Industry Committee on Oct. 17th, 2016

[The Chair, Liberal, Dan Ruimy]

Welcome, everybody, to meeting 27 of the Standing Committee on Industry, Science and Technology.

Today we were supposed to have four witnesses, but two cancelled at the last minute. We have the Canadian Vehicle Manufacturers' Association, Mark Nantais, president; and the Automotive Parts Manufacturers' Association, Flavio Volpe, president.

We are going to get right into it. Gentlemen, you have 10 minutes each to give us your state of the union, and then we will go to questions.

Mr. Nantais, the floor is yours.

[Mark Nantais, President, Canadian Vehicle Manufacturers' Association]

Good afternoon, honourable members. It's certainly a pleasure to be here.

I'm here actually representing Fiat Chrysler Automobiles Canada, Ford Motor Company of Canada, and General Motors Canada. Together, these companies are responsible for approximately 60% of all the production in Canada. They are also among the largest multinational companies in the world, exporting their products to 100 countries around the globe, and producing award-winning quality vehicles from Canadian plants that are among the most productive in North America.

We are very pleased that the committee has undertaken a manufacturing study, and in doing so, recognizes that auto manufacturing has been a foundation for economic growth, and sustains a healthy middle class because it is highly productive and provides high added-value, high-paying jobs.

In fact, the auto industry accounts for roughly 115,000 direct jobs and about 500,000 direct and indirect jobs across the country. For every one assembly job, there are seven to nine other jobs created in the economy. No other manufacturing sector has such a high job multiplier. Our direct contributions to GDP in 2014 were over $18 billion, and our exports of motor vehicles and parts totalled some $87 billion last year alone.

Innovation in the auto industry is advancing at an unprecedented speed in its products and in its business models. The next five years will bring more change than what we witnessed in the last 100 years, and we do not see that pace of innovation slowing down. The automobile is the most technologically complex item a consumer will purchase, and the consumer is the ultimate benefactor of advanced vehicle technology in safety, fuel efficiency, and comfort.

New rapid advancements in technology, changes in consumer preferences, and new entrants into the global auto sector are inspiring new automotive products, services, and business models that will be increasingly electric, digitally connected, autonomous, and part of the sharing vehicle economy.

There is a tremendous opportunity for Canadian assembly plants to have strong quality performance and to remain at the forefront of innovation, while enjoying the same technological advantages as other plants across the globe through their embracement of global manufacturing systems.

Canada needs strong advocacy for its manufacturing sector in order to achieve its economic goals. The committee has requested input on what would strengthen, protect, and promote Canada's manufacturing sector to inform this manufacturing study. We are here to supply whatever information we possibly can to help you.

You may be aware that the Canadian Automotive Partnership Council, whose mandate is to lead a forward-looking and proactive effort to position Canada as a leading jurisdiction for automotive manufacturing, has submitted a response to the Canadian innovation strategy which provides detailed recommendations of what factors will support innovation in the automotive manufacturing sector. CVMA certainly supports those recommendations.

Today, I'd like to focus on four areas that would demonstrate the government's commitment to the manufacturing sector as a key economic driver for Canada, and increase competitiveness on a global scale.

First, we should improve access to capital and financial incentives. The terms of the automotive investment fund need to close the gap against competing jurisdictions, and ensure that Canada has the most competitive tools available. Most competing jurisdictions offer non-repayable contributions in many different forms, including cash grants, refundable tax credits, and infrastructure and training credits and grants, with contribution levels that can exceed 50% of the total investment spending. No additional taxes are incurred as a result of the incentives. The conditions are flexible and performance-based. Project evaluation and approval is nimble and responsive to applicants' business realities and investment cycles. Furthermore, lowering the investment threshold investment to $25 million from $75 million would certainly help increase innovation.

We also recommend that the current form of the scientific research and experimental development tax credit be revised to be more responsive. Research and development programs that are flexible and responsive to the needs of the industry and administratively efficient would help support the innovation agenda by promoting auto research excellence, and the opportunity to build on the existing research capacity. A research tax credit that is truly supportive of innovation must be robust and reflect the true cost of advanced auto manufacturing research and development, inclusive of capital equipment, and be based on a broader definition of innovation versus the current definition of science.

