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

[Stephen Beatty]

Certainly, any kind of program that the Canadian government might release to the industry through the banking system or through other mechanisms is going to have conditions attached to it.

But as I said in my submission, I hope we understand that the credit marketplace is comprised of placements of varying quality, and no matter what sorts of rules you might write for it, there is going to be some variability in the rates charged because of the nature of the risk associated with any instrument you might backstop.

What we're seeing right now are unparalleled gaps, if you will, between the central bank rate and the effective rates in the marketplace. We need to address that in some fashion, in part by providing additional moneys to the marketplace in order to free up credit. Certainly, Parliament, in its wisdom, will have to look at what the appropriate mechanisms are to control the financial marketplace.

[Brian Masse, NDP, Windsor West, ON]

I often regret that we didn't have some of the banking industry come forward in this committee. Unless we're going to come up with billions more for this credit, the $13 billion, I mean, it's pretty universal what we're hearing. The banks are going to need to play a role, and they should play a role. They shouldn't be the ones that make money off the workers and companies without having some type of accountability.

I agree that there might be some different elements that you have to nuance with all the different lending institutions. I think it should be looked at. It's a valuable contribution.

I would like to move to the parent company in terms of what is happening right now with the industry in Japan. It's important. You mentioned that there's kind of this mythology out there that no supports have been provided to some of the American plants for development or for whatever it might be. I understand that in Japan the state also invests in its industry. What's happening over there with regard to their operations in the parent company?

[Adriaan Korstanje]

Perhaps the most notable media around that topic from last week involved Toyota Financial Services being in talks with the state-backed Bank for International Cooperation to loan some money.

It is understandable that media misinterpreted and started calling “bailout” very quickly, but what needs to be understood is that in this instance Toyota Financial Services is not an operating function of our company. They're the financial services. Their job, all year long, is to secure credit from an array of lenders, credit that they can translate into loans and leases for customers.

By talking to this state-backed bank and all of the other array of lenders that they talk to, they're just being prudent in making sure that, as things go forward, they still have sources to be able to run the credit and lease arm. None of this money is for operating; it's just to do what they normally do and to be prudent about it.

That's not to say that there isn't a challenge in Japan. Toyota has 60,000 team members, maybe 100,000 people who work for supplier companies, and thousands of contract team members hired for flexibility but who have had to be let go. They're looking at reduced hours. They're looking at executive and labour wage structures. They're in the same mode: how can we save the dollars but protect the core of what we have and not give up our values in employment? They're struggling just the same as everyone else.

[The Chair, Conservative, Michael Chong]

Thank you very much.

Madam Hall Findlay.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you, Mr. Chair.

Thank you very much, gentlemen, for being here.

It's worth repeating, if ad nauseam, that we all care about jobs. As parliamentarians we also have to care about taxpayers' money. We are here to look at the auto industry, but we are also here to consider a request for significant funding. I'm not talking about the $12 billion credit piece; I'm talking about active cash.

I very much appreciate the recommendations in your submission on supporting the market. I couldn't help but notice that there is not a recommendation in there to have the government provide a significant amount of money to General Motors or Chrysler. So I have a couple of very blunt questions.

Will Toyota benefit from General Motors and/or Chrysler going into...not bankruptcy specifically, but into CCAA, the equivalent of the chapter 11 process here in Canada?

[Stephen Beatty]

The answer to your question is we don't benefit from that. Because of the interlinked nature of both the supply base and the dealer networks across North America, anything that creates broad disruption in the auto sector is going to touch every company.

I think it's also reasonable to say that consumers, in the aftermath of that type of reorganization, are going to look very carefully at the automotive marketplace and question whether now is the right time to be buying a car. Uncertainty always brings the natural consumer response to back off a bit and let the dust settle a little before making major purchase decisions.

It's reasonable to assume that any catastrophic failure or significant reorganization that cuts off receivables to dealers, or parts suppliers and other affiliated companies, will cause dislocation through the rest of the industry. The scale of that is very hard for us to predict.

I think there's been this public perception that Toyota or some other companies gain if other companies fail, and I don't think that's ever true of an industrial sector as a whole. You all benefit when the industry sector is healthy; you all tend to experience pain when some are suffering.

[Martha Hall Findlay, Liberal, Willowdale, ON]

The irony now is that with all of this talk we are seeing market share numbers affected. The GM and Chrysler products are being affected by the current environment and concerns about the companies' future.

You made a comment--and yesterday the representative of the Japanese Manufacturer's Association made a similar comment--that what the government does should not create a competitive disadvantage or a competitive advantage. So I appreciate your answer to the first question.

