Subcommittee on the Automotive Industry in Canada Committee on March 9th, 2009

[David Mondragon]

That's fair, Michael.

This was written by Sally Gibbs. I don't think she had the ability to translate it for us, but we will translate it for the group.

It was to Mr. Alan Mulally. It says:

THANK YOU!!!!!! For NOT asking for taxpayers money to bail out your company. I know times are hard, but you have a good product and you can make it through this! I had a 1993 Ford Ranger and put 269,000 miles on it. Just please stay responsible and accountable. The Americans appreciate that and they will choose Ford over the others that take the taxpayer money for their mistakes. Here is $10 to help you guys get back on track.

Sally Gibbs

Retired USAF and thankful American

I use that as an example.

And please, this is not supposed to be inflammatory towards any of the other manufacturers. It is mostly meant to say that we haven't asked for financial assistance and that is resonating with consumers. They are recognizing that we are in a different place from our competitors in Detroit. Our company is not only on a different glide path given our current liquidity situation, we are also on a very different glide path and trajectory on our new product offerings: on the quality, safety, and technology of our product.

That's what is differentiating Ford today, much more than the fact that we haven't asked for government assistance.

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

Don't get me wrong. The fact that you haven't asked for government assistance is a good thing.

I do want to talk about the secured credit facility. You mentioned that as something important: $12 billion in the budget to help consumers buy vehicles. Obviously it's in the Senate right now. It needs to get passed through the Senate to take effect. It is interesting that you mention it is probably much less than is needed. I think I heard you say $60 billion is what's needed.

I have a hard time with that. When I talk to my constituents, generally the feeling isn't that we aren't giving the auto companies enough. Maybe you can make the argument right now to my constituents, who might be watching this, on how you could justify asking for $60 billion in a secured credit facility.

[David Mondragon]

Let me clarify that. The $60 billion is an estimate from the Canadian Finance and Leasing Association. That is the amount of volume financed in Canada through loans and leasing at a retail level for our dealerships.

Will it be that high? No, it doesn't need to be that high. But if you look at a ceiling, that's the highest level. What's happening now, though, is that we're taking loans, as a manufacturer, as are the other manufacturers, and we are financing deals. But we don't have a market to secure those. There is not a viable market to bundle those and sell them on the open market. First, that creates a huge cash drain on the company, and, second, it limits our ability to offer vehicle financing in the form of leasing. The leasing market with regard to securitization has been extremely tight, not only here but in the U.S.

Basically, with respect to the loans we're offering in Canada today, we, as a manufacturer, are forced to go to our parent company in the U.S. and borrow money so we can offer those loans in Canada. Quite frankly, we're doing business in Canada on borrowed time. We need the Canadian market, the Canadian financial institutes, and the Canadian government to help Canadians help Canadians. This is about stabilizing the economy in Canada, stabilizing an industry that represents 20% of the retail sales, and stabilizing one in seven jobs in Canada.

[The Chair, Conservative, Michael Chong]

Thank you.

Mr. Masse.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair, and thank you to our delegation for being here on such short notice. It's appreciated.

I want to get specifically to your solutions. We've asked you to come here, and I won't speculate on what you might need in the future. I think we want to get some advice here on what would actually protect workers' jobs.

The $60 billion has been noted, in terms of the difference from $12 billion. You specifically outlined a program--the $3,500--based on Germany's. I'm familiar with that and actually commissioned a paper on what Germany is doing for their workers. But there's one thing I worry about with the 10-year cut-off. Do you not fear that if you had a vehicle at eight or nine years you might not take advantage of it? Would it not make more sense to have a progressive payment if you had an eight-, nine-, or ten-year-old vehicle? I'd hate to see people with a nine-year-old vehicle wait another year when maybe you could phase something in a little bit different.

What are your thoughts on how to make sure this program works?

[David Mondragon]

First and foremost, sign us up. We'll take eight years, nine years, seven years, six years, five years. Ten years seems to be a number.... If you look at what they did in Germany, any vehicles nine years or older were included in the program. If you look at Canada, 30% of the fleet is 11 years and older. So it depends on how much of the fleet you want to impact and how robust the program is that the government can support.

To do a program in Canada similar to what they did in Germany is going to cost money. If you offer $3,500 a vehicle and do 100,000 units, that's $350 million. It's not cheap to do, but it will be effective.

If you look at what they experienced, they forecasted a 7% incremental increase in sales in Germany as a result of that program--200,000 units. Their industry is a little less than two times the size of our industry here in Canada, so if we were to do a program of similar value, a good ballpark estimate is that we'd be able to experience around 100,000 units. That's basically the cost of the program. But the lower you go, the more impact it will have because it will offer the opportunity to a broader audience to purchase vehicles in a very difficult environment.

[Brian Masse, NDP, Windsor West, ON]

It's also critical that people really understand what's going on out there with the credit market. You mentioned you haven't had much of a relationship in financing with the major financial institutions in the last couple of years. I think it's important for people to know--and I've raised this a couple of times--if you go to the websites of some of the major banks that are turning profits right now, they have interest payments for car loans anywhere from 5%, if you're a good credit risk, up to 14%. I know some dealerships are offering people with bad credit or difficult credit up to 30% interest.