Second is a welcoming regulatory and intellectual property environment. While governments can assist their emerging technology champions to grow, their policies and regulations can also stifle innovation. Regulators, agencies, and institutions can have strong impacts on the decisions of global OEMs to undertake R and D activities in a given jurisdiction.

Canada's governments need to take a strategic approach that comprehensively addresses the specific innovation needs of the auto sector. Going forward, it would be important to identify and track regulations that encourage or dissuade automotive innovation in Canada and to propose solutions that enable investment in automotive innovation.

Industries like the automotive industry which are fully integrated with the U.S. will benefit competitively by aligning regulations and removing regulatory differences. In fact, there are material cost efficiencies for both companies and governments with this approach, ultimately benefiting consumers.

North American harmonized standards through the efforts of the Regulatory Cooperation Council enable auto manufacturers to continue to design and build once for the North American market cost efficiently, while ensuring consumers are able to purchase the greatest choice of new vehicles that are equipped with the most comprehensive safety systems and meet the most stringent emission requirements in the world. We strongly urge the government to maintain its commitment to the RCC.

Third, we need to negotiate trade agreements that are fair and balanced, providing actual benefit to Canada's auto sector.

As the government works toward furthering opportunities to expand Canada's exports, we need to ensure Canadian companies are provided opportunities to fairly compete in foreign markets on the same equivalent basis as foreign companies have in Canada's domestic market.

The CVMA submits that there are important core principles for trade policy. The first is that free trade agreements must result in fair and free trade. Second is to focus on opportunities that will support and enhance Canada's industrial and commercial strengths. Third is inclusion of currency disciplines to ensure that market access provisions in a final agreement are not undermined by a country's inclination to manipulate its currency, given the intersection of trade and finance. Fourth is to create a level playing field for Canadian companies by removing market-distorting non-tariff barriers in advance of tariff reductions.

The industry is following with interest the efforts toward a successful passage of the CETA this fall as it represents actual growth opportunities for us. Our members, as multinational companies doing business around the world, are committed to working with the government to ensure Canada's free trade agenda supports and provides benefits to the sector, and positions Canada as that globally competitive automotive producer.

Last, we need to keep the costs of doing business low. We need to provide long-term certainty to companies which make global investment decisions as many as 10 years out. As I have said, increases in the costs of doing business have a negative impact on our competitiveness as a determinant in terms of decisions to place new investment in various jurisdictions.

One of the examples most recently is the pan-Canadian framework on climate change. It will be important in that regard to collaborate with the provinces and ensure the federal government establishes a floor on the price of carbon that does not add to the costs that are already being imposed on us by the provincial cap and trade program in Ontario, for instance. Another would be the proposed increases in CPP employer contributions, which really are payroll taxes, adding costs that would not be present in other jurisdictions.

We support efforts to address the effects of climate change globally, but measures will need to be collaborative and balanced to support competitiveness and avoid unintentionally hurting overall auto manufacturing competitiveness, primarily with our primary trading partner, the United States.

Higher costs to operate in Canada could lead to new or expansion of plants with the associated jobs landing elsewhere instead of in Canada. This is otherwise known as carbon leakage and we would lose on two fronts: the environment and the economic job-related benefits.

Finally, there are critical times in our business when specialized expertise is required for new product launches, emergency production equipment, installation and repair, as well as after-sales service. Sometimes this can be on very short notice. CVMA member companies are global companies which have global teams that provide specific expertise and any delay to get temporary foreign worker expertise to Canadian facilities has repercussions on our productivity and on future investment decisions.

Delays to get expertise across the border, as needed, can lead to a shutdown in production and result in costs and lost revenues of over $1.5 million per hour. The CVMA members would welcome opportunities to work with government to address these deficiencies in the temporary foreign worker program and replace it, perhaps, with a new "global talent” visa or "trusted employer” visa program.

Honourable members, that is a very quick overview that would support auto manufacturing in Canada. I certainly look forward to answering any questions you may have. Thank you.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

Mr. Volpe, you have 10 minutes.

