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

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

For clarity, I wasn't just talking about credit for vehicles in the States being the problem. Overall credit is what I was referring to.

I'm curious, and I want to talk just a little bit about the long term, about long-term viability and our ability to keep manufacturers here. I assume that most auto manufacturers are in operation to make a profit and that eventually the goal is to get back to profitability.

I just want to ask about this in terms of the corporate income tax rate here in Canada and the ability to maintain a manufacturing industry, that significant share we have, of course. We're going to hear from the CAW in a few minutes. We definitely have some skilled workers here in Canada who contribute very strongly to our ability to hold onto that manufacturing base.

How important is it to keep our tax base down as compared to that of other countries? As you know, we're shooting for a 2012 tax rate that would be the lowest in the G-7. How important is that for competitiveness here?

[Caroline Hughes]

I believe every automotive company operating in Canada is foreign owned. We're all foreign multinationals, so obviously the tax rate is important for us. It's good that Canada is proceeding towards a competitive tax rate. We have a competitive tax rate now, and it's important to make sure that remains the case.

In terms of securing the next investment, though, or upgrading the facilities, I believe, and it's been Ford's experience, that it's more important to have a competitive investment incentive coupled with all of the other business conditions you need. But you need to have the competitive investment incentive to be able to secure the next investment when that investment is ready to be made. That was what was so successful for us in Oakville and also with our Essex engine plant program.

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

I'd like to ask a final question, if I could. This proportionality question has come up as part of the discussion in virtually every discussion we've had so far, but not so much today because of course you're not asking for money today, so there's not that tie-in to the ask for a loan.

But I am very interested to hear, first of all, what proportion of your North America-wide manufacturing is done here in Canada. More importantly, where do you see that going? For example, do you have mandates that are coming to an end and other mandates that are going to take their place? I'd like to get a little bit of a direction from you on that.

[Caroline Hughes]

Sure. We'll have to get back to you on the proportion in Canada versus the U.S. I don't have the exact number. With our sales going down, production versus sales is a number that we'd need to recalculate for you.

In terms of our capacity, we're very happy with where our capacity is in Canada. In Oakville, as I mentioned, we have a flexible engine assembly plant that can do the four vehicles that we presently have there, the four crossover vehicles, which are in growing segments. We also have the ability to switch to many other platforms in our plan. Should gas prices rise and demand fall for those vehicles, we could always fill that plant with other vehicles we have. Similarly, with our engine plant in Essex, we have the same flexibility to adapt.

[The Chair, Conservative, Michael Chong]

Thank you very much.

That ends the comments and questions from members of this committee. I'd like to thank our witnesses for appearing in front of us today.

Thank you very much.

[David Mondragon]

Thank you for having us.

[The Chair, Conservative, Michael Chong]

We'll now recess for five minutes to allow a change in panellists.

[The Chair, Conservative, Michael Chong]

Good evening.

Welcome to the subcommittee on the auto sector. This committee was struck about a week ago in order to study some of the challenges facing the Canadian auto sector.

Your testimony here today, along with that of others, will provide the basis for a report and recommendations that will be submitted to the House of Commons by the end of March.

I thank you for appearing in front of us today.

We work in both official languages, so some members will be using French, and others English.

We'll have about 10 minutes for opening statements, and then we'll proceed to questions and comments from members of this committee.

We have in front of us today Mr. Ken Lewenza and Mr. Jim Stanford, both from the Canadian Auto Workers union.

Welcome.

I give the floor to Mr. Lewenza.

[Ken Lewenza, National President, Canadian Auto Workers Union]

Let me begin by thanking the committee for the interest in the auto industry and its significance, its importance to the Canadian economy. I obviously thank each and every one of you for your efforts and your commitment to preserving a very important industry in the Canadian economy.

Just as an introduction, the Canadian Auto Workers represents approximately 225,000 members across Canada. About one-quarter of those are auto-industry-related jobs, very significant jobs to our union, and again, very important.

Needless to say, I want to say right off the bat that Jim and I both flew economy on our way here today, and we were serviced by wonderful CAW members who took care of us from the time we left Toronto to the time we got here today.

