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

[The Clerk of the Committee, Ms. Michelle Tittley]

Honourable members of the committee, I see a quorum. We can now proceed to the election of the chair. I am ready to receive motions to that effect.

Mr. Valeriote.

[Frank Valeriote, Liberal, Guelph, ON]

I move that Michael Chong be made the chair of this subcommittee.

[The Clerk]

It has been moved by Mr. Valeriote that Mr. Chong be elected as chair of the subcommittee.

Are there any further motions?

(Motion agreed to)

[The Clerk]

I declare Mr. Chong to be the duly elected chair of the subcommittee.

Before inviting Mr. Chong to take the chair, I will proceed to the election of the first and second vice-chairs. We can now proceed to the election of the first vice-chair. I am ready to receive motions to that effect.

Mr. Lake.

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

I nominate Mr. Valeriote.

[The Clerk]

Mr. Lake nominates that Mr. Valeriote be elected first vice-chair of the subcommittee.

Are there any further motions?

(Motion agreed to)

I declare Mr. Valeriote elected first vice-chair of the subcommittee.

I am now ready to receive motions for the position of second vice-chair.

Mr. Valeriote.

[Frank Valeriote, Liberal, Guelph, ON]

I move Robert Vincent to be elected second vice-chair.

[The Clerk]

Mr. Valeriote moves that Monsieur Robert Vincent be second vice-chair of the committee.

Are there any further motions?

(Motion agreed to)

I declare Mr. Vincent elected as second vice-chair of the committee.

I now invite Mr. Chong to take the chair.

[The Chair, Conservative, Michael Chong]

Seeing that our witnesses have not yet arrived, I'll suspend the meeting until they come in front of us.

[The Chair, Conservative, Michael Chong]

I am calling the committee to order.

First of all, I would like to thank General Motors of Canada for coming to our committee on such short notice. It is very much appreciated that you have taken this effort. I know that all members on this committee are very appreciative that you have taken time out of your very busy schedules to come to talk to us.

This is the industry subcommittee on the auto sector. We are here to study and understand the challenges facing the Canadian auto sector and to allow Canadians a chance to better understand what the Government of Canada is proposing to do to help the auto industry. Our study and recommendations will be reported to the House of Commons by March 31 of this month.

We use both of Canada's official languages. Some members will opt to speak French, and others English.

We use both official languages in this committee, so there will be members who ask you questions in French and other members who ask you questions in English. Translation is provided on your table tops.

We'll start with 10 to 15 minutes of opening comments and statements from General Motors.

Mr. Elias, you have the floor.

[Arturo Elias, President, General Motors of Canada Ltd.]

Thank you very much, Mr. Chair.

Good evening, everyone. My name is Arturo Elias. I am the president of General Motors of Canada.

I am joined here by John Stapleton, GM Canada's vice-president of finance and CFO, and by David Paterson, our vice-president of corporate and environmental affairs. I will ask both of them to join me in answering your questions tonight.

I have just a few minutes of opening remarks concerning the current economic crisis and its impact on the automotive sector and GM Canada. We will suggest a few policy responses that would greatly assist our sector, and we know you'll be interested in our GM Canada restructuring plan.

Let me start with the 52-page restructuring plan we submitted to the Ontario and Canadian governments on February 20. Our plan is not simply a request for a loan, or a quick fix. Rather, it sets out what we believe is needed in the face of the current economic crisis to ensure a viable, leaner, and greener GM Canada for the long term, a restructured company able to fully repay Canadian taxpayers for any support it may receive from them.

It is an achievable plan. It's based on conservative market assumptions. Not only will it sustain GM's business for the benefit of tens of thousands of GM Canada employees and retirees, but it will also sustain our production of combined U.S.-Canadian vehicle production; our multi-billion dollar local purchasing and logistics leadership in Ontario and Quebec; and our research and development leadership, in collaborative work with universities across Canada, to help reinvent our industry and our products for the future.

GM Canada's submission is consistent with GM Corporation's viability plan, which was submitted to the U.S. Treasury on February 17. Both documents have been made available to the committee and the public at large.

Let me speak about the challenge we face. Like all companies operating in our large, complex, and highly capital-intensive sector, GM Canada is working hard to cope with the unprecedented declines in industry auto sales and the general unavailability of credit for our company, our dealers, our suppliers, and our customers. As you are no doubt reading, these challenges are being faced not just by our domestic auto companies but increasingly by all competitors around the world, from Europe to Japan to North America.

