BUSINESS

THE ROAD BACK

BRENDA DALGLISH January 25 1993
BUSINESS

THE ROAD BACK

BRENDA DALGLISH January 25 1993

THE ROAD BACK

BUSINESS

BRENDA DALGLISH

More than at any time in recent history, the North American International Auto Show in Detroit focused on value and safety rather than glamor and style. But amid all the fueleconomy demonstrations and air-bag explosions, much of the traditional showbiz remained. Sexy women decorated the products, the concept cars were as sassy and flashy—and Chrysler stole the show when it unveiled the prototype of its new Dodge Ram pickup truck. The company’s choreographers dropped the red, full-size vehicle from the ceiling. Now, Chrysler needs to go all out to grab a bigger share of the fast-growing truck market because it, like General Motors and Ford, is struggling to strengthen its fragile balance sheet in a stagnant economy. But despite the industry’s problems, the nine-day Detroit show, which ended at the weekend, was cautiously upbeat as the Big Three automakers finally emerge from their decade of decline.

THE BIG THREE AUTOMAKERS ARE NOW ON TRACK. BUT THEY WANT MORE HELP FROM THE GOVERNMENT.

General Motors Corp., Ford Motor Co. and Chrysler Corp. have been invigorated by their newly developed ability to produce top-quality, stylish vehicles that are cheaper than those made by the Japanese. But that new product edge seems only to have strengthened the Americans’ commitment to using every other

tool within their grasp, including government policy, to hammer the competition. The election of Bill Clinton as president has inspired the Big Three to call for new co-operation between government and industry. Spokesmen for the automakers say that they hope the Democrats will swiftly institute tough new tariff protection on key segments of their business.

Meanwhile in Canada, the North American Free Trade Agreement, like the Free Trade Agreement before it, will increasingly restrict the role that the government has traditionally played in assisting the industry. Said Torontobased industry analyst Dennis DesRosiers: “You can identify a significant noneconomic reason behind every vehicle assembly plant in Canada, but, for one reason or another, those policy levers that have been used in the past are almost all gone. Come the turn of the decade, we will be very vulnerable.’’

Although the North American industry’s products are gaining in consumer appeal, its

financial statements continue to lag. The recession has hammered profits to the point where the biggest of the three, GM, has lost more than $14 billion during the past three years. Last week, GM announced, as part of its general plan to reduce employment worldwide by more than 70,000 by 1995, that at least another 1,000 Canadian workers would be laid off, bringing the GM Canada job-loss total to about 4,000 in the last year. The slow growth forecast for the U.S. and Canadian economies during the rest of the 1990s offers little hope for a fast rebound. In Canada, industry analysts predict that vehicle sales during the 1990s will never break the all-time record set in 1988 when 1,538,000 cars and trucks were sold. And auto analysts warn that the Big Three’s margin of error is so narrow that none of them can afford to make a major mistake with a single new vehicle that they introduce in the coming years.

Despite their competitive successes, however, executives of the Big Three launched 1993 with a vigorous round of Japan-bashing, culminating in a call for new government-industry co-operation in the United States. To begin the new era of co-operation, they said last week that Clinton’s first economic act should be to increase the tariff rate on imports of the popular minivans and sports utility vehicles to 25 per cent from two per cent. “That would send an important signal to Tokyo—and to Detroit,” Robert Eaton, Chrysler’s new chairman, told senior auto industry executives. He added: “It could also be the first step towards a realistic new trade agreement between Japan and the United States.”

Although the executives claim to be Republicans, they sounded remarkably enthusiastic about Clinton, and especially about his concern for the health of the country’s manufacturing base. As a result, they swiftly embraced some of the key public-policy initiatives that the new administration will likely launch. At a joint meeting with Clinton on Jan. 6, the chairmen of the three companies offered their support for increased gasoline taxes—an action that will hurt their profits because consumer preference may shift to smaller cars. The executives also agreed to support other costly government initiatives, including health-care reform and even, tentatively, a move towards something akin to a national industrial policy. Said Eaton: “Along with Congress and the new administration, we should look more closely at how government and industry work together in Europe and Japan. We have a lot to learn from

them about working together for the common good.”

That sudden shift towards government-industry co-operation takes place after more than a decade of Republican administrations committed to a hands-off approach to business. For Canada, which has benefited from both the managed-trade approach embodied by the Auto Pact and from the ideal free-market advantage of a lower cost structure, the eventual outcome of the shift could be crucial. Canada has prospered from the Big Three’s long presence in the market: the country enjoyed an $8-billion surplus in its auto trade with the United States in 1991, the last year figures are available for, compared with a $4-billion deficit with Japan. But Canada has no truly domestic auto industry; all the companies are foreign-owned and senior executives tend to favor domestic operations.

