Subcommittee on the Automotive Industry in Canada Committee on March 4th, 2009

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you very much, particularly for coming here on such short notice. I think for both of your groups it was incredibly short notice that we had you come, and you both had good statements prepared.

It sounds like Mr. Bali doesn't need a statement prepared. I definitely have to meet with you at some point following this, because you sound like you have a lot of knowledge that would be interesting to hear.

I want to touch actually first with the APMA, if I could, on a couple of things that I heard. I want to first clarify, you had two asks that you mentioned, but there was a lot around them. I just want to see if I can distill them down.

I wrote, number one, that you want to ensure that your customers can pay you. I think that was how number one kind of shakes down. Number two was on the receivable insurance side of things.

It seems to me that the first question I have would address some concerns that some of my constituents might have. We do, I'm sure on all sides of the table, get letters and phone calls from constituents who ask why are we “bailing out” the auto industry. Let them compete on their own, let them go bankrupt, or whatever the case might be. That's my constituents talking, not me. I just want to clarify the difference.... If you were speaking to one of those constituents, maybe clarify the difference between bankruptcy versus loan, in terms of what we're doing for the auto industry right now and the importance of those big companies not going bankrupt.

[Gerald Fedchun]

I think part of what I said is that the reality is, because the industry is so integrated, each one of our suppliers--certainly all of our major suppliers--supplies all of the major assemblers. One example that I wasn't able to hand out supplies everyone in North America. So if one of our major customers goes under, the chance of a couple of those major suppliers going under, and then the smaller suppliers, is pretty well inevitable. Then the whole industry comes to a grinding halt. Toyota, Honda, everybody stops production as they lose suppliers. It only takes four bolts in the car; if there's no bolt on the steering wheel, you can't sell the car. The other 39,999 parts are okay, but without the 40,000th part, no vehicle.

So if you don't help now, the cost of rehabilitating the North American industry will be absolutely horrendous. There was a University of Michigan study that indicated it was in excess of $100 million. So it's cheaper to fix it now. It's like a stitch in time saves nine. Government would be much better off in terms of making the industry viable now than trying to fix it after it collapses.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

In terms of the second part of the equation, you talked about receivable insurance, and most of you have talked about the secured credit facility and the importance of that $12 billion, getting that budget passed. Maybe you could elaborate on the importance, because right now we have a budget implementation bill that did finally pass through the House today with the support of the two larger parties. Now it has to go on to the Senate, and sometimes we've seen things slow down when they hit the Senate.

How important is it that this budget gets passed as soon as possible and that credit starts to flow?

[Gerald Fedchun]

For our industry it's absolutely essential. Without that money, we're going to have suppliers dropping like flies. There will be blood all over the floor. We need the money in the next couple of months, really. That is serious. I'm not trying to joke about this. I have lots of smaller suppliers who are at their wits end and out of money. They can't go to their bank because without the insurance the bank won't lend to them. With the insurance, the other bankers are saying their balance sheets are too weak. We do need some patient capital, because it's been for more than a year that things have been slowing down for the parts suppliers. They really are out of money, and yet in normal times they are good suppliers and they are viable businesses.

We haven't seen volumes like this in forty years, not since I was a kid. I've been in this business since 1964, and 1965-66 with the volumes we've seen.... We have the same volume as we had in 1981, and in 1981 there were 25% fewer drivers in North America than there are now. It's dire, but it's temporary. All this stimulus package, this $1.5 trillion that the west has thrown into this, will take effect and we will come out of this, but we have to get through this year.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Mr. Gauthier, do you want to comment on the credit again?

[Richard Gauthier]

Yes, thank you very much for your question.

I certainly echo what my colleague is saying. I have been in this business for almost forty years as well, and the single biggest issue for our dealers right now is the ability to access capital to floor plan their product. Those are the vehicles that you see on the lot when you drive by your local dealership, and they need to obtain the necessary working capital to be able to run their businesses.

Our dealers right now are caught between a rock and a hard place. This has never occurred before, but what we have is a situation where the dealers right now have absolutely nowhere to go. The captive finance companies, which are the manufacturer-affiliated finance companies, are unable to access the capital markets that they would traditionally access in order to be able to fund their own operations. Therefore they literally do not have the capital to lend to their customers, their customers being the car dealers, and this does not apply solely to the Detroit three. The Toyota credits of the world, the Honda finance of the world, are feeling the credit crunch that we are experiencing worldwide right now. What we're seeing now is that our dealers are unable to obtain the kinds of capital they need to carry their inventories.