For GM Canada, a perfect storm of economic events hit us here in Canada in 2008, when we were already in the midst of an expensive business restructuring that saw us operating with lower-than-normal cash reserves. As industry revenues collapsed and private capital markets rapidly closed off, we were not able to raise funds by pledging our global assets and intellectual property to raise a large pool of restructuring funds. With capital markets essentially closed, we reluctantly found it necessary to seek financial assistance from governments in the U.S., Canada, and elsewhere.

You will recall that on December 20, the Ontario and federal governments made a most welcome and appreciated offer of financial support, proportional to what was being discussed between the auto companies and the U.S. government in the United States. This sent a very positive message to all levels of our company, the U.S. government, and GM's many stockholders. We began detailed discussions and due diligence with the Province of Ontario and the Canadian government. Those have continued well, under appropriate non-disclosure agreements with respect to competitive information.

In the United States, on December 31, 2008, our corporation reached an agreement with the United States Treasury. This financial support, together with our own efforts in Canada to conserve cash, has enabled us, up to now, to operate our business without having to draw support from the Government of Canada. While we welcomed the offers of support in Canada in December, I think we also agreed it was far preferable to take the approach we have in, first, developing a credible long-term restructuring plan that will enable GM to repay any loans and, second, reaching an agreement for support.

Our plan for Canada is based on significant shared sacrifices, and it respects the government's stated principles of maintaining our proportion of production in Canada in exchange for drawing support proportional to that offered in the United States.

Let me spend a few minutes talking about our restructuring plan. The plan we have developed and discussed, with considerable input and review by the governments, has three broad elements, which might be compared, if you will, to the need of a homeowner, facing a large mortgage and a severe cut in income, to first significantly reduce household expenses and then seek to refinance the mortgage.

Our plan does that in three elements. The first is to adopt a new, lower-cost contract manufacturing business model that will help ensure a more steady stream of income while taking all necessary steps to reduce our costs. This has included significant cuts in executive and salaried work benefits and wages.

The second element is a negotiated new contract with our Canadian Auto Workers partners to bring wages and benefits for our active and retired hourly workers to benchmark levels, and also the establishment of a new post-retirement health care structure similar to the U.S. VEBA model. This work remains under discussion and is very important, as the more we can together reduce our costs the less we will need to borrow.

The third element is the necessity to refinance GM Canada's balance sheet, to reduce our carrying costs and ensure a viable stand-alone business in Canada able to generate profits and repay loans from the Canadian taxpayer. We are working very hard to reach these necessary agreements in the month of March, as GM Canada will then start approaching the minimum cash levels required to sustain our business.

Let me also highlight a few things our plan would enable us to do in Canada. The plan would maintain our share of Canada-U.S. production in the 17% to 20% range. It would have no further plant closures or significant structural reductions in employment beyond those we have already announced. It enables the launch of five new product mandates in Oshawa and our CAMI joint venture, including Canada's first hybrid car production and new transmission investments in St. Catharines. It allows us to proceed in Canada with research and development work related to the electric car systems for future vehicles that would follow our new Chevrolet Volt, and we will build upon our collective university research and development relationships, including with four key universities in Quebec. It would allow us to sustain our auto supply chain and dealer operations across Canada. These have been mapped out for you in our submission.

Of course we will proceed with a very attractive new GM vehicle lineup, which now includes more available hybrid models than any competitor in Canada and will soon include the Chevrolet Volt extended-range electric vehicle.

Now, we also understand the committee is interested in what can be done to assist the auto sector through this difficult period. Let me conclude with just a few of the recommendations we have thought of, and then we will be pleased to take your questions.

On the credit front, credit is now critical for companies, suppliers, dealers, and consumers. The government has responded with an initiative to provide $12 billion in financial assistance for secured credit, and a consultation period is under way. This support truly needs to move fast and extend to groups like GMAC, who assist auto dealers to maintain their operations and finance their vehicle inventories. We were also pleased to see that Export Development Canada has extended receivable insurance to assist Canadian auto parts suppliers.

