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

[David Adams]

You've heard tonight, and last week as well, about some support across the board for a sizeable scrappage incentive that really gives consumer incentive to take an older vehicle off the road. The challenge out there right now, whether it's vehicles or anything else, is consumer confidence and what we can do, as an industry, as a government, to try to spur consumer confidence.

When people are concerned about their jobs and about the economy in general, they don't make big purchases, deferral purchases. So if an incentive were to be put in place, such as a scrappage program, around the $3,000 mark, that could bring people back into the marketplace and spur some of that consumer confidence again.

[The Chair, Conservative, Michael Chong]

Mr. Romano, do you have a comment to make?

[Don Romano]

In terms of a sales strategy, I've been in this business for 25 years and there are two fundamental elements to a solid sales strategy. The first is product. In a declining market it's difficult to bring out the kinds of products that will excite customers to come into showrooms. Without that product, without the R and D, without the profitability of the industry, there is no new product. And when there is no new product, there is no future sales strategy.

But all future sales strategies of success will be led by new products, exciting products. You've heard from a number of manufacturers, some of whom will disclose some of the future products they have coming up. Some of us keep them closer to the vest. The most important thing we can do is keep focused on the future and bring out the products that meet the needs of the customers--more fuel efficient, more environmentally friendly, more cost effective, and just more exciting design and engineering attributes. The product has to be number one.

Number two, then, has to be the ability to finance those new products and to promote them to the middle-income Canadians who cannot afford the higher payments today, to be able to have, for instance, lease options, where they're not taking full possession of the vehicle and the ownership and the cost associated with that, but they can lease it, understanding that after a certain number of months they can return the car and buy another car. This increases term rate as well and improves profitability not only for the manufacturers but also for the dealers.

The sales strategy for us is really twofold. It's to ensure the R and D investment continues to bring out the exciting products, and then to work with the government and the banks to ensure financing is available so that they can finance those new products.

Thank you.

[The Chair, Conservative, Michael Chong]

Mr. Worts, did you have a response to the question as well?

[David Worts]

I don't think I'll add anything more at this time.

[The Chair, Conservative, Michael Chong]

Do you have another question, Mr. Vincent?

[Robert Vincent, Bloc, Shefford, QC]

Yes I do, and it's along similar lines.

Your strategy calls for financing and building vehicles designed for the middle class. Have we currently reached a crossroads in terms of sales of these types of vehicles? Let me give you an example. Yesterday, an industry in my riding was paying its workers $15 an hour. In future, however, it will be paying them $12 an hour. Workers have therefore agreed to take a $3 an hour pay cut. Yet, the price of food and other goods hasn't gone down.

Have you considered designing far more affordable vehicles like the ones we hear about that are being built in other countries and that cost between $5,000 and $7,000? Would it be possible for you to come up with some real designs, given the current economic downturn and the wage rollbacks affecting all sectors?

[Mark Nantais]

Maybe if I could start off, I think what we have in play here is that the industry, first off, is fiercely competitive, so there's always downward pressure on the cost of the vehicle. As you heard earlier today, I think it was Mr. Mondragon from Ford who indicated that we've been into negative pricing for a number of years now. So the price has actually come down, and that's been going on. In the end, it will be what the market will bear, but I can say this. When you look at the plans all the companies have—and clearly a new product plan is something that's held very close to the vest—these product plans will include products that people will demand from all different levels of economic income and whatnot, and there will be that full range of vehicles, at least certainly from our CVMA companies.

The other thing here—and this is what I raised earlier—is the whole issue of regulatory differences and unnecessary regulation, because those things can add literally thousands of dollars to any new vehicle. It doesn't matter the size of vehicle. In other words, we can't choose which vehicles to sell that either meet, don't meet, or meet some of those regulations. Everything we sell in Canada must meet all the safety standards, all the emissions standards. So unnecessary costs associated with unnecessary regulations, duplicate regulations, and unharmonized regulations will add cost. If you can remove those things, that helps us get costs down for consumers.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Nantais.

Now we're going to go to Mr. Lake.

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

Thank you, Mr. Chair.

Thank you all for coming to visit us at this late hour.

I just want to start by answering a question Mr. Valeriote had here a few minutes ago. He was asking about what we've been doing.

