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

[Atul Bali]

We, the automotive parts manufacturers, believe that the government has not moved very fast. It has not moved fast enough. On one given street called Weber Street in Waterloo, among eight who are on that street, we employ 1,300 people. On that same street last month, we had to lay off 650 people, so clearly the government needs to move much faster.

I think the intent is very good and very noble, but we do definitely need to have a way in which the programs that are put into place and the instruments of public policy are directed to undertake these programs expeditiously.

[Frank Valeriote, Liberal, Guelph, ON]

Could I ask one more question, Mr. Chair?

Mr. Gauthier, this relates to the repair issue that you brought up. I'm sorry, but I'm going to read this. It was a question I had prepared and I just had them send it back to me. I didn't think I'd have this opportunity.

In the United States, manufacturers have collaborated with aftermarket repair stakeholders to create the National Automotive Service Task Force, which facilitates the flow of relevant servicing information to those who need it and even includes an inquiry system to deal with complaints. In 2004, of the 500 million non-warranty service events, there were only 48 inquiries.

I'm just wondering if you're familiar with that project in the United States. Might that be a reasonable solution to this issue of repair that's embraced by Mr. Masse's bill?

[Richard Gauthier]

Thank you for the question and the opportunity to respond.

I believe the statistics you're quoting were taken from our own submission with regard to that matter. Yes, we are familiar with that program. We are also familiar with the statistics that you've quoted.

In that vein, we certainly believe that a voluntary solution is the way to approach this. I believe the previous witnesses from General Motors alluded to that as well. We certainly would support a voluntary approach to this. We certainly don't think there is a need for a legislated approach.

The bottom line is that we get absolutely zero phone calls from consumers complaining that they are having difficulty in accessing servicing for their vehicles, either outside or inside, within warranty. As we've stated in our own document, the right to repair issue is really a solution in search of a problem. We believe that a voluntary approach is the way to go on that. We would certainly be willing to cooperate with all parties in order to be able to arrive at that kind of solution.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Gauthier.

Mr. Young.

[Terence Young, Conservative, Oakville, ON]

Thank you.

I'd first like to say, Mr. Gauthier, that I thank you for recognizing the late hours, because I know that the folks who build the Fords in my town work 10-hour shifts. When I was in the car business way back in the seventies, we worked until 10 o'clock at night. It seems that every time I have anything to do with the auto industry, it's 9:30 or 10 o'clock at night and we're still working.

[Richard Gauthier]

I'm sure that as a former automotive worker you're certainly used to these hours.

[Terence Young, Conservative, Oakville, ON]

That's exactly right.

I met with one of the auto dealers in Oakville recently who had the exact problem you're talking about. This was a winning automobile dealer, right on the business plan, whose sales, by the way, were right where they should have been until November. Like the Canadian automotive industry, until November, sales were right where they should have been. They started to fall in December.

It was December when it became quite evident that there was a problem. He had a $7 million loan guarantee to build a brand new dealership. He was on his business plan. He had $1 million cash. The bank came back to him and said, “Okay, we'll still give you the deal, but we want a point and a half higher”, which is understandable. But then they said, “Oh, by the way, we want another half a million dollars cash.” So he basically had to go home and tell his wife that he had to put a mortgage endorsement on their house to build this dealership.

The real problem is that it got worse for him, because he then went to the other banks and they said they wouldn't be doing business with anyone who didn't have a prior business relationship with them. It's effectively a monopoly.

So we've introduced this $12 billion credit facility, and it's my impression from what you said tonight that it's absolutely critical to get it up and operating as soon as possible. Is that correct?

[Richard Gauthier]

Absolutely. And I have to say, without any hesitation or sense of exaggeration, that we are hearing stories like the one you quoted, sir, every single day. Long-standing bank customers who have been with one particular bank for 20 or 25 years all of a sudden are finding themselves having conditions imposed that seem to come out of nowhere.

We have a situation in Canada where the prime rate is going down--almost daily now--and yet the banks, when it comes to the automotive industry, are increasing rates. Their cost of funds is going down, and yet they're increasing rates at the rate of 3% or 4%. I've seen 5% for a group of dealerships out in western Canada.

So we are running into that every day. I support what you said.

