Industry Committee on Oct. 17th, 2016

[Flavio Volpe]

We did a little survey of our members and their 80,000-plus employees—let's say about half of them are represented from Toronto to London and the other half from London to Windsor—incidence of organized labour, and then the difference in prices. We surveyed members representing 39,000 employees, about a 50% sample size. We found 14% union representation overall. The number was 17% from London to Windsor, and it was about 10.5% from London to Toronto. We found that the western end of that geography was the most difficult place to keep staff and employees, but the incidence of turnover in non-specialized business was in the single digits, and so people still stay, regardless of it, as the more skilled people get poached. These are good wages that people more or less gravitate to, especially in towns where they have.... Unlike Windsor, for example, where you have a real concentration of hundreds of companies and some choice, if you're in Ridgetown, you're either at KSR International or you're not, and so it's different from town to town.

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

The automotive supplier innovation program that was brought up in budget 2015 or 2014, I can't remember now, does that need to be enhanced, more grants, fewer repayable contributions? If a parts manufacturer in Ontario, or even in another province, wants to expand or they want to do a greenfield facility or what have you, does that program need to be beefed up? Obviously, we can work with the big OEMs on the huge projects in some cases, but for those parts manufacturers that employ people in small towns and on the periphery, does the program need to be more accessible with maybe a mixture of grants and repayable contributions?

[Flavio Volpe]

There's a family of funds, the automotive supplier innovation program, the automotive innovation fund, so I'll generally answer by saying a lot of those funds were first conceptualized in a different market for liquidity and cost of money. These are now healthy companies with good balance sheets that have access to very cheap loans. From a competitive standpoint, if Canada is going to compete for that investment, as opposed to Michigan, Ohio, or North Carolina, it's a better idea to go with grants, simply because that's the competitive space. These are mobile companies who have custom—they may supply Volkswagen in Tennessee. They might just do it out of there.

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

May I have one last quick question?

[The Chair, Liberal, Dan Ruimy]

In five seconds? You'll get a second round.

Mr. Masse, go ahead.

[Brian Masse, NDP, Windsor West, ON]

Thank you to our witnesses for being here today.

I want to follow up on the innovation fund. We've seen a significant uptick in a number of different losses to Mexico while we've had this fund and previous funds. Why is that the case? We've had funds available and they've not been exercised.... Companies have chosen other states for them, and single states, too, such as states in the U.S. and states in Mexico.

[Mark Nantais]

I think the answer is multi-faceted. In terms of the AIF, that fund, we have to remember that whether it's Mexico or any other country, the benefits of an automotive industry, economically speaking, are absolutely out of this world from a job perspective, a revenue perspective, and a contribution perspective, as a cornerstone of their economy. When you have a job multiplier of seven to nine, that's pretty much unheard of, which is why everybody wants one.

On the AIF, it is a sort of repayable loan structure that is taxed. That's one thing the auto industry is very clear about: it should not be taxed. It should be more into the grant type of structure—

[Brian Masse, NDP, Windsor West, ON]

If I could just interject there, could you describe that a bit more? What I don't think people quite understand is that you apply for a government loan and then, immediately, before you actually start to do anything, you're getting taxed on that loan. Really, it's treated as revenue.

[Mark Nantais]

That's right. It's taxed in the first year you receive it, in which case, when you expected x dollars, you're not really getting x dollars. You're getting x dollars minus whatever tax rate applies. You're not getting the full benefit of the fund or the loan, which is why we're saying that it should not be taxed. Other jurisdictions are not taxing those incentives.

It should be more of a grant structure, and that grant structure should not be kept to the 20% threshold. It should be upwards of 50% plus. Take a look at why Tennessee got the Volkswagen plant. On a $1 billion investment, they got roughly $540 million in incentives. That's $540 million on a $1 billion project by various means, in all various means.

We have to look at how we close the gap. That's one reason that we've seen an exodus—not our fair share is a better way to put it—of new investment. Out of the roughly $18 billion in new investment over the last few years, $10 billion went to the U.S., $8 billion went to Mexico, and we got $1 billion here in Canada. That's not including the most recent announcements and so forth.

It's that, and then it's the cost of doing business. This is where, again, the federal-provincial approach here to new investment decisions or in support of new investment decisions is really critical.

