Canadian industry analyst Dennis DesRosiers on the future of Canada's auto sector
Dennis DesRosiers is the dean of Canadian automotive analysts, with a resume that spans from OEMs to the government sector to the University of Windsor in the heart of Canada’s auto industry. When DesRosiers talks, people listen, and in an era when low-wage right-to-work jurisdictions are claiming an increasing share of auto part making and assembly activity, questions about Canada’s long-term viability in the sector are inevitable.
Canadian Metalworking put the critical questions to DesRosiers…and as always, he pulled no punches:
CMW: Canada became a major auto assembler through deals like the Auto Pact. How much did it drive the expansion of the Canadian industry?
Dennis DesRosiers: The Auto Pact was everything when it comes to the growth of Canada’s automotive sector. At the time (Jan 16, 1965) it was the most important trade agreement anywhere in the world. It merged Canada’s struggling and totally inefficient auto sector to the much larger and much more efficient U.S. auto sector. Most don’t realize it but in the first few years it also decimated the Canadian industry in that none of our suppliers could compete with their American competitors and all of our OEMs needed to totally re-invest in their plants and build modern facilities. But the Auto Pact also was a very protectionist agreement requiring the OEMs to produce one car and truck for every one sold in Canada and there was a separate ratio for cars and light trucks. This meant that each of the members (primarily the Detroit Three) had to build both a car plant and a truck plant in Canada to qualify.
Now remember that in 1965 light trucks were primarily for commercial use (about 20 per cent of sales) as there was no such thing as a minivan or SUV or CUV. When these categories took off in the mid-1970s Canada was perfectly positioned to produce for the fastest growing segments in the industry and thus production eventually tripled from a million units to about three million units.
The Pact also has Canadian Value Added required which was very complex, so I won’t bore you with the details, but it was the root of why the parts suppliers eventually did so well. A number of Canadian suppliers emerged like Magna, Linamar, etc. and just about every U.S. multinational chose to invest in Canada to help the OEMs meet this tough standard. To highlight how important the Auto Pact was … its elimination in the late 1990s coincides with the beginning of the deterioration in our industry which plagues the industry to this day. The Auto Pact was essentially eliminated with the signing of the FTA… The FTA allowed the OEMs to import vehicles and parts duty free without meeting any safeguards which made the Auto Pact ‘toothless’ and every OEM began importing/ exporting vehicles and parts into and out of Canada under FTA. instead of the Pact. NAFTA extended this to Mexico.
CMW: Many economists claim that Canadian operations aren’t cost competitive on a global basis. Is it true? How do we stand in competitiveness compared to other auto making nations?
Dennis DesRosiers: I’m not sure I am qualified to talk about all other auto making nations, but my general response would be that the OEMs are fairly competitive because they have the capital to build – and have built – very modern plants. The suppliers less so, although there would be many exceptions. High value-added parts like the parts that Linamar produces are likely competitive…anything labour intensive would not be…with lots between these two polar opposites.
CMW: Many assembly plants are moving to “right to work” jurisdictions like Alabama and Tennessee. Is it strictly a wage cost issue?
Dennis DesRosiers: Partly, but I think it has more to do with nonwage costs than wages.
CMW: Can the Tier One and Tier Two supplier network adapt to assembly operations that are farther away in the U.S. and Mexico?
Dennis DesRosiers: Some can but there are extremely compelling reasons to be close to your customer base, so as Mexico and the U.S. South explode with assembly activity, ultimately most top tier suppliers will employ their capital close to these plants and not in Canada.
CMW: What can we do to protect our industry?
Dennis DesRosiers: Nothing, and indeed it would be a mistake to ‘protect’ our industry from the competition. Support it through any number of different initiatives, yes, but to ‘protect’ it would mean the end is more likely to happen. Go back to the Auto Pact in 1965. Dozens of weak players disappeared but the remaining players invested in new technologies and advanced manufacturing systems and billions of capital was put on the ground to make the industry globally competitive… the OEMs had tough safeguards to meet, but the supplier community has zero protection under the Pact.
CMW: What’s the future for auto parts making and vehicle assembly in Canada? Is there danger it will decline?
Dennis DesRosiers: Sure, but we started to see the winnowing out of our industry at the turn of the century and it will continue to winnow out for the foreseeable future. It wouldn’t surprise me to see the industry disappear almost entirely over coming years, but this could 20 to 30 years and a lot of water could flow under the bridge in that timeframe.
Since 1985, Dennis DesRosiers has been Canada’s leading automotive industry analyst and global expert on Canada’s auto industry. Founder and president of Richmond Hill, Ontario-based DesRosiers Automotive Consultants, Dennis was the first analyst to use advanced modelling and analysis techniques to analyze and forecast the Canadian auto market. Through his newsletter, blog, multiple public appearances and media interviews, Dennis delivers insight into the automotive market in Canada from new vehicle sales to the Tier One and Two supplier network and beyond. Dennis is a past board member of the University of Windsor and was director of research for the Automotive Parts Manufacturers’ Association as well as an auto analyst for the Ontario Treasury.
Have your say: