The auto sector crisis: What is Canada's plan?

Caught within the clutches of a deepening economic crisis, the big three North American auto makers have testified before a U.S. Senate committee that they are teetering on the edge of the abyss and if help is not found, bankruptcy for any or all of the big three could be the result.

They blame the financial meltdown in the U.S. that has now spread across the globe as the instigator of this crisis. The challenges besetting the industry from the financial meltdown, as testified by the auto executives and the UAW president, has produced credit markets that have tightened up to a point that many of the business as usual mechanisms within the sector have seized up.

Everything from car buyers to dealership operations has been affected and with this seizing up, the cash flow of the big three has evaporated. From all accounts the financial crisis has created another in a long line of economic storms that have brought the auto sector to its knees. From oil price shocks and missed opportunities in vehicle design, to increased foreign competition and some questionable unfair trade practices by offshore companies, the big three are now within a business space where, officially, "survival" is the objective.

Canada's vulnerable auto sector

In Canada, the auto sector is especially vulnerable, as it is ruled by a branch plant Detroit based mentality. With the abandoning of the auto pact some years ago, we have very little to leverage and protect our share of the auto sector within this restructuring process and are exposed to the whims and fancies of decision makers back in Detroit and Washington. We have also been held hostage by exchange rates fluctuations that have tied our dollar valuation process to the price of a barrel of oil that has further compounded the painful restructuring and job loss, which has seen thousands in the Canadian auto sector lose their jobs.

Policy makers should take note; we have reached a cross roads in the long history of the auto industry in North America. With recessionary winds blowing at a gale force, traditional measures of corporate adjustment and restructuring to enable the survival of the auto sector have failed and time has all but expired on the prospects of a traditional recovery.

Liquidity for the short term seems to be a requirement for temporary relief, but longer term solutions will need to be brought forth to provide a sustainable future for the North American auto sector. Thousands of jobs have already been cut, and wage and non-wage concessions by the unions have already been made. A whole host of traditional measures have been put in place to deal with the required restructuring but the economic environment has gone from bad to absolutely really bad.

Seeking government help

As some pundits have noted, we are living within extraordinary times and with that come extraordinary measures. So faced with a fight for survival the big three have approached the government of both Canada and the U.S. for financial help. The size and nature of this help and investment is yet to be determined but it will be substantial and it will also push the innovative abilities of the key stakeholders to satisfy and accommodate various constituents in the process.

As outlined by President-elect Obama, "For the auto industry to completely collapse would be a disaster in this kind of environment. So it's my belief that we need to provide assistance to the auto industry. But I think that it can't be a blank cheque."

The reaction within many circles to this growing awareness that something ought to be done has been mixed. The two schools of thought that prevail are one that favours intervention and pragmatism another that prefers leaving the solution up to market forces.

The investment community and the banking industry have come out strongly in favour of the market based approach under the mantra that governments must not be allowed to pick the winners and losers within the business community. Oddly enough these are the same people whose industry was just provided with the biggest financial aid packages of all time. Faced with similar survival prospects, the financial industry of both the U.S. and Canada raced towards government and with amazing speed and spectacle.

Bankruptcy options a threat to unions

Many of these financial experts have indicated that bankruptcy is the ultimate panacea for the big three. Restructuring and rebooting under bankruptcy protection and all the options that are available to companies within this space are where the solutions to the auto sector can be found. Some within this camp have been citing such illusionary misgivings as ripping up labour contracts and renegotiating new labour deals, or even worse decertification and non-union approaches to a new and restored, leaner and meaner auto sector.

It has to be underlined here that these are very real threats to workers under the proposed bankruptcy options. If the bankruptcy route is chosen a good deal of the restructuring will be on the backs of workers, the companies who currently carry big three debt and lastly the shareholders of these companies.

The other school of thought proposes a financial restructuring with the current business entities, the current labour contracts and the current debt obligations. This, through a yet to be defined series of processes and yet to be defined amounts of both short and long term government financing.

The question of how the government will react to these overtures by the auto sector has already been decided in the U.S., as president elect Obama has openly endorsed an interventionist strategy and Congress is set to release a plan of action. However it is becoming somewhat evident that Congress may not have the numbers to pass such a rescue bill and help may have to wait until Mr. Obama takes power in January. The question is, can the auto sector weather the storms until then?