I want to raise a couple of issues of major importance, recognizing that the time has changed. Obviously, we have been in collective bargaining with General Motors, Chrysler, and Ford. We selected General Motors to establish what we would call the pattern relative to these sacrifices that have to be made by auto workers and other stakeholders, as dictated by several people in terms of maintaining our Canadian advantage here in Canada.

I want to emphasize that because people are asking me why we opened bargaining in a time when we had a three-year collective agreement, it's very, very clear in terms of the downward pressure and the demand of the U.S. government that the UAW be an active part as a stakeholder in the United States to reopen negotiations. So we had to look at the UAW and say, “What are the competitive disadvantages that might result because of their bargaining relative to Canada's particular position?” In the last couple of days we bargained a collective agreement with General Motors that will be the pattern for Chrysler's and Ford Motor Company's. General Motors indicated to us very strongly at the conclusion of bargaining that we maintain our Canadian advantage relative to future investment decisions of the corporation, which is important.

I also want to recognize, as part of the negotiating process, that both Prime Minister Harper and Premier McGuinty announced in December that they would make a 20% footprint in support of the auto industry in comparison to the United States. That was a very important announcement as the Americans were dealing with how they were going to invest their moneys in the United States. So when Prime Minister Harper and Premier McGuinty suggested they would provide support up to the 20%, that was an important statement. And obviously they said at that particular time that all stakeholders had to make some sacrifices. Minister Clement, from that time forward, has indicated that all stakeholders, including auto workers, have to make some sacrifices.

What our deal contains is very significant. In terms of the provisions, we're obviously saving dollars off our active hourly labour costs. Again, General Motors said our active labour cost is competitive with any jurisdiction in the world, especially in areas like Germany, the United States, and Japan--areas that we compete with in a direct way.

We obviously did some substantial, painful reductions in legacy costs. The committee should understand that at General Motors, for example, we will have 30,000 retirees, with much fewer actives moving forward, so we had to deal with the question of legacy. We were able to significantly reduce legacy costs moving forward.

We said at that particular time that when the Government of Canada and the Province of Ontario introduced a support, or recommended support for the industry, we would be part of the solution, and we have been part of the solution. It is incredibly important now that all the stakeholders have made a contribution. I'm being told the dealers have done their job, the executives have done theirs, and the non-union folks.... Everybody involved in the industry has done their part. It's very important now for the industry to survive, that the Canadian government provide the support necessary on a proportionate level. So that's incredibly important.

Before I introduce Jim, I want to say a couple of words in conclusion. What's important today is that the Government of Canada provide the support. The second thing for us is to take a look at the terms and conditions of the agreement and maintain our proportionate manufacturing footprint right here in Canada as a condition of the loan and ensure that auto workers are also obviously protected. Again, only the government can do it today. People should understand that every country in the world that has an auto industry is providing support for their particular industry.

I also want to raise the importance of the auto industry--GM, Ford, Chrysler, Toyota, Honda, and all major auto producers in Canada--to the auto parts sector in Canada, which is facing a significant restructuring. I would ask the government, during the course of its deliberations, to consider support for the auto sector.

At this time, I would like to introduce the chief economist of the Canadian Auto Workers Union, a man respected from one end of the country to the other, Jim Stanford.

[The Chair, Conservative, Michael Chong]

Go ahead, Mr. Stanford.

[Dr. Jim Stanford, Chief Economist, Canadian Auto Workers Union]

Thank you, sir, and thank you, Ken.

A short description of our current collective agreement with General Motors, reached yesterday, has been distributed to the committee in both languages.

What I'd like to do is just very quickly provide some additional detail on our reading of some of the economic context of the crisis in the auto industry, our recent bargaining, and the government's decisions in moving ahead. I will table three reports with the clerk for future distribution to the committee, in time for your study.

First of all, I would like to emphasize that one of Canada's greatest assets moving forward is our sustained and visible productivity advantage. The auto sector is one of the few industries where Canada is more productive on a consistent basis than the United States. The most recent data indicate that Canada has about an 11% labour productivity advantage in auto assembly versus the United States and a 35% advantage relative to Mexico. That advantage has been there consistently over the last decade; in fact, our productivity advantage relative to the U.S. has grown slightly in recent years. I think it reflects the emphasis of all Canadian participants, including the companies and the union, on modern technology and investment in new capital equipment, the high performance work practices, and also the health and wellness of the workers. That's an important part of what makes a productive workforce.

