Subcommittee on the Automotive Industry in Canada Committee on March 11th, 2009

[The Chair, Conservative, Michael Chong]

Good evening to members of the committee.

Good evening to our three witnesses.

Tonight we have Mr. Thomas LaSorda, vice-chairman and president of the Chrysler Corporation; Mr. Reid Bigland, president and chief executive officer of Chrysler Canada Inc.; and we have Madam Lorraine Shalhoub, the vice-president and general counsel, external affairs and public policy, Chrysler Canada Inc. Welcome, to all three of you.

We are undertaking a study of some of the challenges facing the Canadian auto sector. Your testimony will help us write a report and recommendations that will be submitted to Canada's House of Commons by the end of this month. I thank you very much for appearing.

We'll begin with an opening statement of approximately 10 minutes. You have the floor.

[Reid Bigland, President and Chief Executive Officer, Chrysler Canada Inc.]

Thank you very much, Mr. Chairman.

On behalf of Chrysler and Chrysler LLC, it is our privilege and pleasure to be here in front of the committee this evening. We will have 10 to 15 minutes of opening remarks, if that is okay. Mr. LaSorda and I will tag-team these remarks. I will start them off.

There is no question that these are very challenging times, not only for the global economy but also for the automotive industry, and Chrysler Canada in particular. I'd like to provide and start off with an overview of Chrysler Canada's operations and then speak to some of the critical factors affecting our competitiveness in Canada, our future Canadian manufacturing plans, our restructuring and long-term viability, and then speak briefly about our pending alliance with Fiat.

Following our remarks, we will be happy to answer any questions from the committee.

To begin, Chrysler Canada is headquartered in Windsor, Ontario, and we have a significant presence in Canada and a significant impact on the Canadian economy.

Chrysler operates vehicle manufacturing facilities in Windsor and Brampton, Ontario, and a castings plant in Etobicoke. In addition, we operate an award-winning research and development centre in Windsor, in partnership with the University of Windsor. Over the past 20 years, this centre has led and supported many advanced technology development programs, such as propane-fuelled vehicles, natural-gas-powered vehicles, and more recently, electric vehicle technology.

Chrysler Canada also has office and distribution centres in Toronto, Montreal, Calgary and Red Deer. Including our Chrysler Financial operations, the current direct employment by Chrysler is about 9,400 employees.

There are also 451 dealer locations throughout the country, employing close to 26,000 employees, who are exclusively dependent upon the sale and servicing of Chrysler vehicles for their livelihood.

From a supplier standpoint, there are 407 supplier locations providing parts to Chrysler manufacturing facilities. These suppliers employ approximately 50,000. Last year, Chrysler purchased $5.5 billion in goods from these companies.

Last, with 13,000 retirees in total, there are approximately 100,000 Canadians who are directly or indirectly dependent on Chrysler Canada for their well-being.

Chrysler Canada assembles over half a million vehicles a year and sells approximately 230,000 vehicles in Canada each year. In 2007, Chrysler Canada became the second-highest-selling vehicle manufacturer in Canada, and in the same year it gained more market share and incremental sales than any other vehicle seller in the country. With sales revenues of $5 billion and manufacturing revenues of approximately $13 billion, Chrysler Canada is one of the largest companies in our country.

The current lack of credit availability in the Canadian market is having a dramatic impact, not only on Chrysler Canada but also on the Canadian economy in general. In July 2008, prior to the full onslaught of the global credit crisis, Chrysler Canada had experienced 23 consecutive months of year-over-year sales growth—an unprecedented event in the history of our company and unmatched by any of the major vehicle sellers in Canada we compete against.

Today, Chrysler dealers throughout the country have indicated that upwards of 20% of potential new car buyers are unable to secure financing to purchase a new vehicle. Furthermore, lease financing in the Canadian marketplace for many automotive manufacturers is currently not available. During the first six months of 2008, approximately 50% of Chrysler Canada's vehicle sales were leased, whereas today that number is zero.

Credit for our dealer organization is also under extreme pressure. At a time when the current Bank of Canada interest rate is at a historic low, dealers are experiencing unprecedented increases in the costs associated with “flooring” or financing their new vehicle inventory. Further, it is virtually impossible for a prospective Chrysler dealer to secure flooring, which in turn results in a drag on the country's economic activity, and it prevents a new dealer from the having the ability to enter into the business. It is also very difficult for a Chrysler dealer to secure a mortgage to construct a new facility or to finance an amalgamation with another dealer.

