Analysis: The Clock Is Ticking For GM's Oshawa Plant

Derek Kreindler
by Derek Kreindler

Upon receipt of a multi-billion dollar loan from the Canadian government, General Motors signed a “Vitality Commitment”, essentially a covenant in the loan agreement between GM and Canada’s government, which guaranteed that a certain amount of GM’s North American production would remain in Canada. That number is widely reported as being 16 percent, while page F-69 of GM’s IPO filings outlines that the covenant is valid until GM repays its loan commitments or until December 31, 2016, whichever comes later.

While Oshawa has widely regarded as one of GM’s best plants in terms of producing high-quality vehicles, the future of GM’s Oshawa plant is looking increasingly bleak.

The first post-bailout blow to Oshawa was the announcement that production of the next-generation Chevrolet Impala and Cadillac XTS would be split between Oshawa (its traditional home) and GM’s Hamtramck plant, which also builds the Chevrolet Volt and Malibu. Oshawa has long been the domain of the W-Body Impala and the announcement that GM would close the “Consolidated Line” that builds the Impala and GM’s Theta crossovers (the Chevrolet Equinox and GMC Terrain, both hot sellers) was a blow to Canadian manufacturing and the Canadian Auto Workers union.

The CAW managed to keep the Consolidated Line open until 2014 as part of their 2012 contract negotiations with the CAW. But the contract, which expires in late 2016, will coincide with the “drop dead” date for GM’s Canadian Vitality Commitment. What happens between now and 2016 is anyone’s guess, but it’s possible to draw some conclusions based on events that have transpired.

In early 2013, GM announced that production of the next-generation Chevrolet Camaro would shift to its Lansing, Michigan plant in 2015. The main reason behind the move is GM’s desire to consolidate production of vehicles built on its rear-drive Alpha platform to one location. However, the move means an estimated 100,000 units of production will be taken off the “Flex Line”, where the Camaro, Impala, XTS, Theta crossovers and the Buick Regal are built – it’s entirely possible that the Flex Line could see a reduction from three shifts to two once the Camaro is gone.

The remaining product is hardly Oshawa’s saving grace. The Theta vehicles are mostly built at GM’s CAMI facility in Ingersoll, Ontario, as well as in Spring Hill, Tennessee (which handles overflow production, much like Oshawa). Like GM’s Michigan plants, wages at Spring Hill are significant lower than in Ontario. Spring Hill has the benefit of being a re-opened plant, able to pay new hires $15.78 an hour, or about half of the going CAW rate of $34 an hour. The Regal is a dud in the marketplace (selling a paltry 24,616 units in 2012), having been cannibalized by the Michigan-built Buick Verano, and it’s unclear if it will be replaced in Buick’s lineup at all, though Morgan Stanley’s Auto Product Guidebook, considered an authoritative source on GM’s future product, suggests a 2015 redesign. That leaves the Impala and the Cadillac XTS as the sole remaining product with any long-term viability at Oshawa, and even then, it’s feasible that GM could decide to shift production to Hamtramck, which likely has excess capacity due to its immense size and slow sales of both the Chevrolt Volt and Malibu.

Industry observers know that unused capacity costs auto makers a lot of money, and Oshawa is particularly vulnerable to this phenomenon as well. With its enormous size and the massive amounts of money poured into it by GM, under-utilization of the Oshawa plant would be an enormous financial drain on GM. In addition, higher labor costs in Canada and a (currently) unfavorable exchange rate would merely add to the pain. At that point, closing Oshawa would be something GM would have to consider – if it isn’t already on their minds. In this scenario, Hamtramck would get the remaining Impala/XTS production, allowing GM to boast of “bringing jobs home”, while production of the Theta vehicles would be largely unaffected, with CAMI and Spring Hill available to produce them. The Regal, which is built on the global Epsilon II platform, could also be shifted elsewhere, to GM’s Fairfax, Kansas plant or even Hamtramck.

Without the loan agreement and the Vitality Covenant being made public, it’s difficult to gauge the consequences of an Oshawa shutdown. The timing of the agreement and the CAW contract expiration dates suggests that the plant’s closure is a very real possibility. On the other hand, two factors stand in the way of such a theory. One is the enormous negative PR that GM would face if the Oshawa plant closed. Oshawa is the historic home of not just General Motors, but Canada’s auto manufacturing industry, stretching back over a century. While Canada is a small market, it’s entirely possible that sales of GM cars would suffer in the event of an Oshawa shutdown. Needless to say, the community itself would be negatively affected in a massive way.

