Ontario Auto Stakeholders Seek More Government Assistance

UNCLAS SECTION 01 OF 03 TORONTO 000032 SIPDIS SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ETRD ELAB PGOV CA SUBJECT: Ontario Auto Stakeholders Seek More Government Assistance Ref: 07 Toronto 457 Sensitive But Unclassified - Please Protect Accordingly. ¶1. (U) Summary: Canada has become the world's most expensive auto manufacturing jurisdiction according to some auto executives. Canadian-based auto assemblers and parts manufacturers are struggling to stay competitive in the face of a strong Canadian dollar. We expect the Detroit Three to press the Canadian Auto Workers (CAW) union for significant concessions to improve the competitiveness of their Canadian manufacturing operations when contract negotiations begin this summer. Auto sector stakeholders also are asking the provincial and federal governments for more financial assistance. Ontario has committed funding, while the federal government has so far avoided promising assistance to specific projects. End Summary. -------------- Expensive Canadian Auto Sector -------------- ¶2. (U) Exports account for 59% of Ontario's GDP and autos and auto parts comprised nearly 40% of Ontario's C$198.7 billion in 2006 exports. About 130,000 employees work in the automotive manufacturing sector in Ontario, down from 172,000 in 2000. With the Canadian dollar trading at near par with the U.S. dollar and slackening U.S. demand for new cars, Ontario auto exports to the U.S. will likely continue to decrease, negatively impacting the Ontario economy. ¶3. (U) Toyota Motor Manufacturing Canada (TMMC) President Ray Tanguay told reporters in Detroit on January 15 that Toyota's Canadian operations are among the most expensive in the global company. Tanguay explained that labor costs more in Canada than in the U.S. because of more generous parental leaves and vacations and higher payroll taxes. Fuel and property taxes also are higher, he said. Electricity, a major cost for auto manufacturers, is also more expensive in Canada. Tanguay opined that the higher Canadian input costs would make it increasingly difficult to convince his superiors to invest in Canada. ¶4. (U) North American auto executives affirm that the appreciation of the Canadian dollar (by 50% since 2003) and new U.S. labor agreements have negated Canada's government-funded health care cost advantage, making Canada the most expensive auto manufacturing jurisdiction in the world. During last fall's U.S. contract negotiations, the United Auto Workers (UAW) and the Detroit Three �00A;(GM, Ford, and Chrysler) agreed to reduce pay for new hires, and to shift retiree healthcare benefits to union-run trust funds, reducing per vehicle assembly costs by about US$1,000, and removing billions of dollars of liabilities from the Detroit Three's balance sheets. Chrysler Group President Tom LaSorda recently told reporters that annual operating costs for an assembly plant that produces 200,000 vehicles would be US$800 million in Canada compared with US$250 million in China and US$450 million in Mexico. ¶5. (SBU) On January 8 Ford CEO Alan Mulally warned the CAW that Ford's Canadian plants have to remain competitive or Ford will have to lay off more workers and close more plants in Canada. CAW contracts with GM, Ford, and Chrysler that cover some 37,000 union members will expire September 16, 2008. We expect the Detroit Three, which have cut 10-22% of their unionized workforce in the past year, to look for significant concessions from the CAW during contract negotiations expected to begin in July. -------------- -------------- Auto Execs and Union Officials Seek Government Aid -------------- -------------- ¶6. (U) Over the past few years, the Canadian provincial and federal governments have spent billions of dollars to attract new auto sector investment in Ontario. Under the Ontario Automotive Investment Strategy (OAIS) announced in April 2004, the Liberal McGuinty government has spent C$500 million to support large-scale capital projects, such as Ford's Oakville flexible assembly plant and GM's Beacon project. In December 2005 the province also established a C$500 million Automotive Manufacturing Investment Strategy fund to provide interest-free loans for up to five years to stimulate investment in high tech projects that create jobs (Toyota-linked auto parts manufacturing companies have drawn from this fund as they built new plants in Canada). Last June, in the run-up to the October 2007 provincial election, the McGuinty government announced establishment of a new C$1.15 billion Next Generation Jobs Fund to create jobs and stimulate investment in TORONTO 00000032 002 OF 003 clean automotive and other green technologies. ¶7. (U) The previous federal Liberal government headed by Paul Martin matched the provincial OAIS contribution to major investments by Ford, GM, Chrysler, Toyota, and Honda, increasing total Canadian government support for these major projects to 10-20%. But Conservative Prime Minister Harper's government turned off the federal assistance spigot after taking office in January 2006. ¶8. (SBU) Officials from the CAW, Ford, Chrysler, GM, Honda, and Toyota are now strongly urging the federal government to create a fund to encourage automotive investment or at least to provide tax credits for investment in new technology and equipment. So far Canada's federal government has resisted providing sector-specific bailouts, instead creating a C$1 billion economic hardship fund to help one-industry towns weather volatile commodity and financial markets. On January 24, federal Industry Minister Prentice told reporters that, with Ontario's cooperation, the province's manufacturers would be able to tap into Ontario's C$350 million share of the economic hardship fund. Even so, they will be competing for this funding against hard-hit Ontario towns that rely almost exclusively on forestry and