Is Canada’s automotive manufacturing going down under?

Urgent measures must be taken to prevent Canada's automotive manufacturing industry suffering a similar fate to Australia’s, warns Manmeet Malhi

On 11 March 2014, the governments of Canada and South Korea concluded negotiations on a free trade agreement, almost nine years after negotiations first started in 2005. Under the terms of the agreement, Canada will phase out the 6.1% tariff levied on cars manufactured in South Korea (mainly by Hyundai and Kia), over a period of three years. South Korea will reciprocate by eliminating the 9% tariff on cars manufactured in Canada, immediately.

Toyota Manufacturing plant, Cambridge, Canada
Toyota Manufacturing plant, Cambridge, Canada

Union leaders and OEMs in Canada are worried that this deal would prompt a flood of South Korean imports and will be detrimental to the country’s domestic automotive manufacturing industry. Unifor, a union representing 39,000 workers in the country’s automotive sector, estimates that 33,000 manufacturing jobs in Canada could be lost due to the pact. There has been outcry over certain provisions (or lack of provisions) in the FTA as well, with the Canadian government being accused of failing to negotiate better terms for its domestic automotive manufacturing industry. For example, Canada failed to include the ‘snap-back provision’ included in the FTA between US and South Korea. Such snap-backs allow a roll-back of tariff reductions, if South Korea resorts to non-tariff barriers, such as currency manipulation, for example to subsidise exports. Meanwhile, the Canadian government defended the agreement, saying that such fears were exaggerated; in 2012, a study undertaken for the Department of Foreign Affairs, Trade and Development concluded that the impact of elimination of import tariffs from South Korea would only have a modest impact on domestic production, cutting output by just over 4,000 vehicles, equivalent to 0.2% of the current output.

With Canada importing 131,000 vehicles (worth US$2.23bn) in 2012 from South Korea, while exporting a paltry 3,000 vehicles (worth US$92m) in return, it is clear that Canada does not manufacture the type of vehicles that are in demand in South Korea; in the immediate term, only one automotive industry will gain from this FTA: South Korea’s.

However, the trade agreement offers improved access to the Korean market for Canadian-made vehicles, where competitors from the US and the EU have been benefitting from preferential access, as a result of their respective FTAs with South Korea. And, more importantly, the agreement also provides an opening to the vital and burgeoning wider Asian automotive market, which is currently one of the most exciting automotive markets in the world. South Korea is the perfect choice to launch Canada’s move to deeper economic integration with Asia.

It is quite ironic, that ever since Canada signed the FTA with South Korea, all the discussion has centered on South Korean imports flooding the Canadian market; looking at the big picture, it’s not hard to ascertain that the real problem for Canada is the lack of geographic diversification of its export-oriented domestic automotive manufacturing.

Honda of Canada Manufacturing, Alliston
Honda of Canada Manufacturing, Alliston

With nearly 90% of vehicles manufactured in Canada geared for export, the country has one of the most export-oriented automotive industries in the world. And although Canada is the largest vehicle exporter to the US (followed by Japan), and remains a ‘global top ten’ vehicle manufacturer, the country’s automotive exports are limited to North America; 97% of the deliveries are shipped to its NAFTA partners, mainly to the US. Not surprisingly, Canada is the only country that is so dependent on a single market for its automotive exports. So the obvious question is, what’s wrong in concentrating on a single market? And the answer is equally banal: nothing, as long as you hold on to your market share.

It is interesting to note that despite the exclusive focus on the US, Canadian automotive exports to the country lost a significant market share in the world’s second largest automotive market. Canada’s share in overall US automotive imports dropped to 20% last year, from a peak of 31% in 2000 and an average of 25% since the mid-90s. And one of the main reasons for the loss of market share is Mexico, which has made significant gains at the expense of Canada. Since NAFTA was signed 20 years ago, automotive production in Mexico has more than tripled and automotive exports have quadrupled. Moreover, Mexico is expected to overtake Japan as the 2nd largest automotive exporter to the US in 2014 and eventually overtake Canada as the largest automotive exporter to the world’s biggest economy in 2015.

Most major automotive manufacturing countries, such as Japan, Germany, South Korea, the US and Mexico (Canada’s NAFTA trading partners), have diversified their automotive export markets. While US exports outside of NAFTA now exceed 10% of overall US production (a fourfold increase over the past decade), corresponding figures are even stronger for Mexico, which now exports almost 20% of its automotive production beyond North America.

The recent FTA with the EU provides Canada with the opportunity to diversify its automotive export markets and reduce its dependence on the US. This might be the last opportunity to save Canada’s automotive manufacturing industry from meeting the same fate as Australia’s.

Although Canada produced 2.37 million vehicles in 2013 and is still one of the top 10 automotive manufacturers in the world, it is easy to draw comparisons with the Australian automotive manufacturing market:

  • In the past, the local automotive manufacturing industry in both countries was heavily protected by tariffs, which led to a thriving domestic automotive manufacturing industry;
  • Neither country has a strong domestic brand; for example, South Korea has Hyundai and Kia, Germany has VW, Daimler and BMW, while Japan has Toyota and Honda;
  • Both countries have small populations and high vehicle penetration rates, implying that they don’t have a voracious appetite for purchasing new vehicles;
  • Both countries have a rather strong currency, which has meant that they have found it harder to compete with relatively low-cost automotive manufacturing destinations such as Mexico and Thailand.

Consequently, the automotive manufacturing industries in both countries have become dependent on exports to support and sustain the heavy investments made in developing a robust automotive cluster.

Moreover, both Australia and Canada are rich in natural resources and not surprisingly economies of both countries are driven by the primary sector. To satiate the ambitions of their respective domestic agri-food, farm product and mineral resource businesses, both countries have had to enter into FTAs to gain access to new and bigger markets. Naturally, some compromises have had to be made and unfortunately, in both countries, it has been at the expense of the automotive sector.

In Australia, this culminated with Ford, Toyota and GM’s Holden taking the drastic decision to close their Australian manufacturing operations; this has meant that come 2017, Australia will no longer be producing any passenger cars.

The list of challenges facing the Canadian automotive manufacturing industry is long, and the future of an industry that employs 115,000 highly skilled workers looks bleak. But the precedent set by automotive OEMs in Australia should serve as a wake-up call to automotive manufacturing stakeholders in Canada – international automotive manufacturers owe no loyalty to Canada, and they will shift production to countries, such as Mexico, which are more competitive and can deliver sustainable bottom-line growth. As Canadian automotive output was more than ten times that of Australia, it might be premature to think that a country with such a huge automotive manufacturing infrastructure and legacy could go down; but unless steps are taken to fix the structural problems in the industry, there’s a very real chance that it could die a long, painful death.

This article was first published in the Q2 2014 issue of Automotive Megatrends Magazine. Follow this link to download the full issue