[Terence Young, Conservative, Oakville, ON]

Thank you.

To Mr. Fedchun, I had a visit from a gentleman who lives in my riding of Oakville but who operates parts manufacturing in Brantford. They make manifolds for mufflers that go to plants in Mexico and the United States. These are put on engines in plants in the States; come back up to Oshawa, where they're put on Chevrolet Malibus; and then they are shipped back to the States. It's a real, true-life example of how integrated your industry is.

I'm trying to understand, though, what patient capital is and why it isn't happening. Maybe you can explain that to me.

[Gerald Fedchun]

Patient capital is simply capital that looks at this as a longer-term relationship. Right now the regular financial institutions are looking at your sales over the next six months, at whether they're inadequate. And they are inadequate; we're down 40% in production from what we normally are.

Capital has to look through the haze of this next year and ask, what is the viability of this company in mid-2010 and 2011, when we get back to more normal production volumes of 12 million and 13 million? You have to remember that we averaged 16 million units of production in North America for the last 10 years. Then the bottom dropped out to 10.5 million. Now it's looking as though we're going to hit 9.5 million units. You have to look to that and say, what does this company look like, even at $11.5 million or $12.5 million? Right now banks don't do that.

[Terence Young, Conservative, Oakville, ON]

Thank you.

Mr. Bali, could you please give me the acronym that you use for your plan?

[Atul Bali]

It's FRAES, which stands for facilitating redeployment of assets, engineering, and market service.

[Terence Young, Conservative, Oakville, ON]

I just want to make the comment that I think it sounds brilliant. I'm going to follow up with the minister as well.

[Atul Bali]

Thank you very much, sir.

As well, I'd like to help with the definition of patient capital. The way BDC defined it for us is that it's looking at a company's two-year cashflow projections, looking at not even taking interest perhaps, let alone principal, for the first six months of this two-year horizon. Then it's taking only the interest over the next six months--i.e., month seven to month 12--and then the back-load interest and principal from month 13 to month 24.

That's the patience part of the capital. The other part of it, of course, is that if you look at LIBOR rates today, you'll see LIBOR plus 2%, perhaps, or LIBOR plus 3%, not LIBOR plus 7%, which the banks would typically offer.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Bali.

Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chair.

Mr. Gauthier, you stated earlier that credit was very tight and that automobile dealers were being charged an additional one per cent.

How can we help you to better weather this financial storm? Is there a direct link between auto repairs and auto sales reported by the same dealership? If sales are down, is it possible for the number of repairs done to remain steady, or do the figures drop in the case of new and used vehicles?

[Richard Gauthier]

Thank you for your question. I'm happy to be able to answer it.

First of all, the best way to help our dealers would be to approve the $12 billion package as quickly as possible. We believe that these funds will help the financing arms of the auto companies to have more cash at their disposal. Then, our dealers will not have to rely so much on banks, which are not interested right now in lending them money.

We realize that given the current economic conditions, it is impossible to completely eliminate the need to do business with banks. However, if dealers can at least have a chance to finance their operations by doing business with the financial arm of the parent company, for instance, with GMAC, Toyota Financial Services or Ford Credit, then they would not need to deal with banks so much. Besides which, these banks do not want to do business with the auto dealers at this point in time.

We're recommending that the Senate approve this $12 billion bailout package as quickly as possible. We feel that this would greatly ease the pressure on our sector.

Elsewhere...

[Robert Vincent, Bloc, Shefford, QC]

Are there any risks involved? We're talking about the taxpayers' money, about $12 billion that comes from the money Canadians pay each year in taxes.

How do you plan to reassure taxpayers? How to you intend to convince them that you will weather this economic crisis in an honourable way, without squandering their tax dollars? Some dealerships may not be so successful. How can we regulate this situation?

[Richard Gauthier]

That's a good question.

First, let me clarify one thing, Mr. Chair. The $12 billion is neither a loan, nor money from taxpayers. Basically, we recommended that the Business Development Bank of Canada buy back the financing contracts and leases of these financial companies. Normally, these companies would sell these contracts and leases on the open market in exchange for liquidities. The Business Development Bank of Canada would buy back these leases as securities and would then have the receivables associated with these financial documents. In essence, the taxpayer would benefit as a result of this transaction.