[Flavio Volpe, President, Automotive Parts Manufacturers' Association]

Thank you, Mr. Chair and members, for the opportunity to come and speak. Thank you for the invitation.

I won't belabour Mark's inventory of some of the regulatory issues. There is no daylight between the vehicle manufacturers and the parts manufacturers. I'll give you a bit of a contextual overview and speak a bit contemporaneously about the industry itself so you have context for what we're talking about.

The APMA, first of all, is Canada's national association representing OEM suppliers of parts to final assembly, both to the Canadian footprint and for export abroad. Founded over 60 years ago, we represent 95% of independent parts production in Canada, and that includes many machine tool, die, and mould makers.

In 2015, shipments by our industry were $25 billion, the GDP contribution was $6 billion, and direct employment was 81,000 people. We also have a formal partnership with the Canadian Association of Moldmakers, representing 70 mould makers whose subsegment of the industry ships $2 billion of products a year.

In the Canadian auto sector, we talk about innovation and we talk about chasing new investments. We talk about taking advantage of our trade relationships through trade agreements and our geographical proximity to the world's greatest economy. The first added-value sector that was built in the Canadian economy in the early 20th century was the automotive sector.

It started over 110 years ago with Walkerville Wagon Works' production of the Ford Model A in Windsor, and four years later with the joint venture of Mr. Sam McLaughlin and the Buick Motor Company to provide engines to carriages to sell vehicles. The industry is bookended by Oshawa and Windsor, and 95% of this activity is on a 250-mile or 400-kilometre stretch of Highway 401.

The difference between the Canadian automotive sector and its direct competition within the Great Lakes region, which up until 20 years ago was its only North American competition, was that after the American wave of 100 years ago, Ontario and Canada were the beneficiaries of the Japanese investment wave. In 1984, 1986, and 1988, Toyota, Honda, and Suzuki, in the now wrapped-up partnership with General Motors, all invested in final assembly in Ontario.

Canada's first substantive international trade treaty was the 1965 Auto Pact, which ensured the efficient integration of the auto assembly business in the Great Lakes region. In many quantitative and qualitative measures, it's the most integrated supply chain in the world. Our supply chain successfully competed for product mandates with international competitors for over 90 years and we're very competitive in overseas markets as well.

Mark went over the industry snapshot, so I'll just add a few pieces. Of manufacturing GDP, 10% is automotive; 21% of merchandise trade in manufacturing is automotive; and Canada represents 14% of NAFTA vehicle production in total. Our annualized rate is about 2.4 million units, all of which is happening along that stretch of Highway 401 in southwestern Ontario.

There is also heavy truck and bus assembly in Quebec and Manitoba, and specialized, very high added-value technology—I think fuel cell technology—in B.C. We're very export intensive: 75% of annual output leaves the country; 88% of vehicles assembled leave the country; and about 51% of auto parts built here leave the country.

In auto parts, we have 450 companies representing 1,250 facilities. For the machine tool, die, and mould makers, there are 200 firms, and they are concentrated very heavily within a 150-kilometre corridor from the Detroit-Windsor border.

Assembly plants are the main drivers of any automotive business. The manufacture of vehicles is a very localized venture. You put a plant in a location and your customers, whether they are Mark's members or other members, will expect that their supply happens in concentric circles around the plant.

Sometimes that's location, and sometimes that's timing, and sometimes you manage the location and timing within inventory requirements. The point is that if you're going to supply an auto assembler, if you're supplying an OEM, you're going to supply a very specific plant, and you're going to do it in the comfort zone as prescribed by that company.

I say that because it's very important to note that we have 19 facilities run by OEMs in Canada, from five different OEMs. That is a distinct advantage that we have specifically in Ontario over a lot of the other subnational jurisdictions in the Great Lakes and in the U.S. southeast. We have Fiat Chrysler in Brampton and Windsor. We have Ford in Oakville. We have General Motors in Oshawa, Ingersoll, and St. Catharines. We have two plants at Honda in Alliston. We have the Toyota facilities in Cambridge and Woodstock.

