Subcommittee on the Automotive Industry in Canada Committee on March 10th, 2009

[Jerry Chenkin]

I'm not familiar with what our competitors' compensation packages are. I'm sure you are aware that our factories in Alliston are not unionized. Our philosophy has always been that it's up to our associates whether they wish to belong to a union or not. Judging by the fact that they don't, we have to assume they feel they are being compensated at a reasonable level.

[Frank Valeriote, Liberal, Guelph, ON]

You understand that we're here to collect facts and not render any kind of judgment or opinion. In pursuit of that, do you have enough knowledge of the industry to say whether or not General Motors and Chrysler are at a competitive disadvantage because of the compensation packages they offer their employees?

[Jerry Chenkin]

I don't have enough knowledge, and frankly we don't benchmark those manufacturers. We try to make sure we have well-trained, very happy associates working at our factories. So far we seem to have been successful.

[Frank Valeriote, Liberal, Guelph, ON]

Okay.

You indicated that Honda is also suffering. We're curious to know how long the existing state of the economy would have to persist before Honda found itself in financial difficulty and perhaps asked a government for support.

[Jerry Chenkin]

We have never asked any governments for support anywhere in the world, and I don't want to speculate as to when the economy might recover.

[Frank Valeriote, Liberal, Guelph, ON]

You may have a sense of what's happening at Toyota. Could you compare Honda's compensation package with Toyota's?

[Jerry Chenkin]

I have no knowledge of Toyota's compensation package.

[Frank Valeriote, Liberal, Guelph, ON]

You have none at all?

[Jerry Chenkin]

No.

[Frank Valeriote, Liberal, Guelph, ON]

We've all heard about what may happen if there is a structured CCAA arrangement made at General Motors. Can you tell me what it might do to your particular corporation should that happen?

[Jerry Chenkin]

We are of the opinion that any company going out of business will damage the economy, and any damage to the economy will damage our business.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Chenkin and Mr. Valeriote.

You have the floor, Mr. Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chair. First off, welcome to all of you.

All of GM's main competitors in Canada posted sharp losses in February. Ford posted a loss of 15.4%, Chrysler, 27%, Toyota and Honda, 26% and your company, 43%. To what do you attribute declining auto sales in February?

[Jerry Chenkin]

The major issue we had was actually twofold. A year ago, as you may remember, we were tackling a totally different marketplace. The Canadian dollar was at par, and we were taking very strong action to protect the perceived price difference between Canadian vehicles and the equivalent American vehicles. So we had huge incentives in the market to compensate the customers for the foreign exchange gap that disappeared because the Canadian and U.S. dollars were at par. As a result of those very strong incentives and a market that was still quite buoyant, we had huge sales results.

January and February are traditionally very weak months for the auto industry from a seasonal point of view. Compared to February two years ago, our sales this February were down by less than 20%. So from that point of view we were quite satisfied with the results in February.

[Robert Vincent, Bloc, Shefford, QC]

I'll ask you the same question that I put to the other manufacturers.

In light of pay cuts, numerous job losses and declining wages in all industrial sectors in Canada, how to you envision the future in terms of automobile sales and wooing back you customers?

When wages decline, so too does people's purchasing power. A decade ago, and even more recently, wage increases were in the 1.5% to 2% range. Workers who earned $15 an hour and who had agreed to a rollback of $4 per hour to help their employer weather the economic storm and remain competitive in the marketplace needed 10 or 12 years before their salaries were back to pre-recession levels.

Given that consumers are losing some of their purchasing power, how to you envision the future in terms of promoting new vehicles, when customers are dealing with this economic crisis that is further compounded by wage rollbacks?

[Jerry Chenkin]

That's an interesting question. The market tends to find its own level, so today, in real dollars, automobiles and light trucks have never been cheaper. It's the best time it has ever been to purchase or lease a vehicle. So the market is adjusting itself right now based on demand.

As the market recovers and people's wages and salaries start to improve, we will see the market adjusting by itself.

[Robert Vincent, Bloc, Shefford, QC]

I have my reservations. As I said, 10 years passed before workers were again earning their pre-recession salaries. It will surely take today's workers just as long to recover once the economy rebounds.

