By on May 2, 2013

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The latest round of bad news regarding the Australian domestic auto industry has shifted TTAC’s attention to Canada, another country burdened with some similar issues. If Australia’s own car industry is getting hammered, then how much longer does Canada have?

Australia’s car market was once far more protected, but the reduction of imported vehicle tariffs and cheap exported cars from countries like Japan and Thailand have made locally built cars an extremely expensive proposition. Unlike Canada, Australia’s vehicle exports are minimal, and the domestic car industry has been reduced to relying on local consumers and government handouts to help stay afloat. While Australia has rapidly switched from locally-made, thirsty V8 sedans to small, fuel-efficient compacts, Canada has always had a taste for gas-sippers. Hell, two of them (the Honda Civic and Toyota Corolla) are even built there.

But Canada now finds itself in a paradox; the country relies on exports, yet has a very strong currency. Once upon a time, Canada’s dollar was worth around 62 cents, which made it a much more attractive place to build cars. The loonie’s recent rise to parity has made it significantly more expensive to build cars in Canada, and it’s not just the auto makers who are recognizing this.

An Automotive News article quotes one Canadian Auto Workers union official who seems resigned to the fact that increasing costs mean dwindling prospects for Canada’s auto manufacturing industry.

“As those costs increase — 40, 60 percent — we simply can’t compete anymore,” said Ron Svajlenko, the president of Canadian Auto Workers Local 222, the union whose membership has dwindled to 3,500 from 12,000 in 2002. “When it comes to a decision about where you’re going to do things, you go to where the costs are low.”

The CAW was a very tough negotiating partner for the Big Three in the last round of contracts, managing to stave of a full implementation of a UAW-style two-tier wage system for new hires. But the CAW didn’t get all of the investment it was looking for either. While Ford got a commitment to upgrading the Oakville plant, upgrades for Chrysler’s Brampton plant (which builds the LX cars) never materialized and GM even shifted product out of Canadian factories, leaving the future of its Oshawa Assembly plant in doubt. Canada, and the province of Ontario still maintain some advantages; a publicly funded healthcare system and a generous regime of tax credits and low rates for corporate income tax can be compelling reasons for auto makers to continue to build cars in Canada.

But the currency issue will remain a thorn in the side of Canada and Australia, albeit for different reasons. Canada’s strong dollar makes it not only unprofitable to build cars there, but also gives the OEMs a good reason to pack up for low-cost Mexico or, even better, “bring jobs home”, as in the case of GM moving production of the Impala (at least in part) back to Detroit.

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21 Comments on “QOTD: Is Australia The Canary In The Coal Mine For Canada?...”


  • avatar
    jmo

    A classic example of the resource curse.

    https://en.wikipedia.org/wiki/Resource_curse

  • avatar
    DC Bruce

    Other than a common language, the British commonwealth and all that, the only thing OZ and Canada have in common is that their economies have both benefited from the commodities boom, with the resulting appreciation of their currencies. There is a very respectable case to be made for a “strong” currency: among other things, it benefits the consumers in those countries.
    But Australia’s problem as an export economy for manufactured goods is that the not insubstantial cost of shipping has to be added to the delivered price of the product. Canada most definitely does not have that problem, since, thanks to NAFTA it has access to the entire North American market — not just the U.S. but also Mexico, which is growing. If Honda can make Accords and Acura TLs in Marysville, it can also make them in Canada (I thought Honda did make Odysseys and Pilots in Canada?)

    What you’re really saying is that the CAW’s non-competitive (even with the UAW) price structure can’t survive in the face of a stronger Loonie. But the larger picture is this: thanks to the weak Loonie, the CAW and its members rode high . . . but did so at the expense of Canadian consumers generally who paid more for imported goods, from the U.S., Japan and Europe.

    For all I know, the only reason that the Detroit 3 moved production to Canada was because (1) is was very close geographically to where they were building cars in the U.S. and (2) the cheap Canadian currency gave them a cost advantage.

    • 0 avatar
      danio3834

      Before NAFTA and before that, the AutoPact, the Big 3 had dedicated factories for their dedicated Canadian volume, much like Australia does now.

      Once the AutoPact and later NAFTA came along, the already existing Canadian factories flourished because of the other benefits you mentioned that favored exports.

      Since then, the rise of the dollar and rising wages have definitely eroded that benefit with the only new Canadian assembly plant being built in the last 10 years being Toyota Cambridge. During that time closed assembly lines in Canada I can think of of the top of my head are:

      -Chrysler Pilette Road assy (and also an aborted huge expansion)
      -Ford St. Thomas assy
      -Ford Windsor Casting (somehow Windsor engine is still running, mostly RV engines)
      -Ford Ontario Truck assy
      -GM Oshawa Truck assy
      -GM Windsor Transmission
      -GM Windsor Trim
      -GM Sainte Therese assy
      -GM St. Catharines Components

  • avatar
    Type57SC

    my impression is that the strengthened Canadian dollar helped retial companies more than consumers. Consumer goods companies have mostly kept the exchange rate swing from what I can see.