The average dealer in Canada carries a debt load of about $7.5 million at any given time. It's not unusual for a dealer to have, in new cars alone, anywhere between $5 million to $10 million in inventory, and those are typically financed through the manufacturer-affiliated finance companies or typically the banks. But what we're seeing now is that the finance companies don't have the capital. They're imposing terms on dealers that they cannot live with. They're pushing the dealers away, and the dealers are going to the banks, and the banks are literally saying--and I have met with senior bankers who have told me this--we are not open for business. They're saying, when it comes to car dealers, we're not open for business, end of conversation.

This is not limited to Detroit three dealers. This is any dealer right now. If you're related to the auto industry the banks don't want to deal with you, and if you're a Detroit three dealer you really don't have a place to go. These are dire times for us. We expect that we are going to see dealers start to close in rapid succession if we don't address this very quickly, and this $12 billion fund is a welcome solution to this. We urge government to move this through the House--where in fact it has been passed--and now through the Senate quickly.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Gauthier.

Mr. Masse.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

I know quick access to capital is important. I wonder if I might ask a question to the researcher. In terms of Industry Canada, how much money wasn't spent in the last allocated budget in different departments? The minister himself has actually said, previous to the budget passing, that there was money available for the auto manufacturers immediately from the past budget. He said that very explicitly, publicly, a number of times before the budget was actually even brought forth.

So why we would have to wait for the Senate is one thing I would like to inquire about. And also regarding other departments, I know there has been some discussion in public about a number of different programs that haven't fulfilled their full mandates of the money that was allocated in a previous budget.

To Mr. Bali and Mr. Fedchun to start, with regard to the credit issue, do you feel confident with the EDC and the BDC? We've seen this coming down the road; in Ontario there have been 300,000 manufacturing jobs lost in five years. This latest chapter really heightened things even further, but we were going down that road; there's no doubt about it.

We would run into problems. For example, one plant in Essex County, a tier two supplier, had wages of $13 an hour, modest benefits, and they brought in robotics. They were selling parts for the Ford Escort, and it was selling well. But they were going to go bankrupt and had to turn away business because they couldn't get a bank loan at the proper rate. The bank increased its rates in a series of percentage points and actually took up the profit margin entirely. They went to the BDC, and the BDC said, “You know what? We'll give you the money. We'll back up the bank loan.” But they couldn't get the bank loan.

Do you feel confident that this problem can be solved? There has to be some accountability there. Once again, they were making a profit, a modest one, had modest wages—those wages are comparable to the United States and other jurisdictions—and robotics, and were very much a responsible company, and once again the bank profit level was taking up their entire business profit zone.

[Gerald Fedchun]

Well, under normal circumstances for BDC and EDC—because they do run their own accounts on commercial terms, so that goes on their financial statements—they can't normally take on weaker companies. The only way this can work is if the money comes from the Canada Account, and those are the funds that are for the account of the Canadian government; they do not go on the books of EDC. EDC basically is a manager of money for the government. They lent the Davie shipyards in Quebec City $382 million, I think, through the Canada Account. That usually would not qualify for regular EDC funding because it was, frankly, a higher-risk investment.

There's no doubt right now that the supply industry is a higher-risk industry, because we've been bled of cash, but just like the Davie shipyards, it's an industry that will recover and will be very viable and very profitable in the longer term. It only works if you take the money from the Canada Account, because we will not meet the normal credit terms they need to impose.

EDC and BDC have been very good. They certainly have been up front--the lender that has been there when all the others are hiding under the table. Still, there is a limit to what they can do under their legislation, and only by using Canada Account money or some kind of similar funding—because BDC got some higher-risk funding in the budget as well—can this work.

[Atul Bali]

We had made a two-part recommendation to this effect. As you rightly pointed out, the erosion in terms of balance sheets is not looking very good. It started about three or four years ago with the dollar depreciation first and the price of steel and so on. Today's debt-equity ratios look pretty miserable for most parts manufacturers. A normal bank, so to speak, wouldn't even touch an automotive parts company, as our friends here are talking about.

Our recommendation is twofold.

Some foreign non-banking financial institutions came into our country about three or four years ago and lent a fair amount of money against capital equipment as collateral. Today those same institutions, being U.S. based essentially, are withdrawing from Canada. The other peril for the parts manufacturers who have borrowed against such institutions is that they are now working more for the bank than for their own businesses. A tremendous amount of government pressure is being exerted with one strategic objective in mind: they want to withdraw, make life miserable for us, call in their loan, and get out of this place because the U.S. is demanding that from them.