To note on those facilities, the first place that Toyota decided to build a Lexus brand new product anywhere outside of Japan was Canada. Then recently, in the last year, the first place where Toyota has announced the assembly of hybrid Lexuses is in Canada. In the heavy truck and transport assembly business, which my members also supply but to a much smaller degree in volume, 2.4 million light vehicles are produced and 150,000 heavy vehicles are produced. You're looking at Blue Bird in Quebec making school buses; Hino, which is a Toyota subsidiary, making class 4 to 7 trucks in Woodstock; Lion Bus, MCI, and New Flyer in Manitoba; and PACCAR and Volvo Bus in Quebec.

To note in terms of recent OEM activity in Ontario that impacts the sector, we also have the news of last month, which is that as a result of the collective bargaining agreements between General Motors and Unifor, there's a renewed commitment to Oshawa. One very important cluster bookend in our business has been secured at least for the next four years. It is incumbent on the federal government and the provincial government to partner in building up the tools that are required for the new products allocated.

Honda, as a result of the CETA negotiation, and pre-ratification, has declared its Alliston assembly plant the global lead for the Civic and CRV. I went over Toyota. Oakville assembly, for Ford, is the global exclusive for the Ford Edge platform. FCA's Windsor assembly is its lead for the minivan. While there's a lot of discussion of the product mix, and are we in the right product mix in terms of fuel efficiency and size, certainly the assets that the companies run in this country are very important assets within their families.

Much has been given about Canada's relative place in automotive assembly in North America falling to third place behind Mexico over the last 20 years, and specifically over the last five years. Of the last 11 greenfield investment announcements in North America, eight have gone to Mexico, and the other three have gone to the U.S. southeast. An important context is that the Great Lakes region and the Great Lakes cluster, of which Canada, Ontario, is one-third by units of volume, so about 7.5 to 8 million units of volume of installed capacity, is still much bigger than the U.S. southeast, which last year was 5.7 million vehicles assembled, and Mexico, which was 3.5 million. Mexico will crest around five million, but in terms of subnational jurisdictions, Ontario still is ranked either first or slightly second, depending on the year, behind Michigan. That's a very important distinction.

The Canadian supply base is a good mix of private and public companies, Canadian companies and foreign transnationals, but it's very important to note that amongst the global 100 there is a lot of Canadian representation, led, of course, by Magna, which last year ranked number two in the Automotive News' 100 global suppliers. But there are Linamar, Martinrea, Woodbridge Group, ABC, all globally relevant firms, all significantly materially higher than $1 billion of activity annually, in Linamar's case, $5 billion, in Martinrea's case, $4 billion.

The traditional competition is adapting. While Canada held its own, this government and the provincial government partnered with the U.S. Treasury in a restructuring of the industry to anchor General Motors and Chrysler and, by extension, the rest of the industry in the Great Lakes. New investment and added value investment is going south.

Much has been made of the flight of suppliers. Suppliers move with customers by necessity, but what Canadian suppliers have been doing over the past five years is co-locating. When a new investment in Mexico...maybe you need to supply investment from Mexico, but you'd keep your headquarters here in Canada.

I'll leave you with a NAFTA snapshot. In partnership with the Canadian trade commissioner service in Mexico, we participated in a survey of Canadian supplier investment in Mexico, tracking how many companies, their locations, and the trends.

The gross numbers are that 55 Canadian companies have invested in Mexico, have set up 110 facilities over the last 10 years, and the growth rate is 20% year over year. Those companies have all maintained a footprint in Canada. Some have set up a service shop. Some have set up new footprints. The reality for a Canadian supplier is that there is little growth in the Canadian market, although it's solid and thanks to some of the current negotiations, but all the growth is in Mexico.

Thank you.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

We're going to go right into our questioning.

We're going to start with Mr. Longfield. You have seven minutes.

[Lloyd Longfield, Liberal, Guelph, ON]

Thanks, Mr. Nantais and Mr. Volpe, for your presentations. I hope we can get through lots of questions this afternoon. I know you have a lot of important information for our committee.