  • avatar
    28-Cars-Later

    Is Australia The Canary In The Coal Mine For Canada?

    Yes and no. The entire native Aussie auto industry could dissolve and I wouldn’t necessarily jump to the same conclusion with Canada, but I could see Canadian production definitely shifting south to the US and Mexico. I think Australian car production would be winding down regardless of its nation’s strong currency due to tariffs being lifted on Asian imports. I don’t think Canada would be in as much danger if not for its stronger currency vs Fed’s dollar exchange manipulation, if somehow this would stop tomorrow I don’t see an immediate threat to the Canadian auto industry. Canadians still buy products made in their country (and some are exported to the US), Australians switched to Mazda and Toyota over buying more Holden and Ford products.

  • avatar
    wmba

    Ain’t globalization wonderful? Yessir!

    If Australia and Canada had any sense, they would insist that the raw materials dug out of their ground be turned into something useful on their own soil.

    When the province of Newfoundland and Labrador insisted that nickel ore be smelted right there, outrage ensued. Countenances turned beet red, veins popped and throbbed and great gushes of cigar smoke emerged from the elites of Canada, previously happily sipping brandy in their Montreal and Toronto clubs. Not to mention the boardroom of Vale, the Brazilian mining giant who owned the deposit.

    Surely, their thinking went, those damn Newfs are getting too uppity. Everyone knows they should be happy just to train a few miners, dig out the ore and ship it off to Upper Canada or overseas for processing. The tale is too depressing to relate.

    But the greed of the 1 percenters and China to dig everything up RIGHT NOW to make themselves even richer is pervasive.

    And of course, the 1 percenters of Canada and Australia are mere pikers compared to the real 1 percenters in the US, EU and the Chinese government. So, basic ores are dug up and sent off from both countries to enrichen others, and the indigenous elite and politicians are reminded that they won’t enjoy the privilege of becoming global 1 percenters themselves unless they buckle under.

    So, no lasting infrastructure is built in the resource countries. But their currencies soar while resource extraction lasts. The public is advised by their elite that their soaring currencies will mean cheaper imports so as to keep them quiet while they are robbed blind.

    So, for example, when Canada’s dollar currency was worth a mere 72 cents US just 15 years ago, cars cost 30% more than in the US. Now the Cdn dollar is at par with the US, cars only cost 20% more. What a deal, huh! Tires are double the price of Tire Rack. The 1 percenters extract their gelt from Canadians both coming and going.

    Unctuous proclamations are issued to try to quell the mice’s pathetic and querulous bleats. Lies, actually, but nobody wants to stick their head above the parapet for fear of getting it kicked clean off. I lost my very good job in 1995 when I upset some 1 percenters and was too dim to notice I had upset the applecart.

    Likewise, countries like Canada and Australia have to kowtow to the really big boys, suck up all the indignities and just try to get on with life as best they can. Car plants? Toast until the Oz and Cdn dollars collapse to the levels deemed appropriate, if you get my drift.

    Like Bob Dylan said, “You gotta serve somebody”.

    • 0 avatar
      TW4

      The Resource Curse will not be solved by hoarding natural resources and attempting to exploit a trade surplus of finished goods. This isn’t the 17th century, and none of us wish to recreate the medieval economic malfeasance that led to colonization and world war.

      If you pull resources out of the ground, put them on the market. If your currency is appreciating rapidly, or if local purchasing power is rising, you have an advantage acquiring the resources you mine.

    • 0 avatar
      RobertRyan

      “If Australia and Canada had any sense, they would insist that the raw materials dug out of their ground be turned into something useful on their own soil.”
      Well we USED TO DO that but costs got out of hand and it became economically not viable. Yes a much lower exchange rate would help.

  • avatar
    ect

    The issue is actually quite complex, and goes far beyond nominal currency values.

    Auto production in Canada and the US has been integrated since the adoption of the Canada-US Auto Pact in 1966 (or thereabouts). When the Auto Pact came into force, the C$ was US$0.925. In the 70′s, it rose to about US$1.08. It fell from there to around US$0.62, and is now pretty much at par.

    In all of that time, Canadian plants produced a limited range of vehicles for a North American market (now more than 350 million people), so they had long production runs. This builds in efficiencies that Australian plants, producing for a market of around 22 million, can never achieve. So, the situation is very different.

    Direct labour is part of the cost of operating an assembly plant, but only part. Toyota decided to build a new plant in Woodstock, snd Honda to expand in Alliston, when the C$ was already moving towards parity. I’ll presume they did detailed financial analyses.

    From the numbers I have seen and the people I have spoken to, the real carnage has been in the ranks of parts suppliers. Whatever the actual economics are at any given time, the D3 have reasons for wanting to assemble roughly 10% of North American output in Canada.