Our first recommendation is this. In EDC one of their products, as you know, is the loan guarantee system. Whenever EDC steps up to the plate and gives a loan guarantee, our suggestion to the minister is to ask EDC to take over that loan for a limited period of time, until such time as things normalize, then again bring in the regular banking channels. Let the instrument of public policy be mandated to take over the loans they have guaranteed in order to at least let these parts manufacturers have some liquidity access in these critical times.

The second aspect of this issue is an interesting one. For maybe two years you need to change the mandate of an instrument of public policy like BDC. They've been registered in our country as a bank, but they do not have to report the returns of a bank for giving patient capital. That is a very important second suggestion we have made.

The first one is going to be limited to certain parts manufacturers, but very critical ones, of course, where EDC is the loan guarantor, if you will. The second one, even more importantly, is to get BDC into the act. If a company is viable, go ahead, give it patient capital, but don't seek the same level of returns for the next two years. If the Canada Account is the vehicle to use for that, so be it, but that is an important suggestion to try to help the industry at this point.

[Brian Masse, NDP, Windsor West, ON]

Do I have more time?

[The Chair, Conservative, Michael Chong]

You can have a very short question.

[Brian Masse, NDP, Windsor West, ON]

You feel confident that if that were applied, it would bridge things long enough if we started to get the production back up again.

[Atul Bali]

Absolutely.

[Brian Masse, NDP, Windsor West, ON]

It's very important. I've been talking about the extra borrowing costs and all of that being a drag on productivity because the management of the money cycle flow is so inefficient from when a vehicle is produced to how it's financed in the market. I've been using the example of some of the car loans out there. For crying out loud, in many instances the banks are making more on a car because of their interest rates than everybody else in the whole system. It's just not acceptable. There's no production value there. There's nothing value-added.

You mentioned the value-added from your industry. People don't realize, when you talk about the parts supply and the tool and die and mould making, that we have some of the best in the world, but we can't compete anymore because the systems in place are systemic for financial management.

People keep talking about going high tech. We are high tech. We have the best people in the world. At the same time, not only because of the financial management issues but also through some trade issues, which I won't delve into, Mr. Chair, we're putting ourselves at a loss.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Masse.

Mr. Masse, the analyst has indicated she doesn't know the answers to your questions, but she will look into it and let you know at the next meeting.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

[The Chair, Conservative, Michael Chong]

Mr. Valeriote.

[Frank Valeriote, Liberal, Guelph, ON]

Mr. Bali, you referred to three ideas. I'd ask if you could put those in writing and submit them to all of us following the meeting. I know we're all interested in them. Could you do that?

[Atul Bali]

Yes.

[Frank Valeriote, Liberal, Guelph, ON]

You also indicated you had a meeting with Minister Clement and had discussions. When was that meeting?

[Atul Bali]

The day after the budget was announced in Parliament, which is about a month ago now. We had a breakfast meeting at the hotel he was staying in.

[Frank Valeriote, Liberal, Guelph, ON]

What was his response when you submitted those ideas?

[Atul Bali]

In fact, we met him again last Friday in Toronto at a fundraising dinner. He did indicate to us at that time that he had spoken to Eric Siegel, the CEO and president of EDC, and he had spoken to Jean-René Halde, the CEO of BDC, and talked about both the points we just talked about: the need for patient capital from BDC; and two, EDC stepping up to the plate to support the automotive parts manufacturers. He was also very positive on FRAES, our redeployment of assets, and said to let Alison Tait spearhead this at Industry Canada, as he'd like to see this happen.

[Frank Valeriote, Liberal, Guelph, ON]

There's disagreement, I know, between the Conservatives and the Liberals. The Conservatives believe that the $12 billion secured credit facility would help dealers, because purchasers would have access to credit to buy cars.

It's their belief that it would take the budget to be passed in order to deploy that. It's our belief that it needn't and that it could have been deployed two months ago when it was announced, by way of an order in council. I'd ask the chair if we could seek the opinion of some higher authority on that eventually.

I'm curious, though. Do you feel that our Government of Canada has moved quickly enough to deal with the problems in the auto industry, given that two years have gone by? We know that we started losing jobs two years ago. It didn't happen just two to three months ago when this recession hit. Can you give your opinion on that, Mr. Bali?