For half a century, the risk of catastrophe has loomed over the auto industry in Canada, those who work in the plants, their families and the communities where they live. Though it was not possible to predict when and in what precise form a transforming crisis would strike, the calamity that has befallen the industry and that threatens its future has been entirely predictable. The critical decision that pointed Canada’s auto industry toward this doleful time was made in the 1960s. It antecedents went back further to the beginning of the 20th century.

For over a century, Ontario has prospered as a consequence of the location in its cities of an automotive industry, large enough to be globally significant. From the eastern edge of the Golden Horseshoe four hundred kilometers westward to Windsor, Southern Ontario is home to over half of Canada’s manufacturing and an even higher proportion of the nation’s heavy manufacturing. The jewel in the crown of Ontario manufacturing, which includes steel, chemicals and electronics as well, is the auto industry. Directly and indirectly, hundred thousands of jobs in Ontario are linked to auto industry. Southern Ontario has all the locational advantages, as an auto producer, of Detroit and the American Midwest. Ontario’s automotive industry has benefited from much in addition to its proximity to markets.

The first auto makers in Ontario were Canadian. The most famous of them was Oshawa’s Sam McLaughlin who made the leap from manufacturing horse-drawn carriages to producing the horseless variety. Because he could not manufacture engines as cost-effectively as the Americans could, McLaughlin began importing Buick and Chevrolet engines from Detroit. In 1904, Henry Ford opened a factory in Windsor, Ontario across the river from his Detroit operations, to manufacture cars.

Just over a decade later, McLaughlin sold his Chevrolet and Buick operations to General Motors, leading in 1919 to the establishment of General Motors of Canada. During the 1920s, the American Big Three, GM, Ford and Chrysler, found it profitable to assemble vehicles in Canada, both for the Canadian market and for export to other British Empire countries. Locating plants in Canada permitted the Big Three to skirt around Canada’s high tariffs on imported manufactured products. In addition, autos produced in Canada were eligible for the low tariff advantage known as British Preference when they were shipped to other countries in the Empire. This phase in the history of the Canadian auto industry peaked in 1929 when the country’s auto makers produced 263,000 vehicles, 102,000 of them for export.

The Great Depression that followed the stock market crash of 1929 slammed the door shut on this first golden age in the history of the Canadian automotive industry. By 1933, domestic auto production had plunged to 40,000 vehicles annually. Although auto production increased from this low during the rest of the decade, it did not get close to the 1929 level. During the Second World War, production of civilian vehicles was halted altogether. Instead the auto industry turned its attention to the production of military vehicles.

When civilian auto production resumed after the end of the war, the Canadian auto industry functioned in a global environment far different from that of the 1920s. In the 1950s, the market for automobiles expanded enormously in North America and Western Europe. Fiat, Volkswagen, Renault, and Peugeot grew swiftly in Italy, West Germany and France. British plants were turning out Austins. In Sweden, a potentially important role model for Canada, as a small country producing its own cars, there were two national companies, Volvo and Saab. Beginning to emerge during these years were Honda, Nissan and Toyota, the Japanese auto producers that would grow to dominate much of the global auto market in coming decades.

The Canadian subsidiaries of the Big Three U.S. producers no longer had access to their former export markets in British Empire/Commonwealth countries. Limited to the Canadian domestic market, they had become “miniature replicas” of the operations of the Big Three in the United States. They were hampered by all of the problems of branch plant manufacturing. The vehicles they produced were conceived and designed in the United States where top management was located.

Almost all of the production machinery deployed in the Canadian plants was produced south of the border. Most of the engines and sub-assemblies and many of the parts and components used in the production of autos in Canada were imported from the United States. In addition, the Canadian auto assembly plants of the Big Three could not match the economies of scale of their American operations. That was because, while the production run for a single auto could total 300,000 vehicles in the U.S., the Canadian domestic run for the same model was in the range of 30,000 vehicles. This meant that the plants in the U.S. could achieve a ratio of fixed to variable costs that the Canadian plants could not hope to match.

Continue reading this post on James Laxer’s personal blog.