In Ontario, for instance, the cost of electricity was mentioned. We are high users of electricity, and we're very flat in the sense that we don't have the ability to go to off-peak hours. We have to maximize the capacity utilization of our plants. We don't have the ability, for instance, to go to off-peak hours and reduce our global adjustment cost, so we're seeing costs upwards of two to three times higher in Ontario versus our competing jurisdictions. More roughly, on average, that's about a difference of $42 per megawatt hour versus our benchmark plants in the United States. That's one of the issues that also goes into the equation here.

There are also the costs of other regulatory issues and the complexities. These are all things that add to the cost of doing business. It's the multitude of those things that actually affect and influence a decision to invest here or not. Most recently, we've seen “or not” apply.

[Brian Masse, NDP, Windsor West, ON]

Is it fair to say that essentially the investment.... I mean, there has been some progress, but it's been largely driven by negotiations at the table between the workers and the company in terms of similar decisions that are being made today about collective agreements and all that. Would that be a fair thing to argue?

I know that government programs have been used a bit here and there, but again, if $18 billion is invested in North America and we only get $1 billion of it, it's not a successful record.

[Mark Nantais]

There's no question that until these most recent investment announcements we were certainly not getting our fair share. These new announcements of course don't mean it's a given. I think it would have to be clear that it's still incumbent upon governments, both federal and provincial, to come forward and do what they need to do in terms of supporting these potential new investments.

[Brian Masse, NDP, Windsor West, ON]

For parts and general assembly, we've dropped from number two in the world. It's interesting. I'm not trying to pick on any particular member so I won't mention the party name, but we had a member in the House of Commons when debating the automotive industry who said that NAFTA and the Free Trade Agreement actually created the Auto Pact. This came from a member who has auto in their community. There seems to be a lack of awareness, sometimes, of the importance of it to the sector, and also of the trade agreements.

Is it really impossible for us at this point in time, or is it possible with the proper strategy to win greenfield sites? Should Canada be out of the business of competing for these, or should we actually be fighting for them?

I don't think the automotive sector is dead. I don't think innovation and national programs are dead. I think the sites of other places show investment.

[Flavio Volpe]

Let me take a shot at that.

Traditional OEMs can be counted, right? Whatever your number or however you define them, there are 13, 17, or 20 of them.

Take a look at the prospects of the company. Take a look at what they're making. Take a look at the regulatory environment in the target markets, like corporate average fuel economy in the U.S., and you can say, “We can triage two or three targets.” Then, take a look at those targets. You don't have to put your ear to the ground to find out who else is talking to them. Take a look at their package. Take a look at our package. Build it pro forma over 20 years, and then say, “Look, on a 20-year basis, I think Canada is more competitive than anybody else.”

But, these other jurisdictions bend that NPV, net present value, curve with the package. You started on AIF, and I've been very public about this; I think every other competing jurisdiction recognizes that we are now in a very cheap money environment. A company with a good balance sheet can borrow $1 billion at very low commercial rates.

Every other competitor says that if they're in the game—and you have to decide that you're in the game—then you're in the business of grants and/or training dollars or other contributing pieces like that.

I think it's an expectation of this industry that sooner rather than later the AIF terms get changed to reflect a competitive environment.

[Brian Masse, NDP, Windsor West, ON]

I think funds like that are just for political reasons. They're not for getting real action.

[The Chair, Liberal, Dan Ruimy]

Thank you.

We're going to move to Mr. Jowhari. You have seven minutes.

[Majid Jowhari, Liberal, Richmond Hill, ON]

Thank you to the witnesses.

I'm going to start with Mr. Nantais. Earlier this year, your association stated that the auto industry is part of the solution in reference to reducing greenhouse gases. Could you please explain how your industry is part of that solution, especially when you're only representing 60% of the production, with Toyota, Honda, and Suzuki not being part of that?

[Mark Nantais]

Suzuki is no longer here.

When we say we're part of the solution, I'm speaking from an industry-wide perspective. All automakers are investing tremendous amounts of money in new technologies to improve fuel economy, reduce CO2 emissions, and reduce other smog-related emissions at the same time.