So I leave that for your consideration. The productivity advantage is there, and we'd like to make even more of it with more investment in our facilities.

My second point is about the economic importance of the auto sector to the broader economy. This is not just about helping the auto producers, and it's certainly not about helping the auto workers—as if we needed some kind of charity. This is about us as a country deciding that we need to preserve this vital part of our economic base.

I will table the study from the Centre for Spatial Economics in Ontario, which analyzes the spinoff impacts of the auto industry. It indicates that if the major North American auto producers were to fail, the ultimate toll, counting those spinoff jobs in Canada, would be 600,000 lost jobs, only about 25,000 of which would be the direct CAW members. Those are a lot of other non-CAW members whose future depends on this industry being here.

Substantial reductions in GDP would occur, of about $65 billion, or 4.4%. That's enough to take a recession, which we're already grappling with, and make it look a lot like a depression.

The data on the fiscal impact of the crisis in the auto industry are interesting. If the North American producers were to disappear, there would be a net negative fiscal impact of $13 billion a year on the federal government, which is substantial. I know there are a lot of folks who call themselves the representatives of the taxpayers out there, who complain about the government supporting the auto industry. If I really cared about taxpayers, I would be awfully worried about that $13 billion hole in the federal government's budget that would suddenly appear, and how we would fill it.

Finally, we will table additional information about the relationship between international trade and the industry's current problems and its future recovery. Our industry in Canada is totally dependent on foreign investment—of course, all of the auto assemblers are foreign owned—and on exports for its existence. That is something we celebrate. But we have to look at the context in which our international trade and investment relationships take place, and that context has shifted from a very strong positive to a very strong negative for our industry over the last decade. In 1999, Canada enjoyed a $15 billion annual surplus in automotive products and trade with the rest of the world. Last year that converted to a $14 billion deficit. So we've snatched defeat from the jaws of victory and lost what was once a bright spot in our international relations. It's now become a large and growing net drain.

The deficit reflects both a decline in our exports—mostly to the U.S.—and an increase in our imports, particularly from offshore. In fact, in 2008, for the first time in decades, Canada has experienced an automotive trade deficit within North America. We still have a small surplus with the United States, but that is now more than offset by a deficit with Mexico. That, I think, is both a cause and a consequence of the crisis in our industry and the loss of our jobs.

We think it will be interesting, given the restructuring in the U.S. and a parallel restructuring here in Canada, how that will affect the shape and the location of the North American industry. I think we face both a risk and an opportunity here. Obviously the Americans are putting money into their industry, and they are going to tie that to American investments, American supply, and American content.

Canadian governments will do the same thing, and we obviously encourage you to maximize the footprint commitments that will be made as a quid pro quo, if you like, for providing assistance to the industry. I would like to see us and the Americans work jointly around something that could end up looking like a new North American auto pact, where the governments in both countries will provide assistance to the industries in return for proportional commitments that would strengthen the North American industry.

We can't draw a line between us and the Americans--the industry is completely integrated--so it makes no sense to do it separately. If we did that, combined with some accountability from non-North American jurisdictions in terms of if they're going to continue to export here, they have to open up their markets to take products back from here or else they have to expand their own investments in North America, that could end up being a positive.

So I'd like to emphasize, as the industry recovers, that the international trade portion of it, that dimension of it, has to be part of the picture. This is something the Canadian Automotive Partnership Council and other stakeholders have examined, and I think it has to be on our agenda as well.

Thank you very much, and we look forward to your questions and comments now, sir.

[The Chair, Conservative, Michael Chong]

Thank you very much for those opening statements. We'll have about an hour's worth of comments and questions from members, beginning with Mr. Valeriote.

[Frank Valeriote, Liberal, Guelph, ON]

Mr. Lewenza and Mr. Stanford, I'm very grateful, and we're all very grateful, you've taken the time to come up here. We know how busy you've been. You're probably far more tired than any one of us, and we know you have to leave here to continue other negotiations.

