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

[David Mondragon]

Thanks for having us.

[Terence Young, Conservative, Oakville, ON]

Thank you.

This is all about stimulus and jobs. The government agenda is committed to innovation, which is why in early 2008 we created the automotive innovation fund. Ford partnered with the government on a loan from that fund. Would you please tell us about what you were able to do as part of the renaissance project, which, as I understand it, created 500 jobs? That's the first part of my question.

The second part is this. I wonder if you could just tell me a little bit about the EcoBoost engine. Is that part of your plan to accelerate development of new products?

And third--I have to ask this because we talked about it so much in the election--when are you going to build a hybrid in Oakville?

[David Mondragon]

I'm going to let Caroline start with this.

[Caroline Hughes]

Okay, great.

In terms of the investments we've made, we actually have two investments that we've made with help from the government, federally and in Ontario. The first one in your riding, Mr. Young, is the Oakville assembly complex, where we transformed two existing plants into a new complex. It's a flexible assembly plant producing four world-class vehicles now on a global mandate. The flexibility of that plant allows us to produce any combination of those four vehicles, so we could have a different vehicle, one after the other, rolling down the line all day long, and they're produced with the highest quality. That allows us to more effectively utilize the capacity in the plant, to more effectively utilize our investment, and to protect against future market shifts. So that is a very competitive footprint.

The more recent program that you talked about with the AIF is what we call our renaissance project. That will reopen our Essex engine plant in Windsor, and that's a huge success story for us as well. The Essex engine plant will become one of four flexible engine manufacturing plants in our North American system, a very competitive plant that, again, will be protected against future downturns.

I do want to say, though, on the automotive innovation fund, that neither of those investments could have been possible without the government incentives that were available, both federally and provincially. That will continue to be needed going forward. That's one thing we haven't spoken about at length today. Because of the economic crisis that faces us now, not a lot of people are talking about future investments. We do need to make sure the investment incentives that are available in Canada remain competitive to attract the next round of investment that we see coming.

Specifically, in the U.S., the Department of Energy announced a revitalization fund of $25 billion that will be available to all manufacturers that invest in the next generation of fuel economy technology for vehicles and for manufacturing. That's something we need to make sure the automotive innovation fund in Canada remains competitive with.

[Terence Young, Conservative, Oakville, ON]

What about the EcoBoost?

[David Mondragon]

Yes, let me add a couple of things.

First, we're very excited about EcoBoost. That's technology that's available today, and over the next three years we'll transform the industry with our EcoBoost engines. They deliver 20% better fuel economy and are expected to reduce CO₂ emissions by 15%. They should be on approximately 80% of our vehicles by 2012.

The Oakville, Ontario, Ford Flex will be one of the first vehicles with the EcoBoost engine. We'll introduce that this year. And then we'll have the MKT, which is an all-new addition to our lineup. It'll be an incremental unit we'll be building out of our Ontario assembly plant. It will also host this new EcoBoost engine.

I will say, as I said earlier, we've announced a joint venture with Canadian-based Magna International to develop and deliver a battery-electric vehicle by 2011. So we are on track with that commitment. By 2012, we'll have a host of next-generation hybrids, plug-in hybrids, and battery-electric vehicles as well.

[The Chair, Conservative, Michael Chong]

Go ahead, Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Terence, for sharing your time.

You were saying the current scrappage program isn't working because it's not lucrative enough at 300 bucks. You also tell us that 80% of your sales are south of the border.

Are our friends south of the border planning a scrappage program for their vehicles or for vehicles that are purchased down there?

[Caroline Hughes]

Can I start?

[Mike Wallace, Conservative, Burlington, ON]

Sure you can.

[Caroline Hughes]

Okay.

There have been a number of different suggestions south of the border. There was one bill that was fairly close to passage, and then it fell apart. What we have experienced over the years, as we've tried to work as an industry to bring something forward to government, is that the more complex you make it, the more you try to over-engineer the program, the more difficult it is to get broad support and ultimately the more difficult it is for consumers to understand it. So it basically falls in on itself.

Right now, there is nothing in place, but we know that our colleagues south of the border are working on something similar.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Wallace.

Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you. I'd like your opinion on two matters. Firstly, we are hearing about this $4,000 scrappage program. Could the program help to lower vehicle prices? It's well known that in the past there have been shortages of steel because China controlled the steel market, but if we pay people $4,000 for each vehicle retired, that would put considerably more steel onto the market and steel prices will fall. So then, do you think that this program will result in lower car prices?

[David Mondragon]

First off, I don't think that retiring 100,000 units--if that was the number--will greatly inflate the price of steel. A steel commodity is really based on worldwide demand. If you look at the spot prices on steel, they have fluctuated greatly over the last six to 12 months. At one time, spot price on steel was $300 to $500. Then it shot up to close to $1,500, and now I'm not sure where it's hovering--maybe around $800 or $1,000. So it fluctuates greatly. The average retirement of fleet comes into play, and that really doesn't vary all that much on an annual basis.