    They have no such imperative for parts suppliers, and a long history of hanging buying decisions on tenths of a penny in price. So, Canadian suppliers who are unable to deliver the best price because the loonie has risen have been abandoned in favour of lower-cost US and other suppliers.

    • 0 avatar
      jimbob457

      Well put, sir. I can remember when Windsor was a twin city suburb of Detroit. Perhaps, it has become the other way around these days. Oz is a 10 to 20 hour plane ride from anywhere.

    • 0 avatar
      Lorenzo

      One little quibble: North America includes Mexico’s 112 million people (with a rather briskly growing economy), so the NA market is actually 462 million. Otherwise, spot-on.

  • avatar
    Beerboy12

    Well if the Canadians are struggling with currency value, no wonder the Australians don’t export as their currency is stronger than the US $.
    I know that Holden is GM but that still is a powerful card for the Australians, something Canada does not have.

  • avatar
    Felix Hoenikker

    Not to worry about the high price of commodities. Commodity deflation would have set in had it not been for the US Feds QE programs that also have “debased” the value of the USD vs other currencices. But it was really meant as a gift to the TBTF banks for their good work inflating the real estate bubble in sub prime mortgage debaucle.
    However, QE will not last long enough to prevent general deflation in the commodities markets in the next few years. The whole idea is equivalent to rearranging the deck chairs on the Titantic.

  • avatar
    Lightspeed

    If you can’t compete on price, you have to compete on quality. The Canadian auto plants have consistently scored high on assembly quality (and I have no use for the CAW). But, how does Canadian healthcare impact the cost structure? It must be net benefit on the wage-cost side?

  • avatar
    mikey

    I know nothing about Oz,other than they are nice people. I’m a retired GM UAW/CAW worker. So I know a bit about the Canadian auto.
    The UAW has a lower second tier wage than Canada. The UAW has the VEBA in the form of GM shares. The Canadian retirees benifits are paid out of fund. GM has paid thier money into said fund,and never have to pay again.

    While the CAW second tier are payed better,it more than ofset by the outside suppliers working inside the plant. GM Canada has outsourced,all unskilled maintenace,and some skilled. The UAW has not agreed to that just yet. As of right now zero low tiered people are working,all laid off.

    Health care costs/ benifits for active workers,is considerbly cheaper than the USA. Combination of lower drug prices, and a national health care program make for big savings.

    I wish the best for the good folks at OZ. IMHO the Canadian auto industry, decimated as it is,will be here for quite sometime.

  • avatar
    Gardiner Westbound

    When the C$ was worth less than the US$ the CAW rationalized higher Canadian wages saying domestic autoworkers were being paid in cheaper dollars. Now with the currency at par it is burying that rationalization deep.

    The Ontario Liberal government’s completely insane Green Energy Act (GEA) has resulted in major price increases for large energy consumers. Additional hikes of 40% to 50% are anticipated. A recent Fraser Institute study projects manufacturing return on investment will decline 29%.

  • avatar
    Big Al from Oz

    I think Canada’s policies are greatly influenced by it’s dominant southern neighbour, the US.

    I get called anti-American because of my comments, but countries are required to do what’s best for them. If Canada make decisions that the US disagrees with doesn’t make them anti-American. The same goes for Australia.

    Canadian mining is gradually going west, across the Pacific, even its oil. The Canadians must realise that the US will put itself first over Canada when it comes to trade.

    The US can survive without Canada, but Canada can’t survive without the US at the moment.

    Canada needs to look off shore more for its future, like we do. We are very pro American or I could even say Australia, Canada, US and the UK are very closely aligned. Anglophiles.

    Canada can’t ignore the Chinese either, they will become a force much greater than the US ever was. But the US is your neighbour and will always influence. They are between a rock and a hard place at times.

  • avatar
    TorontoSkeptic

    Let’s take this with a grain of salt… when major automakers say things like this the subtext is always “give us subsidies and/or wage concessions or we’ll take all our jobs elsewhere.”

    By any measure the Canadian dollar is very overvalued (20-40%) and that situation doesn’t last forever.

    • 0 avatar
      ect

      I agree that industry is always on the lookout for public subsidy. The shame is that governments so freely offer them. The real shame is how professional sports teams find it so easy to persuade city governments to give them fancy new facilities at public expense, where the only winner is the team owner.

      I’ve always thought welfare for millionaires is a terrible idea.

      But the Canadian dollar is NOT “overvalued”. It trades in the marketplace, and its value is determined by the law of supply and demand.

      Roughly 50% of Canada’s GDP is accounted for by trade, so the value of exports (which are mostly forestry products, agricultural products, oil & gas, and metals) has a huge influence on the value of the currency.

      Hence, the C$ fell in the 80′s and 90′s, when commodity prices (and the value of Canada’s exports) declined.

      As commodity prices rose in the 00′s, so did the Loonie. Higher-priced exports mean that customers have to buy more C$ to pay for them.

      If commodities go into another cycle of decline, so will the C$.


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