Mr. Chairman, and members of the committee, thank you very much for allowing me the opportunity to come before you today.
As you indicated at the outset, I am the president of the Association of International Automobile Manufacturers of Canada. Just for a bit of perspective on this particular association, it has a 25-year history of serving as a national association and representing the interests of member companies engaged in the manufacturing, importation, distribution, and servicing of light vehicles whose head offices are located outside of Canada and the United States. Currently, we have 13 member companies with head offices in three countries: Japan, Germany, and Korea.
The association originally evolved out of the Canadian Importers Association as a specialized trade committee dealing with automotive importation issues. As the size and scope of the members' activities in Canada has grown and broadened, so too have the activities of the association. In 1999, the AIAMC was incorporated as a separate not-for-profit corporation.
For perspective, since 1979, combined sales of the AIAMC-member companies have grown from 10% of the Canadian market to 43.3% of the Canadian market in 2005. Further, AIAMC member companies sell 59% of all new passenger cars in Canada.
If we transition to manufacturing, since the mid-1980s three of our Japanese member companies, Honda, Toyota, and Suzuki, as part of a joint venture with General Motors, have invested over $8 billion in manufacturing facilities, including the recently announced $1.1 billion Toyota investment in Woodstock, and a $154 million Honda investment in Alliston. These investments have set the stage for these three companies to produce over 33% of the total Canadian light-duty vehicle production in 2005, growing from slightly more than 400 vehicles when Honda first started producing vehicles in Canada 20 years ago. And yes, that's 400 vehicles.
Additionally, it should be recalled that Hyundai Auto Canada produced vehicles at an assembly plant in Bromont, Quebec, from 1989 through 1993 before closing it. It was a $350 million investment. The plant employed about 800 people and had an annual capacity of 100,000 units. It never realized its full capacity over the course of its operation.
Like other vehicle manufacturers in Canada, all these companies have benefited from an integrated North American market for automotive goods resulting from the negotiation of the automotive products agreement, otherwise known as the Auto Pact, in 1965, followed by the Canada-U.S. Free Trade Agreement and the North American Free Trade Agreement in 1994. As a result of the duty-free access to the U.S. market afforded by these trade agreements, each company exports more than 75% of their production to the United States.
Canada has no national or indigenous automobile manufacturers. While Honda, Toyota, and the CAMI joint venture may not employ the same number of Canadians in their facilities as their other multinational manufacturers operating in Canada, their recent investments and contingent employment announcements have assisted in moderating the significant restructuring that the automotive industry is experiencing. Of interest is the fact that these three companies have more of their NAFTA production in Canada, on a percentage basis, than the traditional North American manufacturers, and they sell more of their Canadian production to Canadians than the traditional North American manufacturers.
This growth in Canadian vehicle production has also meant growth, not only in the number of parts and components and manufacturers coming to Canada to supply these facilities, such as the $50 million Toyotetsu components plant that was announced in April for Simcoe, Ontario, but more recently in the quantity of parts and components being sourced from Canadian parts manufacturers. There is significant room for growth in this area.
I'd now like to focus on the four priorities that were identified by the committee for us to comment on. The committee has had representations before it. Mark mentioned the appreciation of the Canadian dollar--44% against the U.S. dollar since 2002. That appreciation does not necessarily impact all manufacturers in the same way. Clearly, to the extent that one has manufacturing operations only in Canada and is looking to sell goods abroad, the appreciation of the dollar is a significant negative factor.
However, larger multinational auto manufacturers that have operations in Canada and the U.S., as well as other countries, have a natural currency hedge. So despite the fact that more than 75% of vehicle production is exported, many of the parts and components required to produce those vehicles are imported and will be positively impacted by a rise in the Canadian dollar.
As Mark noted as well, the rapid appreciation of the Canadian dollar has a decidedly larger negative impact on the Canadian parts manufacturers compared to the vehicle assemblers, to the extent that they export their production. The parts sector is also where much of the employment growth for the industry is likely to come from in the near future. We need to be vigilant with respect to this sector.