In Texas last year, in the U.S., they had a program of a similar fashion. They offered a dollar value of around $3,000, and I believe they retired around 100,000 units. I don't think that had a huge impact on the commodities market in Texas. So I don't think we would see any kind of surge or influx or decrease, in terms of pricing. What will move the commodity markets with steel is worldwide demand, and that's out of Asia, out of Europe, and out of the U.S. and Canada as well--North America--but, really, a lot of the prices have been driven by the Far East as well as the Middle East.

[Robert Vincent, Bloc, Shefford, QC]

Secondly, in light of the exchange rate, automobiles are always a little more expensive in Canada than in the U.S. However, if vehicles are built in Canada with Canadian dollars by Canadian workers and subcontractors paid in Canadian dollars, could these Canadian made vehicles not be sold at a more affordable price?

[David Mondragon]

I'm sorry, can you elaborate? I missed the beginning. Can you go back to the beginning? Is it a specific vehicle that you're recommending?

[Robert Vincent, Bloc, Shefford, QC]

I commented earlier that in Canada, automobiles are more expensive than they are in the U.S. because of the exchange rate. However, if vehicles are built in Canada with Canadian dollars by workers and subcontractors paid in Canadian dollars, could they not be marketed to consumers for a more affordable price, instead of selling consumers vehicles that always cost a little more than the ones built in the U.S.?

[Caroline Hughes]

In terms of the prices of vehicles in Canada, we price to the market, as do most manufacturers. So on the pricing side, depending on where the Canadian dollar exchange is, you will see the prices of vehicles in Canada higher or lower than what happens in the U.S., depending on what's happening in the market. Back when the Canadian dollar was 65¢, I believe, DesRosiers Automotive Consultants issued a study that showed cars were, on average, $2,500 cheaper in Canada than they were in the U.S. and trucks were about $3,500 cheaper in Canada. And that was based on the fact that we do price to the market.

To your question about using Canadian labour and Canadian parts, it really is a North American industry. In our case, we purchase parts in Canada for our North American factories, so we will purchase from one or two suppliers, but for commodities across our broad range of vehicles. So that Canadian content gets spread across the broad number of North American vehicles. And the fact that the Canadian dollar, if I understand your question correctly, is lower in Canada will not help the cost of one particular vehicle be lower, because the material content is spread throughout our fleet.

[David Mondragon]

I would add that the other difficult part of doing something like that is, quite frankly, the type of vehicles that are built in Canada.

If you look at Canada in terms of consumer consumption, it's about 50-50 cars and trucks. And in January, 55% of the sales were trucks, 45% of them cars. Now it's kind of levelled back off at this 50-50 range.

A lot of the vehicles that are older and high pollutant are trucks, and we want to get those off the road. That being the case, you get big burly truck drivers who need to have their F-150 truck because they've got a big payload they've got to pull or capacity they need to put in the bed, and they're not going to be willing to trade it in for a car or a CUV. That's not just lifestyle; they use these trucks for work and for play. So it would limit the ability for us to really stabilize and grow the business. And it really would be a dissatisfier to many Canadians who have an older vehicle, who would want to trade it in and buy a new one, because they would feel the program disadvantages them. So I would not recommend that.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Mondragon.

Our last questioner for this round is Mr. Lake.

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

Thanks, Mr. Chair.

I'll preface this line of questioning, I guess, by saying that of course we recognize the importance of credit to businesses and consumers right now, and the problems getting that credit are making it very difficult. We hear it time and time again. But I get a little bit concerned. I hear you say the industry needs to “find the bottom”, and it seems to me one of the reasons we're heading for the bottom in the first place is loose credit. It seems to me there are a lot of commentators out there who look at the situation in the States and say that a big part of where we are right now is because people are taking on way too much consumer credit. I'm talking about consumer credit here. With loosening consumer credit, while obviously we all agree it's a significant part of the answer, is there a danger in terms of trying to solve this long-term viability question by maybe over-loosening credit? What is the danger? Maybe you could speak to the danger of that, the potential of us over-loosening credit, people taking on—you know there are huge opportunities to buy vehicles, but if people are buying vehicles they still can't afford on credit, that might be a problem.

[David Mondragon]

First and foremost, I don't think anyone is suggesting that the banking industry or any of the manufacturers offer credit to people who aren't creditworthy or can't really afford a vehicle. That's not our practice.

The quality of paper we securitize through the ABS market is AAA. That's the highest credit rating you can get, and it offers a very good return and a great safety net as well. It's safe and it's well secured. But we have a long history of great financing and credit practices that really manage the consumers and help them with affordability that fits within their means. Nobody wins—manufacturers or the industry—if we finance vehicles to people who aren't creditworthy.

That's not what happened to the U.S. industry, by the way. It's not a result of the fact that the finance institution and the captives have been financing the people who aren't creditworthy. What's happened to the industry and what's plagued us here in Canada is that there's no ability to securitize paper, so we keep on taking loans, financing vehicles, and then we're holding that paper. And that's a big cash drain on our system. So we have all these notes that we're sitting on, and it's like oil in the car. We need to move those out, bring in fresh capital, so that we can keep that ball moving. That's really what the industry needs.

Now I'll let Caroline elaborate on that. Was that good?

[Caroline Hughes]

That was good.

[Voices]

Oh, oh!

[Caroline Hughes]

You covered my butt.