Second is the currently rosy outlook for the U.S. and Canadian new car market. With a SAAR of 15.3 million units currently forecast for 2013, observers seem to be bullish on the medium-term prospects of new car sales, and GM is making a big push itself. The Impala and Theta crossovers are some of GM’s best sellers, with Theta selling over 316,000 units in 2012 combined and the Impala moving 169,351 units, despite a relatively antiquated design.

Of course, this is all predicated on increasing levels of sub-prime financing for vehicle sales in the United States, as well as and high prices for used cars, factors which many have chosen to omit from their own assessments. These are potential “wildcards” that could derail an auto industry rebound, and are made all the more prescient by news that Ally Financial, a government backed bank that was once GM’ finance arm, has failed a “stress test”. While Ally is GM’s lender of choice for GM’s customers with solid credit scores, GM’s own sub-prime lending arm, GM Financial, has also come under fire for its lending and auto loan securitization practices.

Despite the gloomy outlook, Oshawa does have one saving grace; the Flex Line is among the world’s most modern facilities for auto production, able to build practically any car or truck with minimal interruptions (hence its name). GM could conceivably decide to bring in new product to built at the plant to make up the shortfall, if it really wanted to. But so far, Oshawa’s future seems to hinge on the Impala, which is not a situation that inspires confidence.

** N.B: GM committed $675 million over the four year term to “Canadian manufacturing”. Rather than specify Oshawa, it’s possible that the money could go to CAMI, their St. Catharines, Ontario engine plant, or their other facilities. Currently, GM and the CAW workers at CAMI are negotiating their contract, largely due to the possibility that GM would move Theta production to Mexico or Spring Hill. CAMI has always been treated as a separate entity from Oshawa, with lower wages and benefits (more in line with Spring Hill), and is a modern factory built in partnership with Suzuki. Workers at CAMI are said to be aiming for a “pattern agreement” similar to what Oshawa workers received, but the terms will be unknown until negotiations have wrapped up.

Derek Kreindler
Derek Kreindler

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  • Deaks2 Deaks2 on Mar 08, 2013

    The last GM my family bought was a 1995 Old Acheiva. Since then it's only been Toyota, Honda and VW products. Thanks to the tax-payer rip off that was the auto bailout GM owes each Canadian around $32k, so until they offer a Canadian $32k off a new car discount I won't be going near them. It helps that their products continue to be pitiful with the exception of the 'vette.

  • Chicagoland Chicagoland on Mar 09, 2013

    Car fans will go on and on about 'evil GM' and they will 'never buy one'. But when they close a plant due 'never agains' not buying, what do they expect? Just like Michael Moore. In "Roger & Me", he looks at a window sticker of a new GM car [Pontiac 6000] on display, and derides it as 'overpriced junk'. Then complains of plants closing. If "overpriced" how are the workers he is 'sticking up for' going to get paid? .

    • CJinSD CJinSD on Mar 09, 2013

      I'm a bit confused. I think the product is shameful and I want the plants to close. How is that inconsistent? I have nothing in common with Michael Moore.

  • Theflyersfan Well, if you're on a Samsung phone, (noticing all of the shipping boxes are half Vietnamese), you're using a Vietnam-built phone. Apple? Most of ours in the warehouse say China, but they are trying to spread out to other countries because putting all eggs in the Chinese basket right now is not wise. I'm asking Apple users here (the point of above) - if you're OK using an expensive iPhone, where is your Made in China line in the sand? Can't stress this enough - not being confrontational. I am curious, that's all. Is it because Apple is California-based that manufacturing location doesn't matter, vs a company in a Beijing skyscraper? We have all weekend to hopefully have a civil discussion about how much is too much when it comes to supporting companies being HQ-ed in adversarial countries. I, for one, can't pull the trigger on a Chinese car. All kinds of reasons - political, human rights, war mongering and land grabbing - my morality is ruling my decisions with them.
  • Jbltg Ford AND VAG. What could possibly go wrong?
  • Leonard Ostrander We own a 2017 Buick Envision built in China. It has been very reliable and meets our needs perfectly. Of course Henry Ford was a fervent anti-semite and staunch nazi sympathizer so that rules out Ford products.
  • Ravenuer I would not.
  • V8fairy Absolutely no, for the same reasons I would not have bought a German car in the late 1930's, and I am glad to see a number of other posters here share my moral scruples. Like EBFlex I try to avoid Chinese made goods as much as possible. The quality may also be iffy, but that is not my primary concern
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