in Canada is not meaningfully different, in terms of productivity, than another plant owned by that automaker in the U.S.

• Negotiated contract provisions in Canada have responded to the impact of the rising dollar and new U.S. labour provisions on the competitiveness of Canadian operations. The resulting decline in labour costs in Canada, however, has not fully offset the appreciation of the Canadian currency, so relative costs (in U.S. dollar terms) have increased, and labour costs at current exchange rates are somewhat higher than in the U.S. (and much higher than in Mexico).

• Differences between Canadian and U.S. pension costs and other benefits provided to employees may also lead to labour cost differences between Canada, Northern U.S. states, and Southern U.S. states. Canadian plants have typically migrated to various forms of hybrid defined benefit-defined contribution pension plans. U.S. plants are almost exclusively defined contribution for new hires; a situation which does not always equate with lower cost, but most certainly shifts future risk.

• Canada’s traditional advantage of public health care is being eroded because assemblers in the U.S. have been able to shift retiree healthcare costs to Voluntary Employee Beneficiary Associations (VEBAs). That means risk has been reduced in the U.S. as it has shifted from the company to the employee. It must be acknowledged, however, that Canada still retains an advantage in active health care costs.

• Mexico’s significant labour cost advantage is only marginally reduced by higher taxes and transportation costs.

“But it is not too late,” the study continued. “Canada – its policy makers and its automotive industry alike – must sharpen its game.” For Canada to become the location of choice for automotive manufacturing within North America, the report identifies numerous actions that both the public and private sector should undertake.

The public sector should compete for assembly mandates with globally competitive investment supports, reduce the fully loaded cost of labour, provide one-stop support for investment attraction, improve the transportation infrastructure and border policy, ease the regulatory burden, pursue a free and balanced trade agenda, and align the number of working days with competitor jurisdictions.

For the private sector, meanwhile, it’s all about investing – in plants, machinery, equipment, people, and R&D.


Print this page

Related Stories

Leave a Reply

Your email address will not be published. Required fields are marked *

*