The availability of credit is critical for the return of the automotive industry and the Canadian economy to good health. Further, a more stable U.S. economy will also directly impact Chrysler's success. Chrysler Canada's operations are inextricably linked with Chrysler LLC and our United States operations. For example, 85% of the products manufactured by Chrysler Canada are exported to the United States, 60% of the products we sell in Canada are produced in the United States, and approximately 20% to 27% of Chrysler's worldwide production currently occurs in Canada. Therefore, in our opinion, it is unrealistic and, frankly, improper to examine Chrysler Canada's operation without consideration of the larger context in which we function.

With that said, I'd now like to pass this over to the president of Chrysler LLC and our vice-chairman, Mr. Tom LaSorda, who's going to speak to some of the critical factors for our ongoing competitiveness in Canada.

[Thomas LaSorda, Vice Chairman and President, Chrysler LLC]

Good evening, everyone.

I'm a fellow Canadian as well. I live in the U.S. and became a U.S. citizen three years ago, but I'm a proud Canadian as well.

I'm here on behalf of Chrysler Corporation and Chrysler LLC, as the president and vice-chairman of the company.

The current success and long-term viability of Chrysler's manufacturing operations in Canada are very much dependent on three critical factors: the transfer pricing clarity that we need from the Canadian government, labour costs in this country, and government assistance. Chrysler LLC cannot afford to manufacture products in a jurisdiction that is uncompetitive relative to other automotive jurisdictions.

Let me turn to the first major area, that of transfer pricing. In the fall of 2007, the Canada Revenue Agency, CRA, issued assessments asserting that for 1996 through 1999, Chrysler Canada should have earned greater profits than were reported in Canada and, correspondingly, should have reported reduced profits in the United States.

I'd like to make a point that's not in the script: Chrysler paid the taxes. The issue is that the CRA is issuing the thinking that more taxes should have been in Canada versus the U.S.—thus the dispute.

When Daimler sold a controlling interest in Chrysler, Daimler agreed to indemnify Chrysler against, among other things, these transfer pricing tax assessments. Under Canadian law, even though Chrysler Canada is duly pursuing challenges to the assessments, the company became obligated to post cash and assets to secure 50% of the assessed amounts.

Daimler has stated that it will not pay the indemnity until the contest over the validity of the assessments has been concluded, leaving Chrysler Canada to post the necessary collateral to the CRA. This obligation to pay or secure these assessments has severely impacted the company's ability to operate at this critical time.

The CRA issue has been referred to a dispute resolution process, which includes both the IRS and the CRA, and it will determine what the proper allocation of value is between Chrysler's U.S. and Canadian operations. However, in order to provide Chrysler with the assurance it needs in order to continue to keep Chrysler's Canadian operations running while this dispute resolution process is under way, Chrysler needs the CRA to provide assurance to Chrysler that during this process CRA will be satisfied with the existing security provided to it by Chrysler Canada—a lien on our Brampton manufacturing assembly plant, valued at $500 million, and over $335 million of cash collateral, GST funds owed to Chrysler and being held back—and that the CRA will not seek additional security until the dispute, which they've agreed to with the IRS, is settled and resolved.

Once the dispute over the transfer pricing assessments has been concluded, the amount found to be due and owing to the CRA will be paid by Daimler, pursuant to its indemnity obligation.

Let me go to issue number two,which is labour costs. Currently Chrysler/CAW's all-in labour rates are not competitive. The CAW has been provided with alternative approaches by us, as well as a detailed proposal for closing the CAW labour cost gap of approximately $20 per hour. The labour cost gap is a measure comparing Chrysler/CAW facilities with the Canadian transplants, such as Honda and Toyota. It also includes Chrysler/UAW manufacturing operations and transplant facilities in the United States. As part of the labour cost gap reduction, a 50% reduction of other post-employment benefits is also required.

In addition to the considerations outlined herein, it is imperative that the CAW labour cost gap is closed in order to preserve Canadian operations by Chrysler.

The third area is government assistance. As a result of an unprecedented downturn in automobile demand brought about by the global financial crisis, Chrysler Canada on December 5, 2008, requested Canadian and Ontario provincial assistance.

Chrysler Canada requests proportionate support from Canada to what our parent company, Chrysler LLC, is seeking in the United States on the basis that our two organizations are highly integrated.

