Analysis: Canada auto sector may shrink without labor concessions
TORONTO/VANCOUVER (Reuters) - Canada's unionized autoworkers, perhaps the best rewarded in the world, may have a choice in the next few days: Give the Detroit Three automakers concessions in current talks over new contracts or watch some of their jobs head for the United States or Mexico.
Industry and labor experts are convinced that General Motors Co (GM.N), Fiat SpA's Chrysler (FIA.MI), and Ford Motor Co (F.N) will move some production out of the country to reduce costs if their Canadian plants don't become more competitive.
Making vehicles in Canada has become a lot less attractive in recent years. The Canadian dollar has surged more than 50 percent against its U.S. counterpart over the past decade, and the financial crisis, which almost triggered a collapse of the industry in North America and led to a government bailout of GM and Chrysler, has resulted in curbs in U.S. labor costs.
The Detroit Three are expected to sell around 750,000 vehicles in Canada this year, slightly more than in 2011, against a forecast of some 6.6 million in the United States. About 40 percent of Canadian sales are produced in Canada. More than four-fifths of the Detroit Three's annual Canadian production of around 1.5 million vehicles is exported.
"They have a choice. They don't have to invest in Canada," Tony Faria, a University of Windsor professor and auto industry expert, said of the Detroit Three.
"They're making it as clear as they can make it that they're not going to do it if they don't get a favorable agreement."
Still, a shift in output is not a simple, swift or inexpensive process, particularly as the automakers face capacity constraints in the United States after shutting down around a dozen assembly plants between 2007 and 2009.
"In the short term, in the negotiations, the CAW understands that there is not much the car companies can do," said Michigan-based labor consultant Art Schwartz.
"But the fear is, over time, if Canada continues to be a high-cost producer, then there is a danger that some product could be moved," said Schwartz, who is also a former labor negotiator for GM.
In an unprecedented move, reflecting the tenor of the high-stakes talks, the Canadian Auto Workers union has threatened a triple strike if an agreement is not reached with one of the automakers by the deadline of 11:59 p.m. Eastern on Monday, September 17 (0359 GMT, September 18).
On Friday, just three days before the strike deadline, union and company negotiators remained far apart on major contract issues despite overnight concessions from the CAW. Union organizers were preparing for a walkout, stockpiling picket signs and ordering portable washrooms.
The automakers have been tight-lipped publicly on what their demands are other than to say that labor costs must come down to make Canadian production competitive.
The union has said the automakers want workers to accept the same type of deal they reached last year with the United Auto Workers in the United States. The UAW contract had no wage increases and preserved a two-tier system, in which newly hired workers start at about half the full hourly wage. It also included a profit-sharing formula and signing bonuses.
Eyeing the profits now being generated by the automakers, the Canadian union wants some payback for concessions its members made during the financial crisis.
But all three automakers adamantly argue that Canadian labor costs are the highest in the world and must drop to match those of the UAW or future production and investment will be put in question.
"We have other plants, other options," Sergio Marchionne, who is CEO of both Chrysler and Fiat, told the Globe and Mail newspaper last week.
MEXICO AS A MAGNET
In this round of talks, the CAW is representing about 20,000 workers at the Big Three who earn an average $34 in a base hourly wage. That compares with an average $28 for UAW employees.
Including benefits such as pensions, health care and overtime pay, the CAW's total average labor cost is about $60 an hour, according to the Center for Automotive Research in Ann Arbor, Michigan. That compares with $58 for U.S. workers at Ford, $56 for GM and about $52 at Chrysler.
In Mexico, base hourly wages are just $2 per hour, with all-in costs about $4-$5 per hour, said CAW economist Jim Stanford. Other estimates put all-in hourly costs at $5 to $5.50 in Mexico.
That massive wage gap has made Mexico a magnet for foreign auto companies in recent years. Most large automakers, including the Detroit Three, Volkswagen (VOWG_p.DE), Nissan Motor Co (7201.T) and Toyota Motor Co (7203.T)(TM.N), already have plants in Mexico, which overtook Canada in 2008 as the second biggest assembler of vehicles in North America after the United States.
Some models produced in Mexico are sold in Canada duty-free under the North American Free Trade Agreement.
"Why would you build a vehicle in a place where it costs you more to build it?" Faria asked. "It's no different than why do we shop at Walmart? They offer us lower prices."
The surge in the value of the Canadian dollar against the U.S. dollar over the past decade, and its impact on raising the cost of vehicle production, is the single biggest factor weighing on labor talks, said Doug Porter, deputy chief economist at BMO Capital Markets.
"If the currency was at 80 cents or lower, I am sure negotiations would be much smoother," Porter said, noting that Canada's highest level of auto production was between 1999 and 2001, when the currency was near record lows at around 62 U.S. cents. It was trading on Friday at US$1.03.
Economists expect the Canadian dollar to stay near parity with the U.S. dollar for the next several years, offering little relief for the auto companies and their Canadian workers any time soon.
To be sure, Canada's auto sector no longer provides the CAW with the muscle it once did in contract talks.
Since the late 1990s, when auto assembly and employment peaked, the Detroit Three have closed five assembly plants in Canada. The only new auto factory to open in Canada was Toyota's Woodstock, Ontario, facility in 2008.
Employment in the auto assembly sector is down by a third in that period and Canada's share of continental production has dropped from near 18 percent to around 16 percent, with Mexico being the main beneficiary, according to the CAW.
Automotive data and analysis group WardsAuto expects that Canada's light-vehicle output will hold steady - at best - over the next six years as North American automakers put the bulk of new capacity in Mexico and invest in existing facilities in the United States.
The CAW has lobbied the federal and provincial governments to adopt policies to better protect the auto sector, but the current government's track record of favoring free-market policies suggests little likelihood of success.
"Without government intervention in the form of a strong auto policy, an industrial-based policy that supports our industry, things do look bleak," said Chris Buckley, president of the CAW General Motors Local 222 in Oshawa, Ontario.
GM had said earlier this year it would close an assembly line in Oshawa that would put about 2,000 CAW members out of work.
That announcement was particularly "scary" given the under-utilization of the 8 million-square-foot facility, Buckley said. "That makes me nervous. It really does. Because companies will do better if they fully utilize their facilities."
NO SWIFT OR COMPLETE EXIT
Although the possibility of the Detroit Three moving production elsewhere is very real, analysts say they don't expect them to pull up roots completely. That is especially true for Chrysler, which produces a quarter of its North American output in Canada.
"Chrysler does very well in Canada. They don't want to go too far to turn off the consumer," said Haig Stoddard, an industry analyst at Michigan-based WardsAuto.
Even moving some production is easier said than done. A typical auto assembly plant costs upwards of $1 billion to build and fit with equipment, Faria said, and retooling a plant can cost more than $500 million. What's more, the process can take a couple of years.
"They can't pick up and leave overnight, but that's not the point. The point is they can leave. It may take a few years, but they can leave," Faria said.
(Additional reporting By Allison Martell in Toronto; Editing by Frank McGurty; and Peter Galloway)
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