Do you think the government should be doing some type of regulating there? If we don't come up with the $60 billion, we'll have to find financing somewhere else. The banks have money right now. They're still turning a profit. In fact they're the only ones making money on automobiles right now, which is outrageous. So is there a role there, especially since the Bank of Canada rate is so low right now?

[David Mondragon]

First and foremost, I'd say, just to expand on your point, the market here has basically shut down asset-backed security lending and financing.

That's the first and foremost thing that needs to happen. We need to loosen the skid. We need the government to open those doors and those channels, and quite frankly, it's a very good opportunity to get a great return on investment, because they are asset-backed securities. It means you have a note but you have a very tangible asset that has a great value that you can have support the note; it's not like there's air behind it.

The second thing is that the securitization and the open market needs to support loans, leases, and wholesale, all three of those components. We're having a very difficult time. A lot of dealers are losing wholesale lines. We have some major fleet accounts that aren't able to get financing, that are having to turn away from replacing and replenishing their fleet because they can't get financing in the open market.

There is only one place that is best suited, in my mind, to help facilitate these transactions, and at Ford that happens to be Ford Credit. Captive financing knows this business. We know how to loan, we know how to finance, and we know how to lease and carry wholesale lines. It's our area of expertise, and we know how to stimulate the business. You won't see the Ford Motor Company out there with a 30% rate for a customer. We offer value financing for consumers that is competitive in the marketplace, and we're driven by our competitive set as well.

The biggest casualty of the shortage of ability to finance securities in the market is leasing. The person who is paying the price for our drawdown in leasing.... If you look at leasing now, we're leasing as a brand at about 10%; we used to lease close to 50%. GM is down to single digits, Chrysler is at single digits, and we all used to lease at 40% to 50%. Who's paying the price for that decline? Our consumers. The reason consumers pay a huge price now is because they're forced to finance a vehicle and purchase a vehicle because we don't have an avenue to be able to support leasing.

Now, we do lease 10%, so we're still leasing, but it's a far cry from the normal consumer demand. What happens when a consumer buys versus leases? They have to pay taxes on 100% of the vehicle they buy. When you lease you pay taxes based on what you pay in each month, and if the vehicle has a residual lease-end value of 50%, that means you're only going to end up paying taxes on 50% of the vehicle. So we're penalizing a lot of consumers. The ripple-through effect is much greater, if you want to ask an expanding question, in terms of the duration of contracts today versus what they were just a few years ago.

[Brian Masse, NDP, Windsor West, ON]

I'm very familiar with this, and I'm glad you brought the leasing up because it hasn't been discussed at length here. And the fleet procurement is so important, I see that in my home town. A mini-van can get a fleet procurement...that really affects the order sales. As well, too, it's about businesses being competitive because they modernize their services.

I would be remiss if I didn't ask you about this issue. I do have a private member's bill out there with regard to the after-market. It may perhaps get to second reading. Would you be willing to constructively come back to the committee at that time to discuss it? What we're looking for is a solution to the problem we have in Canada. There are different sets of information between Canada and the United States, so we're looking for a solution for that. Quite literally, I can get into my car and drive over to Detroit, Michigan, in 10 minutes and have my vehicle serviced by a technician who doesn't have the same qualifications as someone here in Canada.

I agree with the suggestions that you've presented here about getting new vehicles on the road, which is very important, and especially to also fight the misconception that exists. Between your company, General Motors, and Chrysler, and also the overseas markets, some of the vehicle products coming out are very exciting and are better for the environment.

At the same time, we do have the after-market issue to deal with. Would you be willing to come back at that time to talk about a constructive solution to this problem?

[David Mondragon]

I'm going to let Caroline answer, but before I pass it to Caroline, I would say a resounding yes, we would love to. I think it's imperative that the manufacturers are part of the resolve. We can't move forward with an initiative like that without getting a manufacturer's input. The technical nuances of the vehicles today are so complex and they vary so much from the vehicles of yesterday that there are a lot of things we need to discuss and take into account.

The first level of expertise that any mechanic needs to have today is electrical and computer, because all of our vehicles now are driven by very complex computer systems, so that's definitely something that we don't take lightly. We would love to be a part of the resolve, and I think we can add a lot of value to the committee, so we would appreciate that.

Caroline has been very involved with this as well.

[The Chair, Conservative, Michael Chong]

Thank you.

[Caroline Hughes]

I believe you're talking about the right to repair bill. We'd be happy to come back and talk to you.

As you know, our dealers spend a lot of money on training and on special tools so they can repair the vehicles. As those vehicles become more computerized and include more technology, we want to make sure that at the end of the day we do the right thing by the customers.

We'll be happy to give you some input on your bill.

[The Chair, Conservative, Michael Chong]

Thank you.

We'll go to Mr. Valeriote.

