When times were good for Canada’s automakers back in the mid-1990s, the Canadian factories cranked out two vehicles for every car sold domestically. But despite the current North American auto sales boom, Canada seems to be missing out on the long-awaited upside. Job growth since 2009 has been anemic, despite the contract concessions made by unions. The trade deficit in the parts sector is at a record high. Indeed, consultant Joe McCabe, of AutomotiveCompass LLC, caused a stir when he predicted in a speech to parts makers that domestic production could plunge 25% by 2020.
Veteran industry watcher Dennis DesRosiers questions McCabe’s numbers, noting that North America’s automakers need all the production capacity they can get right now. But he concedes that Canada’s share of North American manufacturing, which peaked at 17%, will drop—likely to 11% or 12% by the end of the decade. And while there have been incremental investments in Canada recently, such as an $800-million expansion to Ford Motor Co.’s Oakville, Ont., plant announced in September, there’s little prospect of seeing new “greenfield” assembly plants.
So how can Canada shift its auto sector out of low gear? Without the lure of a cheaper dollar and lower health-care costs, companies need a new reason to invest. Earlier this year, Ottawa launched a five-year, $250-million program geared at supporting the auto industry—Ford just received a $72-million cash injection—but DesRosiers and other analysts say the federal government’s efforts need to be less targeted at the assembly plants.
Rather, he argues, Ottawa needs to pursue a more multi-faceted policy that focuses on the parts sector and the tool-makers, promotes labour-force development and assists Canadian auto parts suppliers to promote themselves internationally. For example, Canada needs to address a chronic shortage of medium- and high-skilled employees, as well as attract new recruits capable of functioning in an ever more high-tech industry.
DesRosiers also believes the federal government is failing to invest sufficiently in research and development, and this at a time when the U.S. has set highly aggressive fuel efficiency targets that demand much more innovation. Research funding, he argues, should be at least two to four times higher than the existing levels. Even if the feds boosted existing supports, Canada would lag far behind the well-endowed auto industry R&D programs that have been established in other countries, including the U.S, Sweden and South Korea.
The potential payoff in the parts sector cannot be underestimated, notes Peter Frise, CEO of AUTO21, an industry think-tank based at the University of Windsor. He points to the example of an ultrasonic device that automatically opens heavy tailgates on minivans. Originally developed by the German parts giant the Brose Group for Ford, the system is now sold to a range of automakers. “Our parts companies have to come up with those cool ideas so they can get included on those new models,” he says, noting that only about 10 to 20 vehicle platforms, of the 360 currently in production, account for 60% of sales.
From an export perspective, this kind of R&D is critical because automakers award global mandates to their parts suppliers regardless of location, Frise adds. The better they are at product development, the bigger the contracts.
Perhaps most important, an increased focus on innovation could also counter the relatively high cost of Canadian labour and the impact of the more valuable dollar on export levels. “Germany is one of the most expensive places in the world to do business, but it has a huge manufacturing capacity,” Frise notes. “That requires a continual stream of new products and development activity.”