In the December 2, 2008, submission to the U.S. Congress, we requested a $7 billion working capital loan to support our short-term restructuring and long-term viability. This request was based on a 2009 seasonally adjusted annual rate--SAAR, we call it--of sales in the United States of 11.1 million units.

On January 2, 2009, the United States Treasury advanced $4 billion of our requested amount, and it required Chrysler to submit a restructuring plan to achieve our long-term viability.

On February 17, 2009, Chrysler submitted a viability plan to the U.S. Treasury that revised our SAAR projection for 2009 down to 10.1 million units and assumed more gradual growth in the out-years.

As a result of the continued deterioration in the United States market, we requested an additional $2 billion in bridge loans beyond the original $7 billion.

On December 20, 2008, the Canadian and Ontario governments pledged a repayable interest-bearing loan of $1 billion Canadian to Chrysler Canada. The governments, recognizing that we are an integrated company and industry, indicated that they too wanted their support to be parallel in form and conditions and proportionate in amount with the U.S. support. To this end, Chrysler Canada continued to mirror, where applicable, the restructuring and transformation efforts required by the U.S. Treasury.

Failure to satisfactorily resolve these three factors--the labour cost, government assistance, and of course the transfer tax--will place our Canadian manufacturing operations at a significant disadvantage relative to our manufacturing operations in North America and may very well impair our ability to continue to produce in Canada. As a corporation with operations in multiple jurisdictions, we cannot afford to manufacture products in jurisdictions that are not competitive.

I'd like to turn it back to Reid to talk about the Canadian plans and an outline of our viability plan and what we're doing with Fiat. By the way, I'm sure you all know that the chairman and CEO of Fiat is another Canadian.

[Reid Bigland]

Thank you, Tom.

As previously indicated, Canada has always been an important manufacturing and sales market for Chrysler. It is significant to note that Canada is the largest vehicle sales market for Chrysler outside of the United States and that no other vehicle manufacturer has a larger portion of its total manufacturing in Canada than Chrysler.

Currently, Chrysler Canada builds the Dodge Grand Caravan, the Chrysler Town and Country, and the Volkswagen Routan at our Windsor assembly plant. As well, we produce the Chrysler 300, Dodge Charger, and Dodge Challenger at our Brampton assembly facility.

Subject to achieving the three critical factors outlined by Tom, Chrysler envisions a bright future for our Canadian operations. Specifically, Chrysler Canada intends to continue with current investments in our Windsor and Brampton assembly plants.

I'll recap some of those investments in Windsor. In 2008, for the 2008 minivan program, we invested close to $1 billion. Also in 2008, we put in a close to $240 million paint facility. For the 2009 model year minivan, we're in the process of investing another $41 million to manufacture minivans for the international marketplace. And for model year 2011, we intend to upgrade our existing minivan portfolio by investing a further $153 million in our Windsor assembly plant.

In Brampton, the investments are even more significant. We intend to continue to move forward with investments for the next generation of Chrysler 300 and Dodge Charger vehicles at our Brampton assembly plant, beginning in the 2010 calendar year. These platforms would also be adapted for international markets, including right-hand drive production. To recap, in 2008 we also invested $332 million in our Brampton assembly plant for our Dodge Challenger; and for the next generation 300 and Charger, we anticipate an investment of slightly over $1 billion.

Quickly, on a restructuring and viability standpoint, since Cerberus acquired our organization from Daimler in August 2007, we've taken immediate steps to redesign our business model, enhance our product portfolio, and create a more competitive cost structure.

From an operational improvement standpoint, we've reduced fixed costs by $3.1 billion; we've eliminated 32,000 employees from our workforce; our manufacturing capacity has been reduced by 1.2 million units, reducing 12 production shifts and eliminating two manufacturing facilities, our St. Louis and Newark manufacturing plants; we've discontinued four vehicle models; we've sold $700 million of non-recurring assets and, closer to home, shut down our Vancouver, Winnipeg, and Moncton parts distribution centres. This was all intended to lower our cost structure.

We've also requested all the key stakeholders that have a vested interest in the long-term viability of Chrysler Canada and Chrysler LLC to step up and make concessions. Concessions have been sought and received from the executives and management of Chrysler LLC and from our dealer organizations, not only in Canada but also in the United States. In Canada alone, our Canadian dealers have stepped up and committed in excess of $30 million of concessions to help the long-term viability of our organizations.

Regarding our unions, as Tom mentioned, we're currently in discussions and negotiations with the CAW. But in the United States, we have been able to move our labour rates to be competitive with transplant labour rates south of the border.

