Canada loses luster for Big 3

Canada loses luster for Big 3 http://tinyurl.com/2fqqtb
Weak dollar, UAW concessions raise possibility that Ontario woes could be silver lining for Mich.
Bryce G. Hoffman / The Detroit News
A weak U.S. dollar and new, cost-cutting labor contracts with the United Auto Workers have turned Canada from a low-cost alternative for Detroit's Big Three automakers into the most expensive place in the world to build cars and trucks.
And Ontario's loss could be Michigan's gain.
Canada's national health care system and favorable exchange rates have long made Canada an attractive manufacturing location for American automakers. But with the Canadian dollar, or loonie, now nearly on par with the greenback and the new contracts negotiated this fall with General Motors Corp., Ford Motor Co. and Chrysler LLC, the UAW has more than closed the cost gap with the Canadian Auto Workers.
"Any advantage Canada had has disappeared," said David Cole, chairman of the Center for Automotive Research in Ann Arbor. "Overnight, there's a whole new ballgame."
With talks on new Canadian labor agreements set to begin next year, Detroit's automakers are taking a hard look at their manufacturing operations in Ontario. Executives at all three have told The Detroit News they are concerned about the changing cost equation in Canada. And while they are reluctant to discuss their concerns publicly in the run-up to next year's talks, some of those automakers are rethinking their production plans for Canada.
UAW President Ron Gettelfinger also hopes that some products produced in Canada could come back to the United States. That is likely to make next year's contract talks between the car companies and the CAW even more challenging than this year's negotiations with the UAW.
Ontario is the largest automobile producer in North America, capable of producing 100,000 more cars and trucks each year than Michigan. The U.S. automakers have major production facilities there, as do the Japanese.
But a forecast released last week by WardsAuto.com projects that Ontario will lose more than 600,000 units of production capacity by 2012, while Michigan is expected to gain more than 100,000.
That would effectively reverse a trend that began in 1965 with the signing of the Auto Pact, which removed tariffs and other barriers to trade between the United States and Canada. Canada's edge decades-long
Prior to the signing of that accord, only 7 percent of the automobiles produced in Canada were shipped to the United States. Four years later, that number had soared to 60 percent. The Canada--United States Free Trade Agreement and the broader North American Free Trade Agreement, or NAFTA, have helped push that figure to about 80 percent today.
Last year, the three automakers manufactured nearly 1.8 million vehicles in Canada.
These treaties opened the door to more automotive trade with Canada, but it was the national health care system and the strength of the U.S. dollar that prompted automakers in this country to push their production north of the border.
As recently as 2002, the exchange rate was more than 1.61 loonies to the U.S. dollar. Since then, Canada's growing oil wealth has helped bolster its currency, while a growing dependence on overvalued consumer credit and other factors have steadily eroded the strength of the U.S. dollar.
The paths of the two currencies crossed in September when the loonie reached parity with the U.S. dollar for the first time since 1977 and peaked on Nov. 7 at $1.10. Last week, the Canadian central bank responded to mounting concern about the currency situation by cutting interest rates, and at the end of the week the Canadian dollar had slipped back below the greenback.
But the exchange rate has never been more than gravy for U.S. automakers, industry officials say. The real attraction in Canada has always been health care.
Like most other industrialized nations, Canada has a national health care system that provides basic medical care to all of its citizens. Companies contribute to this system for active employees, but once those workers retire they become the responsibility of the government alone.
In the United States, providing health care for retirees is expected to cost GM, Ford and Chrysler $6.4 billion this year. Even taking into account higher taxes, those companies spend about $6 an hour more for each active U.S. worker's health insurance than they do for Canadian workers.
A decade ago, labor costs for autoworkers in Canada were more than $25 an hour less than hourly labor costs for autoworkers in the United States.
U.S. auto executives say that, instead of preserving Canada's cost advantage, CAW President Buzz Hargrove has used it as a lever to win even more benefits for his members than the gold-plated package enjoyed by their counterparts in the UAW. Shorter hours, more time off
Canadian autoworkers receive more vacation time and work fewer minutes each hour than UAW members. They also get guaranteed cost-of-living increases that roll over into their pensions and supplemental health insurance to fill gaps in their government coverage. Moreover, the CAW contract allows for more higher-wage skilled trade positions.
These perks had already inflated the hourly labor cost in Canada to near-U.S. levels before the new agreements were signed with the UAW. The currency situation has pushed them to par. But the new UAW contracts will give the United States a major cost advantage.
Those deals will allow each of the U.S. automakers to permanently transfer responsibility for retiree heath care to a UAW-run trust fund. They also will allow the companies to pay some new hires less than current employees.
"What GM, Ford and Chrysler did with the stroke of a pen is eliminate $25 an hour," said Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. in Richmond Hill, Ontario. "Canada is now the most expensive spot anywhere in the world for them to manufacture products. That's a real problem."
According to one executive, even if the exchange rate falls back to 75 U.S. cents to the Canadian dollar, the new UAW contract would still make America a more attractive place to produce vehicles. Wage cuts CAW's only hope?
The only way to bring Canadian manufacturing costs back in line with U.S. costs is for Hargrove to give up all the gains he negotiated on the basis of health care savings, DesRosiers said. The only way to regain Canada's advantage is to cut base wages.
Hargrove said he will do neither, nor is he prepared to discuss similar contract terms to those offered by the UAW on wages and retiree benefits.
"If they demand these things, it's going to be a declaration of war," he told The News, adding that the real problem facing the American automobile industry remains competition from overseas. "We could work for nothing. We can't save them from that. We're going to get smaller and the UAW is going to get smaller no matter what we do."
Harley Shaiken, a professor of labor studies at the University of California, Berkeley, said it is in neither union's best interest to compete against each other for jobs.
"Transnational companies will use any reason to leverage better costs," he said. "Unions want to avoid a race to the bottom."
While all three U.S. automakers praise the efficiency and productivity of their Canadian work forces, they agree that the currency situation, coupled with the new UAW contracts, have made Canada a less attractive place to produce cars and trucks.
There is less agreement on the question of how much this will impact their production plans in the future.
For its part, GM has locked in most of its North American production plans as part of its deal with the UAW -- an agreement that ensured most new products for the domestic market would be built in the United States.
Ford and Chrysler have more flexibility about where they build future products, and are taking a harder look at Canada as a result.
Chrysler, which has the biggest percentage of its North American production in Canada, recently announced plans to eliminate a shift at its plant in Brampton, Ontario, where it builds full-size cars. Its Windsor minivan plant is running three shifts, but it costs more to produce vehicles there than at its factory in St. Louis, which produces the same products and is not running at full capacity.
Ford plans to close its St. Thomas Assembly Plant -- one of two Ford assembly sites in Canada.
Sandra Pupatello, Ontario's Minister of Economic Development and Trade, said the provincial government is doing what it can to keep the U.S. auto companies in Canada, including providing money to Canadian suppliers to help them modernize.
"We decided to plant our flag in the auto industry, and we will do whatever it takes to keep a very strong and viable sector for us," she said. "We will face more competition. But we're game."
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