[Frank Valeriote, Liberal, Guelph, ON]

Mr. Mondragon, as you know, every single member of Parliament around this table is concerned about taxpayers' money and its proper investment and about the preservation of jobs. They seem, at this point, to possibly be two competing interests, depending on how this government responds to the needs of the industry.

The reason you're here before us is that we need to have your opinion on where you see this industry going five or ten years from now. Nobody wants to invest $7 billion to $10 billion to keep the lights and heat on for six months. The industry could go through that very quickly.

Could you tell us how you see the industry five years from now and ten years from now? What do you think it will take to make this industry sustainable in the long term?

I'd like that answer from an industry-wide perspective and not from just Ford's perspective.

[David Mondragon]

First and foremost, what the industry needs is to find the bottom. The U.S. hasn't found the bottom, and we, quite frankly, have not found the bottom. There are great opportunities for the government to help the industry and the economy gain confidence and establish the bottom, and, as I said before, to put an anchor at sea for our boat so that we don't keep drifting deeper and deeper into a decline.

If you look at our industry right now, Ford is forecasting a 13% decline year over year, as I said. We're not forecasting that our sales will go down by 13%. Our sales decline will be far less than the industry decline, based on some of the things we talked about earlier.

That said, if you talk to some analysts in the industry, that decline varies. It goes as low as 20%. If we follow the same path that the U.S. has experienced, peak to trough was 42%. If we follow that same path—and we seem to be going down the same road today—without levelling off and finding a bottom, we're going to go from an industry of 1.7 million to an industry of a million, which will be catastrophic.

As I said before, that's $40 billion to $50 billion in sales. That's nearly $6 billion in tax revenues across the country. Main Street Canada is the area where this will hurt the most.

[Frank Valeriote, Liberal, Guelph, ON]

I want to know about five to ten years from now. How do we make this industry sustainable? Do you have an opinion on that?

[David Mondragon]

I sure do. First and foremost, it's strengthening and stabilizing the financial markets. Without a financial market that's viable, without the ability for auto manufacturers to finance vehicles for their dealers, to finance vehicles for consumers, and to keep a robust trade cycle in place, the industry will not strengthen and will not grow. It has to be revolving. It can't be that we put $12 billion into the market and when that dries up there's no more ABS. What's going to happen is that we're going to just go up and then back down. It will be a roller coaster. We can't afford to allow that to happen. First and foremost, it's loosening the credit markets and allowing and supporting asset-backed securities. That will help stabilize and grow the market.

The second, short term--I talked about finding a bottom--is the stimulus package. We need to reach out and put money in the hands of consumers. The consumers need confidence in the economy. They need confidence in the government, and they need confidence that they're going to go out and buy a vehicle they can afford.

[Frank Valeriote, Liberal, Guelph, ON]

Let me ask you this. Do you think $10 billion will last? Will it be enough, or do you think the industry will be back to us?

[David Mondragon]

I'm sorry, is it in regard to the $10 billion?

[Frank Valeriote, Liberal, Guelph, ON]

On the $10 billion, in respect of the current loans assistance they requested, do you think, in your opinion, that it's enough, or will they be back for more?

[David Mondragon]

Quite frankly, it's out of scope for me to make comments on any other manufacturer's plan. Everyone is working very diligently to manage their own business, and it's out of scope for me to talk about GM or Chrysler, and I won't do it.

[Frank Valeriote, Liberal, Guelph, ON]

Okay. You spoke about a loss of sales in Ford. Can you translate that loss of sales in Canada into loss of jobs?

[David Mondragon]

Well, let's think about that. I haven't really thought that through. If you lose sales, it puts pressure on production facilities. What's the output of an average production facility in Canada--100,000, 150,000? If you draw down 250,000, maybe you don't need two plants in Canada. If you draw down 700,000, what does that equate to? So there is risk to footprint.

If you look at the industry in total, capacity utilization is one of the biggest issues the industry faces. Worldwide there are approximately 90 million units of capacity. Demand this year could be 60 million or fewer, so that's something that has to be addressed. The worse the capacity utilization scenario gets, the more difficult it is ultimately for manufacturers to be profitable and viable going forward.

Retail outlets are the other part of that. If you take 250,000 units out, the impact on your retailers is great. Our average dealership in Canada sells 500 new, so bang, that's 500 times 250,000, and there's your number. How many fewer dealerships do you really need in Canada now? What's the impact on our retailers? There's your real impact on jobs. It's not so much our production facilities. It's the little towns across the country that will lose dealerships as a result of this. When they go, a great pillar in the community goes, and a huge financial anchor in the town goes. That's an even greater risk. The average dealership employs 50 to 100 employees. If you do the math, it's a substantial risk to our economy, to our lifestyle, and to the average Canadian.

[The Chair, Conservative, Michael Chong]

Thank you.

Mr. Young.

[Terence Young, Conservative, Oakville, ON]

Thank you, Chair, and welcome to my constituents and the people who are responsible for about 4,000 jobs, including spinoffs, in Ford and the surrounding areas. It's great to see you. I invited you to Ottawa and you came, so thanks for coming.