Editorial: Canada's Auto Industry Is Hooked On Subsidies, And It Won't End Well

Just a few short years after the Canadian and Ontario government bailed out General Motors and Chrysler, a familiar scenario is playing out along Highway 401. Chrysler is reported to be negotiating with both the Ontario and Canadian federal government regarding subsidies for their Windsor assembly plant that builds the Dodge Caravan and Chrysler Town & Country minivans.

While auto makers like Ford and Toyota have received government money recently, the size and scope of the subsidies are said to be unprecedented. And according to reports, Chrysler is threatening to leave if they don’t get what they want. According to the Financial Post, Chrysler is looking for a total of $460 million (compared to the $71 million and $34 million received by Ford and Toyota respectively), which would represent about 20 percent of the planned $2.3 billion investment. Chrysler is said to be seeking funding for R&D work on the new vans, as well as money to revamp Windsor to a new flexible assembly plant that can build sedans, minivans and crossovers. Reports from the Windsor Star quote Ontario government officials as stating that they are in “ serious negotiations” with Chrysler. When reached by TTAC Chrysler Canada refused to comment.

While the minivan market is shrinking in America, Windsor is still running flat-out, with three shifts running and both nameplates ranking among the top sellers in the segment. Chrysler is slated to transition one nameplate to a crossover while keeping the other as a traditional minivan. But Chrysler and CEO Sergio Marchionne have flip-flopped on this decision so many times that it’s tough to keep track of what was said last. As early as the end of January, Marchionne made comments that hinted at a secure future for Windsor at a launch sometime between 2015 and 2016 model years.

But the recent developments, as well as the expiration of Chrysler’s contract with Unifor (formerly the Canadian Auto Workers) could prove to create an opportunity for Chrysler to make a hasty exist from Windsor. The hardball talk is backed up by the very real fact that Chrysler has the capacity in other plants that could enable a move for their minivans. Mexico is one option, with production of the Fiat 500 moving to Poland and the Dodge Journey said to be leaving Mexico for Sterling Heights, Michigan. Either plant could be a candidate for minivan production, assuming the new vans ride on the CUSW architecture used for the Dart, Chrysler 200 and Jeep Cherokee.

Both levels of government are captivated by a desire to keep Canada’s auto industry intact, even at great expense to the taxpayer, and Chrysler head Sergio Marchionne is likely banking on this. With elections looming in the next couple of years, Marchionne and his team know that the threat of moving production to the United States or Mexico is potent enough to get the governments to acquiesce to his demands. With roughly 4,700 jobs at Windsor, Chrysler is the town’s biggest employee, and crucial electoral districts are up for grabs as well.

The wrong decision could have political consequences in tightly contested elections at both the provincial and federal levels. The negotiations with Chrysler are occurring against a gloomy backdrop for the Canadian auto industry. Production levels have been on the decline, as a strong Canadian dollar, lower labor costs and generous incentives from other jurisdictions have made Canada an unpopular choice for new assembly plants. The lion’s share of new investment has gone to the United States and especially Mexico, which has seen a boom in auto assembly plants from Japanese and European auto makers.

While a recent slump in the Canadian dollar will help Canada’s overall export picture, it’s this author’s opinion that Canada’s auto industry will eventually meet the same fate as Australia’s. The Canadian auto market is roughly the same size as Australia, and though it does not have such a competitive and fragmented selection of brands, it does share Australia’s proximity to low-cost assembly locations that have reciprocal free-trade agreements. The Minivan may stay in Windsor, given the costs associated with moving production, and Marchionne’s prediliction for blusters. But it’s this author’s opinion that when the Vitality Commitment between General Motors and the Canadian government ends in 2016, the Oshawa assembly plants will close, ending a century-long tradition of auto assembly in that town.

The move will devastate an already vulnerable municipality, but every vehicle built in Oshawa is already built at another, lower-cost assembly plant, and GM CEO Dan Akerson made up his mind long ago, calling Canada “ the most expensive place to build a car“. Like Windsor, the timing of the Oshawa closure could easily coincide with the expiration of the current CAW/Unifor labor agreement, allowing for a clean break.