Relative to consumer stimulus, around the world governments are now providing new direct forms of stimulus to help consumers with the purchase of new vehicles. This help comes in many forms, ranging from targeted income tax credits or sales tax reductions to scrappage programs like Germany's offer of approximately $4,000 in assistance for consumers who retire old, higher-polluting vehicles from the roads and buy new ones. It would be equally beneficial to start removing some of the outdated federal and provincial taxes or levies that remain in place on automotive manufacturers, dealers, and Canadian new buyers. Clearly, all action to accelerate the return of the consumer to the new car market would be welcome.

Finally, relative to regulations, we must recognize, as I believe the federal government clearly understands, that Canada enjoys a significant amount of automotive investment, employment, suppliers, R and D, and related spinoffs because we are fortunate to be part of the largest integrated auto market in the world in North America. In Canada, we have approximately 10% of the North American market sales, yet we have 20% of the production here. It is, therefore, critical that Canada not regulate its way out of the integrated market through the tyranny of small differences in automotive regulations. You would be hard pressed to find a more regulated industry in the world than the automotive industry. We can cope with regulations, but we cannot cope with a patchwork of disharmonized regulations that generally offer little or no incremental benefit, but do add massive incremental costs that we must ultimately pass to the consumer.

Mr. Chairman, with that overview, let me turn it back to you for guidance. David, John, and I would be pleased to take your questions.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Elias.

We'll use the order of questioning set out in the routine motions of the main committee, so we'll spend about an hour providing the members with opportunities to ask you questions.

We'll start with Mr. Valeriote.

[Frank Valeriote, Liberal, Guelph, ON]

First of all, I want to thank Mr. Paterson, Mr. Elias, and Mr. Stapleton for coming on short notice. I appreciate it. I know we've talked before, and I appreciate those talks. I read the rather lengthy report that you provided and I very much appreciate the effort that went into that submission to the federal government.

I'm particularly interested in some of the irritants that might exist right now. I understand you're trying to reduce your structural costs and renegotiate your contracts with CAW. I'm sure those are very sensitive discussions going on at the moment. But from reading your report, I understand there are some other issues. You've alluded to them: the scrappage program, levies, regulatory issues. You seem to intimate that we ought not to promote these regulatory issues too much. On the other hand, I know they need to be harmonized with respect to emission standards, safety, etc.

Can you talk to us and be more specific about the scrappage programs, the levies, and the regulatory issues, and even the trade impediments that you refer to in your report?

[Arturo Elias]

Yes, let me talk about the harmonization of regulations. We at GM design vehicles for the North American market, and obviously we enjoy here in Canada the benefit of the economies of scale that harmonization brings. It's akin to procuring the same part and you get the benefits of the volume of scale. So maintaining and moving towards harmonized regulations, whether it be in safety or fuel economy, is very desirable.

With respect the CAW agreement, I can tell you that we were very pleased that tomorrow we will start formal bargaining discussions with our labour partners. The key message I would like to say is that all of our stakeholders are much aware of the situation and the challenges that our company and our industry face. I think there's general consensus that there must be shared sacrifice to reach competitive levels that will enable us to sustain our operations in Canada. So I am optimistic that we can achieve, through our bargaining process, the type of results that will enable us to have a very strong car company over the long term and, as I indicated in my remarks, repay the Canadian taxpayers.

David, would you like to add something?

[David Paterson, Vice-President, Corporate and Environmental Affairs, General Motors of Canada Ltd.]

I'll just pick up on the comment where scrappage was mentioned, for example. This is an area that General Motors Canada perhaps has more experience in than anyone else in the industry in Canada because of a relationship we've had with the Clean Air Foundation over the last several years. We offered our customers a $1,000 credit toward the purchase of a new car if they demonstrated they had removed a car that was 10 years or older and made sure it was scrapped from the road.

In Canada we still have over one million vehicles registered on our roads that are over 10 years old. The degree of technological improvement that has happened in terms of not just fuel economy but particularly in terms of reduction of all kinds of other emissions, particularly emissions that are health related, is extraordinary. Every time we get an old vehicle off the road and replace it with a new one, we automatically get an environmental benefit.

We found this program that we offered together, called Car Heaven, was extraordinarily positive. We were able to retire over 30,000 old vehicles from the road and we were pleased to have been awarded a Canadian Environment Award for climate change for the work, together with our partners at the Clean Air Foundation.

Around the world, in Germany we cited a program that is doing effectively the same thing, but they are providing quite a significant benefit to someone who does this trade-in, trading in the old and making sure it's scrapped. It must not come back as a second-hand vehicle. The German government is offering the equivalent of about $4,000 Canadian, and that incentive is clearly working in the German marketplace.