Supplier concessions are also under way.

Second lien holders are requested to convert 100% of their debt into equity, and shareholders are also being requested to convert their debt and obligations into equity in the company.

We're also looking to enhance our restructuring obligations by entering into a strategic partnership with Fiat. We currently have over two dozen joint ventures and alliances, but the proposed Fiat alliance would enhance our restructuring plan, provide Chrysler with substantial cost-saving opportunities, and provide us with distribution capabilities in key growth markets.

The Fiat alliance would also help Chrysler achieve fuel economy improvements, as Chrysler gains access to Fiat's smaller fuel-efficient platforms and power train technologies. Given that the Canadian marketplace is 42% small and compact cars, this would be a disproportionate benefit for Chrysler Canada.

In conclusion, Mr. Chairman, thank you very much for the opportunity to present to this subcommittee and for your patience with our going over the time limit.

We are fully aware that the loan we've requested from the Canadian government and the taxpayers is substantial. However, we feel the investments we intend to make in Canada are also substantial. We strongly believe that the government's fully collateralized loan will also deliver a positive return for the taxpayers.

[The Chair, Conservative, Michael Chong]

Thank you very much to our witnesses for their opening statements.

We use both official languages in this committee.

There will be some questions posed to you in English and some in French.

Without further ado, we'll have about an hour of questions and comments from members of this committee, beginning with Mr. Valeriote.

[Frank Valeriote, Liberal, Guelph, ON]

Thank you, Mr. LaSorda, Mr. Bigland, and Ms. Shalhoub, for coming this evening. It's very much appreciated.

I said yesterday that I'm beginning to feel like we're trying to land a plane on the Hudson River right now. We have a huge obligation, as members of Parliament, to make sure we balance the need to preserve hundreds of thousands of jobs in Canada with the fiscal responsibility we have to our taxpayers, and that is to not needlessly or recklessly--being a bank of last resort--invest in something that cannot be collateralized or that may fail. I'm not suggesting that's the case; I'm saying that's what we have to look at.

We have to know that you're viable in both the short term and the long term. We have to know how we might help and if the help we offer will be meaningful and actually do anything.

Speaking of collateral, you indicated that some of your debt was converted into equity. That tells me that if debt becomes equity, you're freeing up a certain degree of collateral that might be offered to secure any loans that might be given to you by Canada.

I'm going to refer to page eight of your submission. You say: “Furthermore, we strongly believe that the government's fully collateralized loan will also deliver a positive return for Canadian taxpayers.” I need to know, first of all, how much you are actually asking from the Canadian government in billions of dollars and how you propose to collateralize or secure that loan.

[Reid Bigland]

As far as our request to the Canadian government is concerned, we have always requested a proportionate response from the Canadian government to what we are seeking in the United States. Approximately 25% of our current Chrysler manufacturing occurs in Canada, so we are seeking 25% of the amount we're seeking in the United States. We're currently seeking $9 billion from the United States Treasury; therefore, we are seeking approximately $2.3 billion from Canada.

With that loan from the Canadian government, we intend to pay a prescribed interest rate, somewhere between 5% and 6%, and to collateralize that loan with unencumbered assets in Canada, such as our Windsor assembly plant and our Etobicoke casting plant.

[Frank Valeriote, Liberal, Guelph, ON]

Do we have a first priority, or second or third? Who would be in advance of us as far as priority goes?

[Reid Bigland]

We would give the Canadian government a first lien on our Windsor assembly plant, a first lien on our Etobicoke assembly plant, and subject to our discussions with the Canada Revenue Agency, we would also be prepared to provide a first lien on our Brampton assembly plant as well.

[Frank Valeriote, Liberal, Guelph, ON]

Okay, thank you.

While we may invest this money now, Canadians want to know that you will be viable in the long run. I presume you have accountants, analysts, and others plowing over numbers, determining what future growth there may be to assure that you can sustain these loans and sustain your business.

I see, on page four of your submission, that when you made your submission to the American government, you assumed “more gradual growth in the out-years”. I am reading from your submission.

On what basis did you make those assumptions, and what were those assumptions? In other words, we have a contracting market in the United States. We don't know when we're going to come out of this. A lot of our success is based on how much we can sell in the American market. Can you tell me on what basis you made the assumptions, and what were the assumptions going into the future?

[Thomas LaSorda]

Yes. Let me answer that.