We're not taking taxpayer dollars and giving them it directly to this sector. This is not a loan. We are buying back an asset from Toyota Financial Services or from GMAC, which cannot currently sell these securities on the open market. Normally, they would turn to life insurance companies, to pension fund companies that would buy these securities in exchange for liquidities. SInce there are no such buyers, whether life insurance companies or pension funds, in the current market, the government has agreed to step in for these companies temporarily. This is a temporary situation, since the average length of these contracts and leases is about 33 months. We are confident that over the next two to three years, the market and the economy will recover to the point where the government can let market conditions play out and our companies can again experience the capitalization level they have enjoyed in the past.

Therefore, this is neither a loan nor money that comes from taxpayers. We are purchasing an asset, whether a financial contract or a lease, and in the process, reintroducing liquidities into the system.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Gauthier.

You have the floor, Mr. Lake.

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

This is an interesting meeting for me—the two meetings back to back. The average Canadian looking at this situation, when hearing from the manufacturers and the dealers, would assume that the challenge is identical or very much related, and they are related to an extent. But if I'm hearing correctly, what the manufacturers face is as a direct impact of what's happening in the U.S. and the global market, in the sense that Americans stopped buying cars made in Canada. This had a direct impact on the business and on the parts business as well, whereas CADA and the dealers are dealing with the Canadian situation—with an indirect situation wherein Canadians who have jobs or had jobs have faced economic hardship because of what happened in the U.S. situation. When those Americans stopped buying Canadian goods, Canadian employees were affected and stopped buying cars from the dealerships here in Canada.

And there is an important distinction. We're helping the manufacturers with the loan program we're putting together and everything else, and of course that's going to have an impact on the parts manufacturers. But for the dealers, it's an entirely different situation. It's that credit situation. Canadians aren't buying cars because they can't get the credit to buy the cars—or because they've lost jobs and income and can't buy the cars, but the credit side of things has seen a significant impact.

I want to go to something Brian was saying, if I may. He used the phrase “best in the world”. He used it in a little different context, but one of the things that are important to note is that the Canadian banking system is the best in the world. We've had a lot of conversations and we hear different ideas on tinkering with the banking system—maybe doing some fairly significant tinkering with the banking system—but we have to remember that according to the World Economic Forum, our banking system is the number one, the most secure banking system in the world, whereas the American system was ranked number 40.

The Economist noted in an article from the fall that “in a sinking world, Canada is something of a cork. Its well-regulated banks are solid.... The big worry is the fear that an American recession will drag Canada down with it.” That is what The Economist noted in the fall. Newsweek , about a week ago, noted that “Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize.” They went on to say, “If President Obama is looking for smart government, there is much he, and all of us, could learn from our quiet...neighbor to the north.”

I want to ask this question. We're dealing in the short term with the EDC, the secured credit financing, the loan to the manufacturers, and the impact that it's going to have. But in the long term, how important is that solid banking system at the core to the business you have, to the long-term success of the organizations you represent?

[Richard Gauthier]

First, let me say that your analysis of the situation is right on. You have all of the dynamics exactly where they belong. That is in fact the crisis we're facing at this point.

While there is a lot of press with regard to the strength and viability of our banking system in Canada lately, it's not a secret that the Canadian banking system, for the longest time, has been perceived as the most solid and financially stable banking system in the world. I think what we're seeing worldwide now has just reinforced that notion, and this is an opportunity for us to take some pride in that, obviously. However, the banks, in our view, also have a corporate responsibility during these very unusual, unprecedented economic times to come forward and help government and corporations and citizens work their way out of the downturn in the economy that we're living through right now.

This is an unprecedented situation. As I said, I have been through a number of recessions as a businessman. I have never seen anything quite like this. This is a time when our Canadian banks have been able to show what they are made of, but this is an opportunity for them to step up to the plate, as government is doing right now, and do their share in helping stimulate the economy and help us out of this. It is only with their help and their willingness to step forward that we will come out of this in a much shorter timeframe than other countries.