I note that Dennis DesRosiers had some comments about that. He's been quoted a few times. He said on CPAC the other day: “Mr. Flaherty and Mr. Clement have been brilliant in how they've handled this going way back...”, talking about last summer and last fall. He says, “They came out weeks” after “the American government's going through this ridiculous process”—these were his words, by the way—“in early December of embarrassing the vehicle companies. Flaherty, Clement were up there saying we're there, we'll help you....” Then he finished by saying, “Brilliant by Flaherty and Clement. They really deserve a lot of credit.”

I'm sure Mr. Valeriote in his next round will make sure he gives them that credit.

I want to get to the issue at hand here. Actually, first of all, I want to talk a little bit around this scrappage program. I want to get a little bit of clarification around the scrappage program, because it sounds intriguing. We talk about Germany's $3,500 per car. I think someone mentioned 500,000 vehicles that we have to sell here. As I kind of crunch the numbers, it looks like a program that would cost somewhere between $350 million, and possibly over $1 billion, depending on how many people would take up something like that. Of course, we're in a difficult situation because we're dealing with priorities here. Obviously, there are a lot of pressures on the economy, outside the auto industry as well, and we're putting $34 billion out there in a stimulus plan to try to kick-start the economy.

I'll make one comment first and then I'll ask the question. The comment I would make is this. There's a significant number of vehicles that are sold in Canada but made outside Canada. What would that percentage be--anyone?

[David Adams]

Probably about 85%.

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

So 85% of cars that are sold in Canada are manufactured outside. So a scrappage program that motivates people to buy cars doesn't necessarily help save manufacturing jobs here in Canada; it would help to save a lot of manufacturing jobs outside Canada.

I'm not saying it's not a good idea. I want to make that comment at the front.

Secondly, on the secure credit facility, the $12 billion that we're putting forward, I think that virtually unanimously people have said it's a really good idea to get that money flowing as quickly as possible. But earlier tonight we had some people suggesting that we might need more. I know the minister has not closed the door on looking at more, but on behalf of my constituents.... When we start talking about more money—about a billion dollars, or maybe $350 million, whatever the case is—it becomes absurd, when we start throwing around numbers like $350 million and $1 billion as if they're pocket change. Where does it end? On behalf of my constituents, who ask me this question on a regular basis, where does it end?

[Mark Nantais]

Maybe I can kick that off. First, $350 million was a number we put out for roughly 100,000 vehicles. Our view of this is that we keep the program simple; we don't construct something like what we've already constructed, which is not going to work or provide any real economic stimulus. We need something that's simple, that doesn't create winners and losers, as we did on the ecoAUTO rebate program. We need to avoid those pitfalls absolutely. But it is good money spent, in terms of engendering some consumer confidence. And that's what we really need, because consumer confidence is contagious. Whether it starts in the auto industry or elsewhere, it undoubtedly will spill over into the housing industry and all of the key indicator sectors, we hope. So it would be good money spent, in our view, in addition to these things.

In relation to your question about the number of vehicles sold in Canada that are produced elsewhere, let's remember that we're an integrated industry. Most of the vehicles we sell in Canada generally come from the United States—a high percentage. We're an integrated industry, so many of the parts and components that are in the vehicles we bring in from the United States for sale in Canada actually have Canadian parts content in them, in high percentages. We still benefit. It's not necessarily black and white, but there's some real benefit in that, nonetheless.

The secured credit facility is something you're hearing about from everybody, I think, who has come to this table to appear before you. It is absolutely critical, because without access to credit, nothing moves. One of the biggest benefits to the consumer has been leasing: affordable monthly payments. Since credit has been locked up, we've virtually lost leasing. Some companies have a higher percentage than others, but I think it's fair to say that everybody across the board is down, in leasing, because you can't get credit, and yet leasing is so beneficial to Canadian consumers. That's why we're saying it's absolutely critical.

As pointed out before, $12 billion is a good start, and we have to start somewhere. Maybe, at some point down the road, when we can see that this number is not sufficient...I guess we'll cross that bridge when we get there. But we have to get up and moving now.

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

Yes, and of course we need to be constantly monitoring the situation. I know that we have been and will continue to do so.

Speaking in terms of consumer confidence, because that's another big theme that has come up, I was talking a little bit about priorities. Obviously we have a lot of different priorities across the economy. We have an economic stimulus package that, across the board, is designed to keep people working in this country, whatever it is they're doing. Whether it be working in the auto sector, whether it be building houses, whether it be working in the forestry sector or other manufacturing—no matter what it is—we want to keep people working.

How important is it, in terms of their ability to buy vehicles, that people keep working? It's an obvious question, but I guess I want to make a point with it. How many people who aren't working are out there purchasing vehicles?