One lesson we would underscore is that the more straightforward and simple these programs are, as was the GM program, the more effective they are. That is one mechanism that really does help bring consumers back into the marketplace, but we have suggested a number of other ones.

You asked about regulations as well. I'd say we have seen some very positive change, with the current government taking on issues such as the bumper regulations, which had been disharmonized for a long period of time, but we still have a list of over 30 different regulations, which are often safety regulations, or others that are just slightly disharmonized in various ways. Progress is being made toward taking away that tyranny of small differences, as we call it, and it's very important because even though these differences can have no appreciable difference in terms of safety, they can cost hundreds of millions of dollars in terms of design changes that are required just to be able to bring a vehicle into the Canadian marketplace.

Again, removing some of those taxes, those barriers, are all things for the longer term that can really help the auto industry.

[Frank Valeriote, Liberal, Guelph, ON]

Are you encouraging a better scrappage response from the government? And would you talk about the green levy?

[David Paterson]

I can do that quickly.

We certainly think that one of the outdated levies we pay, which costs us millions of dollars, I must say, is a levy that was part of the ecoAuto rebate program. We'd like to work together with the government in designing these programs to make sure they can really work. We think there are lots of good models around the world. I mentioned the German one. We're seeing them increasingly taken on, but these things always work best when we do them in consultation and help design something that will really work.

You will hear from the dealer association later. They have some excellent ideas in this area as well. I'm sure that, working together, we could find some additional stimuli that would really help on the consumer side.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Paterson.

Monsieur Vincent, vous avez la parole.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chair.

Welcome to the committee.

The federal and Ontario governments have appointed a special advisor to examine the problems plaguing the auto sector. His name is Mr. Jim Arnett. Have you met him? Did anything come out of this meeting?

[Arturo Elias]

Bonsoir. I'm sorry I don't speak French. I wish I did.

We have met with Mr. Arnett. He is part of the group we have met that includes federal government representatives from Industry Canada; members from the Ontario Ministry of Economic Development; members from Export Development Canada, EDC; and ourselves, of course. We have had several meetings with them. I would say the meetings have been extremely constructive. The key objective of all of us has been to put together a plan that is based on conservative assumptions, a plan that makes fundamental change that would allow us to have a viable company over the long term, a company that is self-sustaining, a company that is able to repay the Canadian taxpayer, as I indicated in my remarks.

[David Paterson]

I just might add, to be precisely clear, that Mr. Arnett is in a function of advising the Ontario government more specifically and directly. That is his official role. But indeed, as our president has indicated, we've met with all of these officials and are together doing extensive due diligence on our business, I must say.

[Robert Vincent, Bloc, Shefford, QC]

Thank you.

As you know, the Conservative government will be injecting $2.7 billion in Ontario's automotive sector. Earlier, you mentioned the Canadian taxpayers. It's important for Quebec and Canadian taxpayers to have a clear understanding of your restructuring plan, because the sums of money involved will come from their tax dollars.

Can you reassure us at all about how you intend to spend tax dollars on the restructuring plan? Those who have invested some or all of their savings in your company need some reassurance.

[Arturo Elias]

Thank you very much.

First among the elements of our plan, as I indicated, is the self-help that we must do in the company to reduce the cost of operating our business. I can tell you that the three of us have taken salary cuts of 10%. We have made reductions in wages. We have restructured our operations. We are working on all elements of our costs.

Therefore, I think that, combined with an agreement with our Canadian labour partners and financial support from the federal government and Ontario, will enable us to have an operation that is sustainable, as I said, and that allows us to restructure our balance sheet and ensure that we have a very lean and green sustainable company over the long term. I think our plan does that. I think our plan delivers on that. We are looking for agreements with all of our stakeholders here in the month of March to make that happen.

[Robert Vincent, Bloc, Shefford, QC]

There are three key elements to your restructuring plan. I read that in Auto 123. The first element calls for reducing the cost of your operations; the second involves the adoption of a contract manufacturing business model.

I'd like to hear more about the second element, namely contract manufacturing. Will you be awarding subcontracts to Quebeckers and Canadians? Does your restructuring plan call for keeping these subcontracts here at home, in North America, instead of awarding them to China or to some other countries?

[Arturo Elias]

I'm sorry, can you please repeat the last part? I had a problem with my audio.