We had a round table in Guelph two Fridays ago, talking to the auto parts manufacturers. We have Magna, Linamar, and we have Guelph Tool , a lot of large parts manufacturers in Guelph. Guelph also has the lowest unemployment in Ontario.

The success of those manufacturers is drawing a lot of talent, which is creating a bit of a vacuum. One of the things that was brought up in our round table was access to talent, particularly proposed revisions to the temporary foreign worker program, and the needed revisions, let's say.

Are your members experiencing some particular talent vacuums that we could put into our study?

That question is for either one or both of you.

[Flavio Volpe]

I'll give you a sense from a supplier's point of view.

Labour mobility is a very important piece. The more skilled workforce is an aging workforce. What we like to use as a median demographic is 55 years old, male, 25 years plus of service. There isn't a pool of succession in place, and as a result, there's a bigger demand for finding those skilled labourers anywhere we can find them. There is a shortage everywhere in the Great Lakes region, and anything that could help in sourcing them from other jurisdictions is helpful.

The frustration sometimes is in the current protocols of visa programs, where we have to have some of those skilled labourers cross the border to take care of an acute problem or an acute customer request. We work in real time, and there is an uncertainty as to whether you will get that approval in the time frame required.

[Lloyd Longfield, Liberal, Guelph, ON]

Right, that was mentioned. Thank you.

Mr. Nantais, do you have anything to add?

[Mark Nantais]

Yes, on that very point, if I might, what we have, as I mentioned.... For instance, in a new product launch, the plant goes through a considerable renovation, and much goes into the logistics, the assembly line logistics and systems that are associated with that. Oftentimes the only real talent we have, or access to talent, is those parts of the global teams that actually have that responsibility. They don't necessarily reside in Canada but in our offices in the United States. Timing is very critical. Sometimes we need them for hours; sometimes we need them for several weeks at a time. Oftentimes, when we have a critical situation, we may have very little time in which to make sure that person gets across the border and deals with the problem.

It's not that we don't have that skill in Canada, it's just that those are the teams that have been designated on a worldwide basis to carry out that activity. We need them, and we need them quickly, and we need them without a lot of administrative burden associated with bringing them across the border. We have that problem.

[Lloyd Longfield, Liberal, Guelph, ON]

A nuance on that are the service contracts for equipment coming across the border from other countries, that those service people aren't available at the end of the service contract when quite often that is when they are needed.

[Mark Nantais]

That's a possibility. But at the same time, often when we get new equipment like that, while they may have service contracts, much of that service contract can be at times serviced by actual company resources. We obviously want to make sure we're not caught when we don't have somebody who can service them onsite or as quickly as possible. That's something we're very mindful of.

[Lloyd Longfield, Liberal, Guelph, ON]

Thank you both.

I'm going to stay on labour for a bit because it's such an acute problem in our area. You mentioned mould maker as being a particular group that you're working with, and one of our members of the round table said that it took him two years to get his last mould maker. They talked about programs where maybe collaboration between business and education might solve that if we were allowed to put colleges right on the floor of manufacturers.

Have you had any experience with programs where colleges can put people directly on to factory floors and get financial credit and academic credit for the students who are there?

[Flavio Volpe]

Sure. I think the best example of this is what's happening in Windsor. On one hand, St. Clair College has a very big program with 700 students enrolled per year. They are the biggest local source of tool, die, and mould makers. But, of course, you work at a pace where you get them through the college program and then they have to apprentice and then we see whether they get poached. There's so much demand. They move around. A company down there is a supplier named Valiant, and in partnership with the CTMA, has run a program sponsored by the provincial government on a smaller scale giving 40 weeks of on-the-floor training in a shop owned by a private company where they pay minimum wage, plus the training, plus a set of tools. It was originally set up for a pipeline for Valiant's operations, and now Valiant, I think, is training people for its competition.

There is some discussion about how you put the two together—what Valiant does on the floor with certification at St. Clair—but there's obviously a need for a hybrid solution there.

[Lloyd Longfield, Liberal, Guelph, ON]

It's something like the military offers. You get the training but you have to spend something like two years after you have the training.

[Flavio Volpe]

That's right.