Harper ill prepared for this challenge

In Canada, reaction has been less than unified. The Ontario government has come out in full support of a government interventionist strategy; however it does not have the authority or the financial means to lead the charge for the ailing auto sector. To his credit, Mr. McGuinty and his crew have made the federal government under Stephen Harper look abysmally confused, standoffish and ill prepared to take on this challenge.

Given the uniqueness of the Canadian auto sector within the make-up of our small export oriented economy, combined with a branch plant, non-protected auto sector, one would seemingly think our government leaders by this stage of the process would have an automotive rescue package fully outlined, debated and publically scrutinized and presented to Washington and Detroit.

Faced with this crisis, policy makers have got to be prepared for the consequences of their decisions. If help is not afforded to this struggling sector, we in Canada could be faced with the eventual elimination of thousands upon thousands of high paying high quality jobs. These losses will result in a quite large hit on our standard of living that will reverberate from one coast of the country to the other.

Actions speak louder than words and the lack of concrete action to date by Harper leaves one to conclude that there is an unwillingness to step up and take a leadership role within this crisis. The lethargy displayed in formulating an action plan to actually help the auto industry has been blatantly obvious. Those in Washington under president elect Obama must be shaking their heads in pragmatic disbelief.

For example, Finance Minister Flaherty has been ducking his responsibility. He has quoted a handful or less of unnamed local constituents in his riding, who suggested to him that taxpayer monies should not be used to aid the auto sector. Somehow, last week, these sentiments made the front page of almost every national newspaper. Yet, only a week earlier, Flaherty was handing out $50 billion of tax payer monies to Bay Street and the finance sector to help secure the foundations of that sector.

Adding to the confusion is newly appointed industry minister Tony Clement who has done nothing but make a bad situation worse by continually harassing the Canadian Autoworkers (CAW), pushing for more concessions and wage rollbacks.

The CAW, just a few short months ago, provided the big three with a precedent setting round of significant concessions in wage and non-wage benefits. Having Mr. Clement use his position to enforce the notion that Canadian workers should accept less from a foreign-based multinational is about the last thing workers who are losing thousands of jobs need to hear. Hello Mr. Clement: during a recession, we want workers (aka consumers) to spend, which is kind of difficult if you are making less. Can you say deflationary spiral?

We need our government to start taking this situation with a great deal more seriousness. Instead of spending the weekend signing Bush backed free trade deals with Colombia, a country that has been internationally sanctioned for the continued slaughter of trade unionists, Mr. Harper should have been at home focusing on the auto sector and finding solutions.

We need our government to start thinking outside the box. Unfortunately for Canadians, I am not sure Mr. Harper and his band of ideologues have that ability, but who knows maybe Mr. Obama will have some solutions for us working Canadians.

Hopefully these policy makers do understand that along with these thousands of lost auto sector jobs will be the loss of further downstream jobs that are completely integrated throughout the economy - from high tech to public sector jobs, the auto sector is second to none when it comes to wealth generation and job creating effects. The auto sector is by far the single biggest source of exports in the country in terms of dollars (5 per cent of GDP) and jobs, estimated at 400,000.

It has been shown by various studies that the "multiplier effect" of one auto sector job is significantly higher than any other industry. In these times of economic turmoil, stopping this job loss in the auto sector has got to be a priority. This can only be achieved through hands on industrial strategy for the auto sector.

To date, the economic carnage being wrought upon the auto sector has thrown the once mighty Ontario economy into recession and turned the province, for the first time in many years, into a "have not" province. With the western half of the country facing the bust in commodity prices, we will undoubtedly see the remainder of the Canadian economy entering into this recessionary territory.

If the auto sector is allowed to die in Canada, the question is: what industry can replace the wealth generating capacity of the auto sector? Quite simply there isn't one.

We as taxpayers have been asked by the auto sector to help out and make an investment in the future of this important sector. Whether it is in the form of loan guarantees, investments or R&D expenditure, some deep and historic decisions will have to be made in the coming weeks by both the U.S. and Canadians governments.

Paul Tulloch worked for 14 years at Statistics Canada as a senior economist. He now works as an independent research consultant and a volunteer correspondent for Labourstart [1]. You can find his website at livingwork.ca [2].

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