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.

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Expensive Canadian Auto Sector
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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
(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.

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Auto Execs and Union Officials Seek Government Aid
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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

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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.

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Overall Sales Up; Ford Loses Market Share Again
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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.

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Ford Looks for Ways to Stay Competitive
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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.

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GM Rethinking Its Products; Oshawa Jobs on the Line
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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.

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Chrysler
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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

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quarter of 2008.

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Toyota and Honda Still Expanding Capacity
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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.

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Auto Parts Sector Continues to Down-size
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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