In the process and the effort of helping the government on a non-partisan basis, what are some of the things this government can do to address those concerns and not provide a competitive advantage? At first blush one would think that providing two companies with a great deal of money would give them a competitive advantage. I'd really appreciate your comments on how to reconcile those two things.

[Stephen Beatty]

I hesitate to go too far down that road, because clearly, General Motors and Chrysler are the companies that need to talk to you about the necessary elements of any type of restructuring. As I said earlier, I think what we're faced with right now, in some respects, is the perfect storm. Not only do you have companies that needed to restructure operations, because, quite frankly, they were manufacturing in excess of the real market needs of North America over the last number of years, but now they're facing a situation where, as a result of a further decline in demand, there are cashflow issues. There are any number of other impacts on their business.

The assistance you might provide to companies to help them restructure and emerge as stronger, more viable companies isn't necessarily something we see as a competitive disadvantage for us. To the contrary, if it avoids a situation in which you do significant damage to the supply base and the dealer networks and so forth, there may be some advantage, as a whole, for the industry.

The issue, though, is that sometimes there is a demand on government to look at very specific and narrow programs. They are designed to underwrite specific vehicle programs or to provide very narrowly focused consumer incentives that assist one or several companies to the disadvantage of the industry as a whole. That's really where our comments are pointed. If you provide incentives to the consumer, make them broad-based, and aim for a general benefit to the consumer. Then the consumer decides. I think that provides us with the proper mechanism.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Beatty.

We'll go to Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman, and thank you, gentlemen, for coming.

I would agree with your presentation earlier, when my colleague from the Liberal side was talking about whether we could have done something sooner. As an active member of the auto caucus on the Conservative side, which meets with the big North American three and the international manufacturers that are here, I can tell you that at our monthly meetings there was no discussion about what was going to be happening. Things were going well at this time last year, for example. It came as a big surprise, in a sense. We were talking about the automotive innovation fund and so on, into which we put $250 million, and about increasing that.

I have a couple of quick questions for you.

You mentioned the jobless protection system. Are you financing that, or do you have a third party doing that?

[Stephen Beatty]

Toyota Financial Services is providing that free of charge to the customer.

[Mike Wallace, Conservative, Burlington, ON]

The customers don't pay for that when they buy a car.

[Stephen Beatty]

The customer does not pay for that.

[Mike Wallace, Conservative, Burlington, ON]

How long does that program last?

[Stephen Beatty]

We're offering it right now.

[Mike Wallace, Conservative, Burlington, ON]

Is it a one-year protection?

[Stephen Beatty]

We're offering it as a special program in the spring market. We'll have to wait and see whether it goes on beyond that.

[Mike Wallace, Conservative, Burlington, ON]

If I'm a customer and I become.... How long do I have? Is it for any length of time that I'm financing with you?

[Stephen Beatty]

It covers your contract.

[Mike Wallace, Conservative, Burlington, ON]

It covers the whole contract. Okay.

Are you the only company providing that kind of service?

[Stephen Beatty]

On a no extra charge basis, yes.

[Mike Wallace, Conservative, Burlington, ON]

It's an interesting concept. Somebody would have the incentive to buy if there's some protection in case something happens to him or her.

[Stephen Beatty]

For us, we know that the bulk of our vehicles are sold to families. Here are the people who have the greatest concerns at the moment about what the household budget looks like, so that's the aim.

[Mike Wallace, Conservative, Burlington, ON]

I have a financing question for you.

At this time last year there was a lot of discussion here in the House, and lots of discussion in Canada, about non-bank asset-backed commercial paper. ABCPs are what you're looking for, in a sense. You guys would try to bundle your financing, bundle it and sell it to the Government of Canada in the $12 billion financing capacity.

There was concern. We have the Montreal agreement--I forget what it's actually called, I think it's called the Montreal Accord--whereby some investors were protected, basically, based on those things failing. Tell me, as a member of Parliament risking $12 billion in a secured financing facility--and I agree with putting it in here, by the way--how your asset-backed paper is better. Why is it quality? If you can't sell it in the marketplace, why should we buy it?

[Stephen Beatty]

The answer is that it is a very good investment strategy for the government. The reality of it is that the financing arms of the auto companies have traditionally been quite profitable, because this is quality paper, based on people buying a vehicle and leveraged against the value of that vehicle.

Certainly at Toyota, we take considerable pride in the amount of retained value in our vehicles over time. So there's a good asset there. Typically on one of our contracts, the customer ends up with equity in the vehicle that they apply to the next one. So they're very conservative instruments. They are tied to the value of vehicles, and they're tied to something that the Canadian consumers are not leveraging against. This is their principal means of transportation.

So it's a very conservative, if you'll excuse the term, approach to financing.