Having said that, you've raised some really interesting points in your comments. I want a broader question and then I'll dig down into some more specific questions. We want to preserve jobs in Canada. We already know that to do that we have to preserve our 20% of the footprint through mutual negotiations, that kind of thing. But as a committee, we also need to know that before money is invested, essentially, or loaned to General Motors and Chrysler, Canadians know it's a good investment and that jobs will indeed be protected. To do that, we have to be satisfied that it's going to do more than just keep the lights on for the next six months.

Can either or both of you discuss with us where you see the industry in five to 10 years from now? Will it be sustainable, will it be viable, and how do we get there?

[Ken Lewenza]

The answer to the question is yes, it can be viable and it could be sustainable. I believe General Motors, Ford, and Chrysler made some painful decisions, before the global financial crisis, to restructure their operation based on their particular market share. The problem was, as they were restructuring their operations, a global financial crisis hit, credit froze up, and as a result of that, the perfect storm hit.

I believe they have the automobiles, the vehicles, the consumers want in the future. There's a lot of discussion, there's a lot of research, there's a lot of.... As the Ford Motor Company said, more environmentally friendly vehicles are going to be part of the fleets. So there's a lot of work, there's a lot of effort, but, unfortunately, today it looks as if those efforts are wasted as a result of this global credit freeze. But there's absolutely no question that General Motors, Ford, and Chrysler were on the right track prior to the global financial crisis, as painful as the restructuring was.

[Dr. Jim Stanford]

In a way I'm sympathetic to the notion that we have to see the long-run business plan, not just for the companies but for the industry as a whole. We aren't interested in just throwing money at a problem and crossing our fingers--absolutely not. We have to be sensible, we have to be prudent, and we have to be proactive in using all of our resources to make sure we're building something we need. We need this industry. We need the high technology; we need the well-paid, high productivity jobs it generates and the spinoff jobs and the exports that come with this industry, but make sure we get our share of it.

That's where I think, coincident with the short-term immediate task, which is to help these companies survive the crisis, we have to have our eyes on a longer-run picture as well. This is where we would again emphasize the need for Canada to develop a national auto strategy. We used to have one. We had a vision of how we would build this industry and expand our share of it. The auto industry didn't just fall in our lap. It's something we built through proactive, smart policy.

The Canadian Automotive Partnership Council had been working for several years to try to develop the framework for a strategy like that. That process has not been active in the last couple of years, and I think it badly needs to be reactivated to fill in that long-run dimension of the challenge we face.

[Frank Valeriote, Liberal, Guelph, ON]

I'd like to pursue that specifically.

We asked in question period today about a national auto strategy. We've been pressing for this for some time. I picked up a document that was developed in October of 2007 from the Canadian Vehicle Manufacturers' Association that addressed a number of concerns that to me, by any other name, amounts to a national auto strategy.

It's interesting that you mention the Auto Pact because I'd scribbled down a question for you this afternoon and it revolves around the idea of a national auto strategy, and indeed a North American auto strategy, which really means possibly revisiting the Auto Pact. What salient points do you think we need to address if we were to renegotiate that?

[Dr. Jim Stanford]

There would be several dimensions to a North American auto pact, and there's a lot of exciting potential to do that, given the direction of the U.S. administration today. They are concerned about supporting the auto industry, as well as the broader manufacturing sector and the environment. I think all of those would have to be part of a strategy.

First of all, we'd have to do something to enhance the overall level of North American content in the vehicles that are sold in North America. North America is the only important regional market in the world trading system that tolerates this very dramatic trade imbalance. Every year four million vehicles come into North America from offshore jurisdictions, and virtually nothing goes back in the other direction. That means the average North American content in the typical vehicle on the road is much lower than in other markets.

So it would involve a combination of carrots and sticks to go to the offshore makers and say, “Listen, you can't continue to use North America as a dumping ground for your products. You have to be adding value to the North American economy through new investments here--potentially joint venture investments with existing companies in North America.”

We have an exciting example of that in Canada. Volkswagen is now producing the Volkswagen minivan--the new one, not the old one the hippies used to drive--at a CAW-represented facility in Windsor. This is a way for Volkswagen to put something back into the economy and not just treat us as wallets on legs.