Banks are risk averse, and we're seeing that right now. I use as an example the government's initiative to buy $125 billion worth of mortgage commercial paper from them over the course of the last year, yet without our seeing that money trickle into the real economy. That's an example of where they need to be able to step up and say that if the government is going to take these mortgages off their balance sheets in exchange for cash, they then have an obligation to make that cash work for the economy.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Gauthier.

Mr. Masse.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

Mr. Gauthier, I appreciate the suggestion of a voluntary agreement. Unfortunately, that's really not up to dealers to decide; the problem is with the manufacturers, who won't provide that information because it's proprietary information. As you heard from General Motors, they also don't oppose it. It is important as well to note that in the United States it is legislation. The environmental protection act is part of the recipe in the agreement they have, and there is legislation working through the courts too.

Perhaps we can move to something we agree on, so that we can spend some productive time together and maybe agree to disagree on this issue later, at some other date.

You did mention a suggestion about what Germany is doing with respect to $4,000 per vehicle purchase, which sounds good on the surface. I agree that some of the incentive elements can be very important and popular. Unfortunately, this government's past practice with the ecoAUTO feebate program saw the Yaris, for example, receive a significant amount of cash from Canadians for a vehicle produced overseas. That really didn't help our economy here. It helped get the Yaris on the streets and it provided Toyota with a competitive advantage, but it hurt other Canadian manufacturers who also paid a tax and continue to do so on certain vehicles, because the tax element is still there. The industry estimates that around $40 million to $50 million a year was paid on the tax when the vehicle sales were at their normal level.

To get right to the heart of the question, if we could find a model that was sufficient in terms of an incentive to get there, there would be cynics who would say that's good for the dealers, because they would get the cash. You'd go and buy a new vehicle and then you'd have the servicing agreement that comes with it for the next number of years to get that vehicle on the road.

I agree with some of the environmental arguments you've made, though, and I don't necessarily think that's a bad idea.

What some people might be concerned about is how we guarantee that there isn't a gouging on the price, whereby it goes up because of the $4,000 available. I know that with the government's new home renovation program, whereby you get the money to fix your home, some contractors have already admitted they're going to raise their prices; they've done so right in front of the cameras. I worry about that aspect.

Second, how do we guarantee a low-interest loan similar in level to where interest rates are right now? We all understand that there could be a profit in borrowing; I think people are reasonable about that. With the banks, in terms of their credit card issues and their percentages on loans, we've heard here tonight how difficult it's been to even access credit during profitable times. How do we guarantee that consumers are going to get a low-interest loan for a car?

Yes, there's a win-win: we get new vehicles on the road that become servicing models for your dealerships and provide a credit stream coming in; the production of vehicles is maintained, and hopefully they'll be domestic vehicles. I think that's very important, because I certainly don't want to subsidize Toyota if they're not producing here in Canada. I don't need to subsidize Japan anymore.

Maybe you can respond to that. How do we make that model work really well, or what would you be willing to do to see that it's practically applied here, so that our people who are producing parts for those vehicles are going to have jobs; and as well, to maintain the value for the consumer, if the public's going to expend money to make this happen?

[Richard Gauthier]

It's a very good question. Clearly you are very focused on the whole issue of making sure consumers have access to competitive loans and that they don't get gouged. We are certainly huge proponents of that and we subscribe to it.

I would start by saying that no one can guarantee anything these days, so I certainly wouldn't want to be the one to make such a bold statement. However, I can say that the passage of the $12 billion Canadian secured credit facility would inject liquidity into the hands of the captive finance companies, such as GMAC and Toyota Credit, and they in the past have been the ones to make sure that consumers have access to more-than-competitive loans. We've seen the zero percent and the 1.9% financings. Why have they disappeared from the marketplace? Why has leasing disappeared from the marketplace? It's because they can't access capital to put those financing instruments out there.

I suggest to you, sir, that if these companies can become liquid again, you are going to see a very competitive environment, because right now there isn't one manufacturer who isn't looking for a way to outsell the other manufacturers. The consumer would be the one to benefit from that. As we mentioned earlier, vehicle prices are at their lowest in 25 years. Combine that factor with aggressive marketing plans and finance companies that are flush with cash or, certainly, that have access to capital, and I think there is a recipe that will benefit the consumer.