[Lloyd Longfield, Liberal, Guelph, ON]

Finally, from ISED, the supply chain is changing. The Internet of things has hit the automotive industry in a good way, so the supply chain needs to respond to that. Do you think Canada is keeping up to speed with supply chain changes around electronics and vehicle sensing and the Internet of things, as it relates to manufacturing autos?

[Flavio Volpe]

I think it is. If we overlay the geography of North America and we take two clusters—the automotive cluster and the IT cluster—we're in the middle of the biggest automotive manufacturing cluster and the second-biggest IT cluster. The problem is there's a cadence difference between how IT vendors get business, and the obsolescence time frames of it are very different from what the automotive sector is used to. It requires the two to mix a bit.

In the OEM sector, there isn't a final assembly sector in Canada, so many times it's the Canadian supplier that's working with the IT sector. There is a lot of private and public partnership programming happening, some of it by us and some of it by our American counterparts.

IHS, which is an American-based auto analysis group, says that by 2030 the value of electronics in a vehicle will exceed 35% of the total vehicle value. It was below 5% in 2000. It's incumbent now for new Canadian entrants from IT into automotive to get into the automotive supply chain before the OEMs decide on who their suppliers are. If that becomes crystallized, you're done.

[The Chair, Liberal, Dan Ruimy]

And you're done.

Thank you very much.

We're going to Mr. Lobb.

[Ben Lobb, Conservative, Huron—Bruce, ON]

My first question is for the automotive parts manufacturers. I worked in the automotive parts industry for many years, and the one issue they had in the mid-2000s was competition from China. That pretty much finished many of our competitors, but I guess it allowed us to remain in place, barely. Some of the issues they have now are scarcity of labour and also the price of electricity. This is in the province of Ontario. For them, this is a foundry that makes cast iron parts and stainless steel parts. They actually shut down on high-demand days to make money...or to save money. In some years it's to make money.

It seems a perverse reality in the province that CFOs and plant managers have to shut their plants down in the summertime, in the afternoons for sure, and in some cases for the day shift and most of the afternoon shift. This can't be the only plant in Ontario that's experiencing these issues. How do businesses make the case to invest in Ontario when that's the first issue you have?

[Flavio Volpe]

That's a good question. Regardless of big or small, when we take a look at the costs of energy, that is probably the biggest delta between us and our competition, both the immediate competition and the U.S. southeast.

As a volume supplier, you don't have the option to shut down. Your customers, like Mark's members, are expecting 15,000 door modules this week, so you just have to absorb that cost. If you're making tools and you're making one specific tool and it's not a just-in-time supply, you may be able to ride that time-of-use curve. The vast majority of the time you're stuck with that cost, but there's some perspective on that cost. It's a real irritant. It is, in some cases, double that of our competitive jurisdictions, but in many cases, unless you're a foundry and you're making volume parts, it's probably around 5% of your total cost. This is a business that operates on single-digit margins in EBITDA, earnings before interest, taxes, depreciation and amortization, so every point counts. If you have a business here it's not going to cause you to close the business, but if you're in competition for that investment attraction with other jurisdictions in the Great Lakes and it's even, it may be the irritant that sends you somewhere else.

[Ben Lobb, Conservative, Huron—Bruce, ON]

Yes, and on the machine shop side the decision has been to bring it to machine shops in Michigan when they used to be in Wingham, Ontario, and Strathroy, Ontario.

[Flavio Volpe]

That's right.

[Ben Lobb, Conservative, Huron—Bruce, ON]

With the issue around labour, I give full credit to the CAW. For the company in my area, the CAW negotiated a good collective agreement that would allow them to bid on and compete with most jobs out there. The issue it had was attracting people to work there at that price, so the CAW and the company were able to renegotiate mid-agreement to increase the hourly rate, and they're still having issues attracting people to work at a starting rate of around $17 an hour plus benefits. How can that be?

[Flavio Volpe]

You mentioned a machine shop as an example. A machine shop has really skilled labour and there's a real shortage of those labourers, so there's a really high competition for those people.

[Ben Lobb, Conservative, Huron—Bruce, ON]

This is even for people to run a CNC machine.