We should tell other companies with no manufacturing presence here whatsoever, such as Nissan, Mazda, Hyundai, and BMW, that we have idle capacity in Canada, productive technology, and productive workers, so come in on a joint venture. They won't do that of their own accord, but if government twists their arms a bit they can make that happen.

[Frank Valeriote, Liberal, Guelph, ON]

You talked about a $13 billion hole if the industry isn't supported. I'd like to know more about that. Can you explain that to us and to Canadians?

[Dr. Jim Stanford]

Certainly. That number comes from the study that was developed by the Centre for Spatial Economics, an economic consulting group based in Milton, Ontario. I will table the study--I have it electronically right now--and then arrange for its distribution to the whole committee.

They simulated what would happen under a number of scenarios: the complete collapse of the North American OEMs, a partial collapse, and a gradual downsizing. In the worst-case scenario in Canada you would lose the direct jobs at those companies, but much more than that--600,000 jobs in total and a decline of 4% to 5% in annual GDP. The federal government's revenues would be affected in a number of ways by the loss of income taxes paid directly by auto workers, the taxes that come from spinoff jobs, the sales taxes, and the other taxes that decline in step with GDP. So the government's revenues would decline and its expenses for EI and other programs would increase, and the net fiscal impact would be that $13 billion figure.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Stanford.

Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chair.

Last week, we heard from GM officials. The Head of GM informed us that executives were taking a 10% pay cut. I asked him whether they were going to ask for more than that from workers, that is whether they were going to ask them to take a pay cut of more than 10%? He didn't answer my question.

Earlier, I read through your submission. I think you've really gone over the 10%. When workers are asked to take a pay cut, there is one thing that neither the union nor the workers can control, and that's the way the company is run. I don't think the workers are responsible for the predicament in which the company is currently mired. The economic crisis is one thing, but while we look at what's happening and try to make the changes that haven't been made, the workers are the ones left to pick up the tab. The only thing you're asking is for the workers to make some concessions and yet, the price of consumer goods doesn't budge at all.

We also read in the newspapers and hear on television that auto workers earn hefty salaries, that they can afford to take a pay cut. What about auto workers in other countries? Are their salaries comparable?

[Ken Lewenza]

Compared to our major competing markets of Japan, Germany, and the United States, on an active per worker cost basis, Canadian workers are cheaper. That's a realistic fact. But we are very cost competitive here in Canada with those major trading partners that manufacture vehicles.

On the salaries of the management folks, the non-union folks, the reality is that the terms and conditions of the loans in the government's directive mandate that everybody make a sacrifice. That's how the CAW ended up indicating to government that it would be part of the solution. So part of the terms and conditions of the loans explicitly say what non-union folks are sacrificing versus what auto workers are sacrificing.

To answer your question one more time, Canadian auto workers in the Canadian Auto Workers Union are competitive with each jurisdiction in developed countries, such as Japan, Germany, and the United States.

[Dr. Jim Stanford]

Again, just to reinforce your point that cutting wages alone is not going to solve this problem whatsoever, you could say, in fact, on one hand, that it will make things worse. The ultimate problem of this immediate crisis is that people are not buying cars. If industries widespread--not just auto companies, but industries throughout the economy--start cutting their own wages in response to this downturn, that is part of what happened in the 1930s. Then you get a downward spiral in purchasing power, which prevents consumer spending from recovering.

Again, we committed to being part of the solution. We also committed that our labour costs would remain fully competitive, and we have done that. But we don't claim for a minute that what we've done in the contract can somehow save the company or save the industry. That's where we need the bigger response.

[Robert Vincent, Bloc, Shefford, QC]

I've come to the conclusion that when workers are asked to take a pay cut because of the economic downturn, regardless of the sector in which they work, these workers end up consuming less and all industries ultimately feel the effects.

Another matter that we need to consider is free trade. Do you feel that free trade has helped or hindered the auto sector? This is also a consideration.

[Ken Lewenza]

Jim will deal with the free trade question, but let me just reiterate for the committee's information, and I'm sure you know this already, that the cost associated with labour in an assembly plant is 7%. The total cost of a vehicle in an assembly plant is 7%. We could have worked for nothing, for absolutely nothing, during this global financial crisis and the company wouldn't recover. So it's not about wages.

Jim.