In that regard, our first recommendation is to assist in offsetting some of the negative impact of the dollar's appreciation by accelerating the capital cost allowance rates for purchases of manufacturing tooling and equipment. A faster writeoff, combined with an appreciated Canadian dollar, would make imported machinery much more attractive for parts manufacturers to purchase, enabling them to become more productive.
Mark also talked about high energy costs, and our members who manufacture have the same issue. Ontario used to have an abundant source of energy at reasonable prices, and this is not necessarily the case today. In January 2005, a submission by the industry consultation committee of the Ministry of Economic Development and Trade noted that electricity rates for industrial customers had risen by more than 46% between the first quarter of 2000 and the second quarter of 2004. With respect to price predictability, it should be noted that the Ontario Minister of Energy did announce in February that it would be providing predictability and price stability for large industrial users by dropping the price per kilowatt hour to 4.6¢, beginning in May, and would increase it to 4.7¢ in 2007 and 4.8¢ in 2008. While it was a welcome announcement, this is viewed as an interim solution to a systemic problem. Beyond the rising cost, the stability and reliability of the electricity supply has taken on increasing importance as well.
With respect to globalization, the automotive industry is perhaps the most global of all industries. Globalization is viewed as having a negative effect on Canada's automotive industry. However, the numbers do not necessarily bear this out.
Capital investment in Canada has been fairly consistent at about $3 billion a year for each of the last seven years. Direct employment in the parts and assembly sector has been relatively stable at about 150,000 for the past five years. And the figure of 148,250 employed in 2005 is about 11% higher than the 133,181 employed in 1995. Vehicle production has been relatively stable at about 2.6 million units for the past five years, and Canada has held on to about a 16% share of North American production over that timeframe.
Vehicle sales have been relatively stable as well at about 1.55 million units over the past five years. That is not to say there is not significant transition taking place in the industry and in the different sectors and manufacturers within the industry. The challenges currently facing the traditional North American manufacturers are well documented and likely to persist, at least for some time. Again, however, the health of much of the parts manufacturing community is pinned on General Motors, Ford, and to a lesser extent DaimlerChrysler, pushing through their current challenges.
Other manufacturers, such as those in my membership, continue to achieve impressive sales results and add North American production capacity. With respect to sales, six of the AIAMC's 13 member companies had record sales in 2005. In the past year, Canada's first greenfield investment in almost 20 years was announced by Toyota. A Hino truck plant was also announced for Woodstock. There is the Toyotetsu component plant, which I referenced earlier, as well as the Honda engine plant. These investments were made because sales volume dictates additional capacity, and around the world most manufacturers have adopted the business model of producing vehicles in or close to the markets into which they are selling these vehicles. These assembly facility investments then serve to anchor parts and components plants.
In the October 27, 2005, issue of the Canadian Auto Report, Carlos Gomes, senior economist in industry and commodity market research with the Scotiabank Group, suggested that a Canadian-built Japanese model now contains less than $2,000 of auto parts imported from Japan, down from a peak of more than $5,000 in the mid-1990s.
A more telling statistic is Canada's auto parts trade deficit with Japan. The deficit last year was about $1.7 billion, which is almost exactly the same as it was in 1996, despite the fact that automotive production from Japanese companies in Canada has increased 140%, from about 366,000 units to about 881,000 units last year. It is clear, then, that a lot more parts sourcing is being conducted by these companies in Canada and the United States.
The NAFTA market is highly competitive and represents the largest automotive marketplace in the world. As sales volumes continue to grow, direct foreign investment should continue to flow into the region. However, Canada needs to take appropriate steps to ensure that it has a highly competitive tax structure that keeps the industry competitive within a global context.
In this regard, the 2006 budget rightly acknowledges that although the corporate statutory tax rates on manufacturing income are 5.1% better than in the U.S., this percentage will shrink to 2.0% in 2010 with the U.S. tax cuts. Moreover, the budget points out that on a marginal effective tax rate basis, Canada currently has no advantage over the U.S. and proposes measures to ensure that on a marginal effective tax rate basis, the tax rate will be about 32% in 2010, slightly lower than the U.S. rate of 35%.
Some additional recommendations are to have a marginal effective tax rate--