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The business case for investing in Canada's auto industry

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Photo: Fiat Chrysler Automobiles: Corporate/flickr

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Contract talks currently underway between Unifor and the Big Three U.S. auto manufacturers are being called the most significant in a generation, maybe a half-century. The union has put future investments at the top of its wish list. Underlying it all is that old existential question: does Canada really need an auto industry, especially now that Mexico is such a magnet for new investment?

It's true demand is rising in Mexico, but it only represents around 10 per cent of all Big Three sales in North America now. Population growth is faster there, and the Panama Canal has just been deepened to accommodate bigger ships, making Mexico a possible launching pad to other emerging markets. But there is a strong business case for why Canada is critical to the Big Three's business plan. It's not a case of Mexico versus Canada, but of Mexico and Canada.

Indeed, GM has sunk $1.6 billion between Oshawa, St. Catharines and Ingersoll in the past few years and this June announced it would hire 700 more engineers, bringing the total to 1,000 in Ontario.

In February, Fiat Chrysler spent an unprecedented $3.7 billion on the minivan line in Windsor and added 1,200 new jobs. Ford broke hearts in 2014 by choosing Mexico over Windsor for production of a new engine, but last year the company's Oakville plant saw $700 million in investments and 400 new jobs.

Unifor is right to focus on future investment, particularly in a year that every one of the Big Three manufacturers are seeing record profits and outpacing expectations this year.

What we are witnessing is hardball negotiations: these companies will see even more profit if they can wring concessions from the Canadian union before they announce next steps.

High costs of labour aren't the dealbreaker for future investments that we often hear about. Japan and Germany have the highest labour costs in the world and thriving auto industries. Mexican wages are obviously lower than Canadian wages, but Canada is cheaper than the U.S., where these companies are also investing billions of dollars in production.

Labour gets 99 per cent of the attention during contract talks but represents a stunningly tiny four per cent of the price of an average Big Three car in Canada, the same amount these companies spend on advertising.

Canada has a competitive edge even when our dollar is at par with the greenback, partly because of our public health-care system that saves automakers $5 an hour per worker compared to U.S. labour costs. But today we've also got a 76-cent dollar, which makes Canadian workers significantly less costly.

The exceptional productivity of Canadian auto workers is another factor for reducing costs: 13 per cent of the cars for the North American market are made here, but Canadian plants win 33 per cent of quality and productivity awards.

That is partly because 60 per cent of autoworkers in Canada have college or university degrees compared to 40 per cent in the U.S. and 15 per cent in Mexico. Linda Hasenfratz, CEO of auto-parts giant Linamar, dismissed the high cost of labour argument, which she noted actually paid off for her company, leading to a 21 per cent increase in sales over the last year. As cars get more complicated, more connected, she said, a smart workforce can improve quality control and innovate processes and products. That spurs savings and creates new markets.

And when it comes to markets, consider this: southern Ontario's auto plants are a day's drive from half of all North American sales, and those sales account for almost 90 per cent of the profits for the Big Three.

Auto is not only Canada's number 1 export industry, worth $77 billion last year; Canadian buyers are the fifth largest market for Big Three vehicles in the world. The reason? The Auto Pact of 1965. Increased production of cars in Canada led to more good-paying jobs here, which meant increased consumption.

But shut down production and watch consumption fall. The Centre for Spatial Economics estimates closing the Oshawa GM plant would see a direct job loss of 4,100 workers spiral out to affect 30,000 jobs. That would trigger $1 billion in lost provincial and federal tax revenues, creating further pressures to cut jobs or services.

If these companies don't invest in Canada, they will lose the buyers who can afford to purchase their most profitable products. It's hard to grow the bottom line when you're killing the top line.

It may seem like a man-bites-dog story, but when you add it all up, the business proposition is simple: If the Big Three want to make more money making cars, they should invest in Canada.

Armine Yalnizyan is Senior Economist at the Canadian Centre for Policy Alternatives, and Vice President of the Canadian Association for Business Economics.  You can follow her on twitter @ArmineYalnizyan.

A version of this piece was originally published in the Toronto Star.

Photo: Fiat Chrysler Automobiles: Corporate/flickr

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