[The Chair, Conservative, Michael Chong]

Would any of the witnesses like to try to answer that question?

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

I think the point is made there.

Mr. Nantais, I want to come back to you for a second, because you represent the big three. One of those big three sat before us tonight. They're not asking for money at this point. Perhaps you could comment on what's different about the way Ford has conducted its operations. You are probably limited in the way you can answer this question, but in general, what is different in the way Ford has conducted its operations that makes it not so necessary for Ford to be asking for money right now, compared with the other two?

[Mark Nantais]

Yes, I am very limited in what I'm able to respond on that. Ford Motor Company took steps to increase their cash reserves before this hit. It was part of their ongoing restructuring plan. I think we just have to remember that every company that has gone through a major restructuring like that takes a huge hit on their cash reserves. It's not an easy or a cheap thing to do.

It's very difficult for me to comment beyond that, Mr. Lake.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Nantais and Mr. Lake.

The floor goes to Mr. Masse.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

My first question is for Mr. Carnevale. One of the things that we have limited witnesses on is the tier one and tier two suppliers, but they're part of the overall survival necessary for the industry to move forward, especially with new models. How vulnerable are the mould makers and tool-and-die organizations if they don't have some type of provisions change, either for Export Development Canada or through some type of program that has guarantees?

As you were mentioning, first of all, we can get rid of the PPAP system, which in my opinion is just completely counterproductive. It's inefficient. It creates more borrowing costs, whereby the banks once again come out as the winners, the ones that really benefit from this. Also, it's unproductive. It kills Canadian productivity. How important is it to structurally change those elements if there's going to be assistance?

[Angelo Carnevale]

It's very important. This situation that the tool shops are currently in has been years in the making. The PPAP type of parts approval system has been in place for several years. But to pin 100% payment on it...it has come to the point, with the big three coming back to the suppliers, wanting give-backs and cost-cutting, and not just with the mould shops but also the tier ones, where you've carved a lot of the profit out of the system.

Combine that with a very punitive type of payment system. A tier one, for example, could run parts off an interim A type of tool, provide those parts that were saleable or approved to go on a car, and still get paid in 30 days for the parts they supply, yet the tool is technically not approved for payment so they don't have to pay for the tool.

Tool shops, by definition, are export-driven companies, but in order to maintain their competitive edge.... There are intensive payments and intensive costs of new machinery. For a five-year-old machine, whether you use it 500 hours a year or 5,000 hours a year, the technology is five years old and has to be replaced.

Companies will come in. If you want to get into the big three you will be surveyed as to your competence levels and what type of machinery you have. This is all part and parcel of being approved to work for them, yet they're not going to pay you to buy that technology that's necessary for you to be approved as a supplier.

The end result is that it will create a cost disadvantage. No matter what you do, if you're not going to get paid for two years, you're going to have to somehow put your bank's interest on the price of that tool. If you want to compete against a Chinese tool shop, for example, if they're getting paid in progress payments, that alone would cause a cost advantage for them because they're not carrying the money. In some cases, we have been carrying money in this type of payment system from 1995. You heard the president of Ford of Canada in here earlier today saying that it's been tough since October to carry the paper, to carry the money. We've been carrying it since the nineties.

[Brian Masse, NDP, Windsor West, ON]

It's important that we get this fixed.

Mr. Worts, I want to ask a question with regard to what's happening in Japan. We heard about Germany tonight. Is the Japanese government providing any assistance to the auto manufacturers--parts, assemblers, or labour--in their country right now?

[David Worts]

I'm not an expert on what the Japanese government is doing at the moment, but I believe that Toyota has requested some assistance on credit from the Japanese government for their global operations and operations in Japan as well.

I'm not aware that there's assistance to the labour force in particular. I know the CAW mentioned something about that earlier this evening, but I'm not aware of that.

[Brian Masse, NDP, Windsor West, ON]

How would we get that information? I've commissioned a paper. There's been a lot of discussion about the fact that it seems only the North American Detroit three are getting assistance. However, my research indicates that other countries are providing direct assistance to their manufacturers, their parts people, and their workforce. So since you represent the association for Canada here, how would we go about getting that information? Can we get that further follow-up to kind of balance it out?

[David Worts]

I think I could put in a request to our Tokyo office and get a sense of what's going on in Japan and any assistance that may be provided.

[Brian Masse, NDP, Windsor West, ON]

Okay. It would be helpful to get a balance on that.