The price of consumer goods hasn't changed, but people's purchasing power has declined. Consequently, as a result of declining purchasing power, banks and credit unions are tightening credit conditions. They argue that if a person who once earned $14 or $15 an hour is now earning $10 or $11, credit conditions must be tightened up for a while. A person earning $15 an hour was thought to be able to afford a new car. However, when that person earns only $10 an hour, given the mortgage and other debts, financing for the purchase of a automobile is not so readily available.

I can understand that the automakers might need some assistance in the form of loans, but this situation cannot go on indefinitely.

Have you given any thought to what you will do once the crisis is over? The market will change. Today, for instance, the market is reacting a certain way, but in light of people's salaries, you will need to change your model options or build more affordable vehicles. People will not be able to obtain the required financing from the banks and the credit unions to purchase a new vehicle.

Have you given any thought to producing new models? Have you any other new car designs in mind?

[Jerry Chenkin]

I think I understand your question. The challenge for any manufacturer is to listen to the voice of your customer. The good guys are the guys who listen and react quickly. They're the winners. The losers are manufacturers who don't listen to the voice of their customer and continue to produce product. And I'm not talking automotive especially; this applies to any product. If you continue to design and produce product the customer doesn't want, then you cannot survive.

I can only speak to Honda. I don't know anything about any other automotive company. Honda has always listened to our customers very closely, and we are agile enough to be able to react very quickly to what customers want. For example, next month we will launch a brand-new small hybrid vehicle called the Insight. This is the second generation of Insight. It's the lowest-cost hybrid in the marketplace. We haven't announced the pricing yet, but they did in the U.S. So we are now in a position where we can adapt our product lineup to match the income of the customer.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Chenkin.

Mr. Lake.

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

Thank you, Mr. Chair.

Thank you for taking the time out of your schedule tonight to be here.

I want to come back to a little bit of context, if I could. I'm not going to read through all the quotes I read when the Toyota folks were here, but I just want to point out a few things.

Advantage Canada, our plan in 2006-2007--we did several things in there, and one of those things was to reduce taxes across the board, including a GST cut, 2% over a couple of years, about $600 on the cost of a $30,000 vehicle. We also started reducing the corporate tax rate from 22%, eventually to 15% by 2012. It will make us the most competitive tax environment in the G-7. These are important steps.

When you look at the numbers in the G-8, for example, all other countries in the G-8 ran deficits in each of the last three years previous to this one. Canada was the only one that ran a surplus in any of those years, and we ran a surplus in each of them. World Economic Forum says we have the most solid banking system in the world here in Canada, number one. I think U.K. was 44, the U.S. was 40. IMF and OECD are saying we're going to come out sooner and stronger than any other country.

I'll read one quote from The Telegraph that sums up the rest of them: “If the rest of the world had comported itself with similar modesty and prudence, we might not be in this mess.”

Speaking about the steps Canada has taken prior to this, I think it's important that we don't lose sight of the long-term track when we're talking here about the short-term measures, especially when we're talking about a company that's generally in a pretty solid financial position compared to others.

First of all, do you agree with my assessment that Canada is in a very strong financial situation relative to other countries?

Secondly, and an important part of the equation we haven't touched on a lot, is what do you see as the long-term prospects of the Canadian auto sector once demand in the U.S. rebounds?

[Jerry Chenkin]

Honda believes in Canada. We believe in the strength of Canada. We have invested, as I said earlier, over $2.6 billion in Canada. That money has been earned in Canada, from Canadians. Honda reinvests money back into the economy.

If we didn't have confidence in Canada, then we would not be here, so absolutely: unquestionable loyalty to this country. There are many thousands of Canadians who are now making a living from the business that Honda does in Canada. We are totally committed as a corporation.

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

All right.

No doubt, despite whatever measures you're taking, you would have an overcapacity issue of some sort right now, I would imagine. Can you quantify that in any way?

[Jerry Chenkin]

It's very flexible. As Honda, we have one of the most--if not the most--flexible manufacturing systems in the world for automotive, so we can adapt almost daily to the requirements of the marketplace.

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

Maybe I actually phrased that wrongly. I'm thinking more about inventory, your inventory numbers. You probably have more than you are able to sell right now in terms of your inventory. There's a follow-up to that and I'll just ask it now: what is your strategy to clear that oversupply? I guess that's the word I'm looking for.

[Jerry Chenkin]

We have been adjusting for the last six months. When we saw this problem coming, we immediately reacted. This is one of the advantages we have as Honda. We can adjust production very quickly in all of our plants across North America, so our inventory situation, while not perfect, is in actually quite reasonable shape.