other slumping industries. -------------- -- Overall Sales Up; Ford Loses Market Share Again -------------- -- ¶9. (U) In 2007 Canadian auto retail sales recorded their second best year ever -- 1.7 million autos. Despite millions of dollars of incentives by automakers (reftel),sales of new vehicles in Canada slowed in November and December compared with the same months a year earlier. In 2007, Canadian retail sales rankings changed. GM retained the number one sales spot, but Chrysler displaced Ford in the number two spot for total sales last year. Ford's fall to the third sales spot in Canada mirrored its decline to number three in U.S. sales (behind GM and Toyota). Since 2000 Ford's market share in Canada has fallen from 18.3% to 13.5% in 2007, while the market share for Toyota and Honda continues to grow. On January 15, Ford replaced Bill Osborne as President of Ford Canada with Barry Engle, formerly General Manager of marketing for Ford in the U.S. -------------- Ford Looks for Ways to Stay Competitive -------------- ¶10. (SBU) Ford has asked the federal and Ontario governments to kick in C$60 million to support its C$300 million plan to re-tool and re-open the 1981-era Essex Engine Plant in Windsor, Ontario that was idled in November. Ontario has agreed to pay its C$30 million share from the Next Generation Jobs Fund created last summer. Ford hopes that Canada's federal government will kick in another C$30 million, enabling Ford to reopen the plant and begin assembling a new fuel-efficient V-8 engine. If the Essex Engine Plant re-opens, Ford would re-employ 1,750 people in Windsor, which has been particularly hard hit by auto sector job cuts over the past few years. -------------- -------------- GM Rethinking Its Products; Oshawa Jobs on the Line -------------- -------------- ¶11. (SBU) As part of its C$2.5 billion Beacon Project, GM will replace one of two 1953-era Oshawa auto assembly plants with a new leading-edge flexible plant that can assemble multiple vehicle platforms on one line. GM originally planned to employ 3,000 people to manufacture up to 500,000 rear-wheel drive vehicles, including the Chevy Impala and Camaro, once the plant was in full production in 2010. But on January 23, GM announced it had cancelled plans to build the rear-wheel-drive version of the Chevy Impala in Oshawa. GM also said it would build two other Cadillac and Buick models at its Lansing, Michigan facility instead of at Oshawa, to honor its commitment last fall to the UAW. GM will now have to identify other vehicles to build at the new plant in order to meet commitments it made to Ottawa and Ontario to add 500 jobs as part of the Beacon Project deal announced in March 2005. -------------- Chrysler -------------- ¶12. (U) Last July, Chrysler announced that the company would invest US$1.2 billion to re-tool for new models at its Brampton, Ontario Assembly Plant, which first opened in 1986 and employs about 3,800 hourly workers. In November, Chrysler said it would eliminate one of three shifts at the plant (cutting 1,100 jobs) during the first TORONTO 00000032 003 OF 003 quarter of 2008. -------------- Toyota and Honda Still Expanding Capacity -------------- ¶13. (U) Toyota's 1988-era assembly plant in Cambridge, Ontario is solidly profitable and is the only plant outside of Japan that produces Lexus vehicles. Toyota is spending C$1.1 billion to open a second assembly plant this year, which will employ an additional 2,000 workers, in nearby Woodstock. Because Toyota's Canadian operations are among the most product-diversified in the world, their employees hope they are less likely to face significant cut-backs or closures than other plants. ¶14. (U) In 2007, Honda shifted production of the Honda Pilot SUV from its Alliston, Ontario plant, which opened in 1986, to Lincoln, Alabama. Honda used the increased available capacity to ramp up production of the fuel efficient Honda Civics in Alliston. Honda's two Alliston plants employ 4,300 workers who produce 390,000 vehicles a year. In June 2007, Honda announced plans to construct a new C$2 billion engine plant, creating 340 new jobs, to produce 200,000 4-cylinder engines for Honda vehicles produced in Canada. -------------- Auto Parts Sector Continues to Down-size -------------- ¶15. (SBU) The Auto Parts Manufacturers' Association estimates that Canada has lost 21,000 auto parts jobs (about 20%) over the last three years. On January 15, auto parts manufacturer Collins and Aikman, announced it was shuttering its Guelph, Ontario facility, laying off 518 employees. The plant supplied plastic instrument and console panels to Chrysler, its sole customer. The CAW is hoping to find another buyer for the troubled company, which still operates auto parts plants in Port Hope and Ingersoll, Ontario. ¶16. (SBU) Comment: Slowing demand for cars in the U.S., a strong Canadian dollar, and relatively high labor costs have prompted Ontario auto stakeholders to ask for more assistance from the provincial and federal governments. Toyota and Honda continue to expand their production capability, while the Detroit Three, and their affiliated parts companies, continue to restructure and downsize Canadian production facilities. We expect the recently re-elected Liberal provincial government will continue to support the automotive sector, which generates a significant portion of the province's GDP. With a federal election now expected within a few months, the provincial government and other auto sector stakeholders will continue to press the Conservative federal government to help shore up auto sector investment and employment in Ontario, where nearly 40% of the country's voters reside. End Comment. ¶17. (U) More details about Ontario's financial support of the auto sector and auto sector employment are posted on the Economy tab of the Pol/Econ page of ConGen Toronto's intranet site (http://toronto.state.gov/PEEconomy.asp). NAY