It's the entire industry that's working towards this. The entire industry is probably one of the most technologically advanced, green-technology industries that exists. For instance, in the 2017-25 GHG emission regulations for light-duty vehicles, we are spending over $200 billion in new technology investments, $100 billion of which is probably going directly into electric vehicle development. You will see much more of that going forward.

Year over year, fuel economy or fuel efficiency improvements are roughly 3% to 5%. They used to be 1% to 1.2%. That's changing the entire profile, if you will, of new vehicle fuel efficiency. That will deliver about a 266 million tonne reduction in GHG emissions from the light-duty fleet between now and 2025—and beyond, actually, because these vehicles are going to be on the road much longer.

By virtue of those investments in technological advancements, we are making significant reductions in those emissions. On top of that, we now have what we call electrification taking place in our industry. That includes not just the vehicle itself, but also vehicle-to-vehicle connectivity and vehicle-to-infrastructure connectivity. These are all things that are ultimately going to help reduce congestion and move vehicles more effectively in terms of constant speeds and safer operations because they will communicate with one another.

We recently had Transport Canada officials in Detroit to look at those very technologies. I'm not going to speak for them, but I can tell you what they thought. They thought it was mind-boggling just how quickly this technology is taking place. Whether it be lightweight materials, mobile communications, sensors, software, artificial intelligence, analytics, advanced battery technologies, these are all things that we as an industry—I'm speaking of all manufacturers now—are contributing to the global change equation.

[Majid Jowhari, Liberal, Richmond Hill, ON]

Can you expand on the impact of reinvestment that the provinces will be making as a result of, for example in Ontario, cap and trade back into the industry? How will it help you expedite or increase that benefit and reduce emissions?

[Mark Nantais]

This requires a long explanation, but I'll try and be as brief as I can. We can take it offline as well.

Clearly, the cap-and-trade program poses certain requirements on industry. This requires, from a manufacturing standpoint, reductions in greenhouse gas emissions. What people don't understand is that, from a manufacturing standpoint, vehicle assembly is less than 1% of the total Ontario inventory, so we're not very energy intensive at all. Vehicles in our supply chain may be perhaps because of the products they provide to us. Ultimately, the idea with cap and trade is that if you can't meet what we call the cap decline and meet the fuel efficiency improvements, and you don't have sufficient allowances or credits, then you have to buy them.

Unfortunately, with the way it's been constructed to date and thus far for the next four years, even though they commit to giving industry allowances, because we have made so many improvements in our energy efficiency over many decades—why? Because it made good business sense to improve the bottom line—we've taken all the low-hanging fruit away. Now we're talking about high-cost energy-efficiency projects.

The idea here is, you take cap-and-trade revenues and you recycle them back into the industry, hopefully using appropriate criteria to help companies to make some of the more costly energy-efficiency improvements in their operations. Ideally here, we have to keep in mind that these are costs imposed on us in Ontario, and ultimately Canada, that our competing jurisdictions do not have.

We only use, for instance, natural gas, which is part of the cap-and-trade program, to do two things: to paint vehicles, in other words, temper the air that goes into our paint shops, and to heat our buildings. Those are two things that our competing plants, say, in Texas, don't have to do. We're automatically, potentially, paying higher costs in energy or electricity that could offset our competitiveness.

[Majid Jowhari, Liberal, Richmond Hill, ON]

I'm sorry, but I'm going to interrupt you.

On the partnerships with universities and colleges, especially on the research side, the innovation side, specifically with fuel cells and electrification, is your industry partnering with any specific educational institutions?

[Mark Nantais]

Absolutely.

[Majid Jowhari, Liberal, Richmond Hill, ON]

Can you give me an example?

[Mark Nantais]

With respect to vehicle manufacturers, assemblers, and parts makers, and Flavio can speak to that more eloquently than I can, I can say that the OEMs have multiple arrangements with universities, centres of excellence, and colleges across the country. They are focused on battery development. They are focused on lightweight materials. So much more now is being focused on vehicle connectivity, and at universities such as the University of Waterloo, the clusters on—

[Majid Jowhari, Liberal, Richmond Hill, ON]

I happened to be at the University of Waterloo and I saw—

[Mark Nantais]

So you know.