By on March 8, 2013

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.



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24 Comments on “Analysis: The Clock Is Ticking For GM’s Oshawa Plant...”

  • avatar

    As more and more manufacturing leaves Canada, there will be more and more cries for the Government to “do something”. We’ll hear pleas to manipulate and depress the currency, give cash handouts or other bribes and enact trade barriers.

    Anything but provide manufacturers a stable, competitive long term business environment or wage concessions to be competitive with the alternatives.

  • avatar

    FWIW, the Verano is assembled in Orion Township, Michigan, not Lordstown, Ohio.

    To me the macro-economic issue is the strength of the Loonie, and the relative strength of the CAW, until something moves with those issues, I see Canada assembling fewer cars.

    • 0 avatar

      That “relative strength of the CAW” might be the key. Not only are labor costs lower at some U.S. plants, but Michigan’s adoption of right-to-work legislation could further weaken the UAW, making the state even more attractive, relative to Canada.

  • avatar
    doctor olds

    The largest factor will be the CAW’s response to the problem that Canadian manufacture went from being cheaper to higher cost than the US. Othewise, Ontario is a desireable place to operate. Educated, good work ethic.

    • 0 avatar

      “Canadian manufacture went from being cheaper to higher cost than the US”

      I believe that has also materially contributed to Canada shifting from manufacture to oil-exporter.

      And there is enormous pressure on GM (and other auto manufacturers) from Obama and the ‘crats, through the UAW, to bring the bacon home to America by revitalizing and even expanding its operations within the US borders.

      I found it interesting to learn that Hecho en Mexico auto production is running at 128% of capacity while GM plants in the US and Canada can’t even reach anywhere near 100% capacity.

      • 0 avatar

        Canada didn’t magically “shift” from manufacturing to oil exporting. The basis of the Canadian economy has always been resources. Manufacturing, most of which is located in Ontario, has been secondary.

        The very long term global trend (roughly 150 years) has been to lower commodity costs, which has negatively impacted resources and agriculture. Particularly in the 1980’s and 90’s, the secular trend in resource prices negatively affected the Canadian dollar, which made manufacturing in Canada more competitive.

        That trend has been reversed. When I graduated from university in 1976, the C$ was nearly at par with the US$. When I moved to the US in 1995, the C$ was around $0.75 US. When I moved back in 2002, it was $0.63, and Canadian manufacturers were very happy. Then resource prices (and especially oil) started to run up. Within 1 year, the C$ was above US$0.75, and a few years later it hit parity. Today, it is about US$0.97, which is at the low end of its trading range over the past 5-6 years.

        The simple truth is that Canada’s exports are mostly resource product – oil, pulp and paper, lumber and minerals. In fact, Canada is the largest foreign source of oil for the US.

        If you’re a manufacturer, dependent on sales into the US, and a change in currency rates drives your cost up by 50% within 2-3 years, you simply can’t adjust your costs in that timeframe.

        The CAW argued for years that auto industry wages in Canada should move towards US$ levels, especially based on currency differences and the fact that costs for health care are far less for employers in Canada than in the US.

        The Canadian and Ontario governments have “skin in the game” at GM, having participated in the bailout. When that goes away, though, the CAW is going to have to show more flexibility than it has to date. Which is not an anti-union rant, just a reflection of reality.

  • avatar

    Mikey, If You are here today when did Oshawa open? Is it an older plant? Hope you and the family are doing well.

    • 0 avatar
      Gardiner Westbound

      The Oshawa Ontario car plant started producing the McLaughlin Buick in 1908.

    • 0 avatar

      Guys I talked to Mikey a few days ago and he’s on vacation now, without his phone or laptop. I’ll send him an email for when he’s back.

      • 0 avatar
        Extra Credit

        It would be more accurate to say that McLaughlin started building cars in Oshawa in 1908. His facility was not on the same real estate as today’s factory. “Modern” vehicle production began in Oshawa in the ’50s. The current Oshawa plant(s) are what remain of Autoplex, which was at one point, GM’s largest facility in the world. The bulk of Autoplex was constructed during the ’80s and ’90s to accommodate three assembly facilities – one truck and two car plants almost all under one roof. There was also a battery plant and sundry fabrication facilities thrown in for good measure. It was an impressive operation in its prime.

  • avatar

    Derek, what are the real wage differences once you include benefits in addition to wages? Benefits for U.S. plants has to be way higher, no?

  • avatar

    Well, so much for helping out our American “brethren” in their time of troubles.

    First Chrysler, now GM, both of whom went hat in hand to the Canadian government when they were on their knees, now biting the hand that fed them.

    I’d say ‘typically American’, except I know many who are far better than this. We may not say much, but we’ll remember their ‘gratitude’ in the future, and with our wallets.

  • avatar

    GM Canada started in 1915! They also have a Cold Testing Place in Northern Ontario, as well in Oshawa they have a Engineering Plant, I think I will let Mikey fill the rest of this in, as I may be wrong on my dates,suffice to say GM has been in Canada a long time and I also not our Canadian Dollar is dropping in value to about 97 cents today!

  • avatar

    Speaking of the Regal, I could have easily predicted that the 4 pot only Germanic sedan would never do well in NA where most Buick customers are expecting a smooth quiet riding V6 highway cruiser and not a fast and the furious hard riding wrong wheel drive sports sedan.

    • 0 avatar

      Sure, but this way Buick can brag about how they’ve lowered their average buyers’ age, even if they’ve done it by subtracting.

    • 0 avatar

      Exactly. People seem to think Verano Turbo is “where its at”, keep up that success but realize Buick as a whole is as you put it “not a fast and furious” brand and never will be.

    • 0 avatar

      “want a smooth quiet riding V6 highway cruiser… not wrong wheel drive”

      Umm, Buick has been selling V6 FWD cars since 1980. Most of the loyal customers couldn’t care less about RWD.

      OTOH: The generation that loved ‘marshmellow ride’ cars are not driving much these days. Think about why for a minute.

      • 0 avatar

        I concede your points but its presumptuous to assume only older people want reliable V6 highway cruisers (irrespective of FWD/RWD and marshmallow feel). I’ll be driving for the next forty years minimum and travel quite a bit (business and personal)… this is exactly the type of car I buy used and would buy new for both comfort and fuel economy. I have smaller four pot beaters for urban driving, because that’s what they excel in.

        • 0 avatar

          I think will contimue to be a niche player under the halo Cadillac brand. They could easily do a Rivera Coupe and a Regal GNX with a 3.6TT and keep the nameplate alive.

          Nothing wrong with separating your eggs into more than one basket in the e ent one should be dropped.

  • avatar

    Didn’t GM just announced a $250M expansion of Ingersoll/CAMI? Doesn’t look good for Oshawa.

  • avatar

    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.

  • avatar

    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?

    • 0 avatar

      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.

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