The assumptions for the U.S. industry we had originally submitted were 11.1 million, 12.1 million, and then it went higher. The latest submission we made in February was, if the market was at 10.1 million, we increase by 500,000 units per year thereafter, capping at 13.7 million in 2011-12. We have the lowest forecast of SAAR of any submission to the U.S. government and against all the outside analysts in their forecasts for the SAAR in the U.S.

[Frank Valeriote, Liberal, Guelph, ON]

Thank you.

You do mention in your submission that not giving the money would severely compromise your ability to continue to do business in Canada. I come from Guelph, which is a parts manufacturing town, and I'm concerned about that.

Should you not continue operations in Canada for any reason, would manufacturing then go down to the United States, and do your plants in the United States have enough capacity to accommodate future growth, so that you might be disinclined to return to Canada in the future? And if that's the case and you do go to the United States, to what degree will our parts manufacturers in Canada still have an opportunity to be in the American market and be protected or preserved?

[Thomas LaSorda]

Let me answer that as well.

First of all, we closed a minivan plant in St. Louis, Missouri, that built the same minivan as the Windsor assembly plant. That production could be moved back to St. Louis. I'm just answering your question, what you're asking. Secondly, the products built in Brampton can be built in multiple locations in the U.S., as well as Mexico. So that could be moved as well. The parts manufacturers would have to compete for the business and will likely lose business in Canada.

[Frank Valeriote, Liberal, Guelph, ON]

Sorry?

[Thomas LaSorda]

If that were to happen.

[Frank Valeriote, Liberal, Guelph, ON]

If that were to happen, okay.

I have another question. You talk about your efforts to...well, you talked about the CAW contract specifically. Can you tell us where you are with your discussions with the CAW?

[Thomas LaSorda]

Yes. Relative to the CAW, we met again with them this morning. We continue to meet and tell them where the gap is and work together with the CAW to close this major labour gap, which is roughly, as I said earlier, a gap of $19 to $20, and we have to address every area of active wage benefits, working conditions, and ongoing health care. So we're still negotiating and hope to come to the proper conclusion.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. LaSorda.

Mr. Vincent, you have the floor.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chair.

I don't know whether you read the Canadian Press dispatch, today, concerning Minister Tony Clement's remarks that Canada is not the one helping the auto industry out of the current crisis, but rather the United States is. Do you agree with the minister's comments?

[Reid Bigland]

Canada can certainly do its part, and I don't think we can rely exclusively on the United States, but directionally his statements are correct. With 85% of our production being exported to the United States, it is imperative for us that the U.S. market pick up in order for our Canadian manufacturing activities to also increase.

[Robert Vincent, Bloc, Shefford, QC]

Earlier, you said that Canada's rightful share would be 25%. If you're saying that 85% of your sales are in the United States, Canada's share would be 15%.

[Reid Bigland]

The real economic engines for the Canadian economy are the manufacturing jobs that are created by a manufacturing facility. So I think the true measure is to base it off the manufacturing percentage we have in Canada relative to the United States.

[Robert Vincent, Bloc, Shefford, QC]

I want to continue along the same lines. We are talking about jobs. First, what percentage of salary or benefits should Chrysler auto workers give up to ensure that the company can remain viable?

Next, when do you think you'll be able to give this money back or bring the hourly wage back up to what it is now? Let's suppose that CAW workers agree with you, in a week or two, so that workers now earning $20 an hour will see their wages go down to $15. Once you climb out of the crisis, will you give back the $5 you took? Otherwise, will it be done in stages, on a yearly basis, so that we restore things to current levels?

[Thomas LaSorda]

First of all, the all-in labour cost in Canada is just over $75. We're not talking $15 or $20; the all-in labour cost is $75. What we're saying is that the gap between where we're at and where Toyota and Honda in the United States are at is roughly $20. Over time, as we continue to come out with the viability, we will continue to improve wages in line with what's going on in the marketplace. We have to close the gap first, and then be in line with the competition based on the wage rates and the overall benefits in the company.

[Robert Vincent, Bloc, Shefford, QC]

Other auto manufacturers, such as Ford, GM, Toyota and Honda, have said that auto industry salaries are comparable from company to company. You were talking about $75 an hour while others have talked about approximately $30. There is some disparity. Everyone was saying that the rates were the same, that they were comparable. Outside Canada, in the United States and elsewhere in the world, they were also comparable. What you are telling me is completely different.