Norman Clark, president of the Torontobased lobby group the Motor Vehicle Manufacturers’ Association, offered an illustration of how executives are influenced in their decisions. “There’s a man on the other side of the river in Detroit staring out at Windsor with a proposal for a plant from Canada, and one from Michigan,” said Clark. “He thinks Canada is politically stable and its costs are good—but there is some risk there because he is not as familiar with Canada as he is with Michigan. Where do you think he is going to build the plant?”

In addition, Clark says that Canada is gradually losing its low-cost advantage. Several major cost components have increased sharply. Canadian labor costs in the industry, which tend to be about $7 to $8 per hour lower than in the United States, climbed in the last four years as the value of the Canadian dollar increased. The cost advantage of Canada’s national medicare system is declining because medical costs are increasing as the average age of Canadians rises. And in the United States, Clinton appears committed to providing a comprehensive, universal medical care system, easing the strain on corporations, which currently carry a disproportionate share of health costs. As well, electricity costs in Central Canada, which used to be among the lowest in the world, have soared during the past five years until now they are among the highest on the continent. If all those costs continue to increase, Canada will lose its ability to compete. Said Clark: “We’ve got to be as competitive in Canada as the lowest-cost producer in the world.”

If the governments of Canada, the United States and Mexico approve NAFTA, the deal will affect the Canadian auto industry in major ways. Executives and analysts say that it will benefit the industry in both Canada and the United States because it will give them access to the Mexican market, which may become one of the fastest growing in the world. Victor Barreiro, president of Ford’s Mexican operation, says that conservative estimates indicate that the average per-capita income in Mexico, with a population of more than 80 million, will more than double to almost $12,000 by the

year 2000. “Right now, there is just one vehicle for every 20 people in Mexico (compared with one for every two people in the United States),” he said.'This shows the tremendous opportunity that lies ahead.” But his company, like others with manufacturing operations in Mexico, is already preparing to double its manufacturing operations, so the benefits of the growth may largely go to producers in Mexico itself. Canada has several parts suppliers that already serve the Mexican market and they are likely to benefit from the trade deal in the short term.

But the real impact of NAFTA, like that of the FTA, will be felt as it increasingly restricts the policy options available to governments. Among other things, the trade agreements will gradually phase out Canada’s right to impose tariff penalties on vehicles or parts manufac-

tured in the United States and Mexico, even if they do not meet the content requirements established in the Auto Pact and the trade agreements. In effect, companies will no longer be forced to manufacture vehicles in Canada to gain tariff-free access to the Canadian market. “Nobody is saying that it will be a disaster for Canada immediately,” said Basil (Buzz) Hargrove, president of the Canadian Auto Workers union. “But NAFTA does move more of the decision-making over to the corporations, away from the government.” As a result, government will lose its right to interfere in the free market, an activity that has often worked to Canada’s advantage in the past. Industry analyst DesRosiers says that historically the federal and provincial governments have played key roles in obtaining almost every major auto-assembly plant in Canada. But he

noted that under NAFTA rules, governments will not be allowed to take the same kind of role in the future. “Canada has got this decade nailed, but by the end of the 1990s we will be very vulnerable without an auto policy,” said DesRosiers. “And the fundamentals of our auto policy have to start with the notion that all the auto companies are foreign-owned.” That is not the only difference between Canada and the United States. Consumers’ preferences are also surprisingly different. James O’Con2 nor, the new president of Ford g Motor Co. of Canada Ltd., i notes that the average Canadi| an household income is 11-per5 cent lower than in the United States and that gasoline prices I are 40-per-cent higher in Cana“ da. As well, government charges, including sales taxes and recycling taxes on tires and deterrent taxes on vehicles with high fuel consumption, increase the cost of owning an automobile in Canada. As a result, O’Connor says that Canadians tend to buy smaller, less costly and more fuel-efficient vehicles than Americans. The best-selling car in the United States in 1992 was the mid-sized Ford Taurus, with a base price of $18,195, while in Canada, the top seller was the compact Chevrolet Cavalier, with a base price of $9,998.

Because of the variety of differences between the auto industries in the two countries, industry observers say that Canada may have difficulty protecting its interests. Indeed, that is already evident. In Toronto last week, in an intimate restaurant aptly named Le Rendez Vous, Ontario Premier Bob Rae met with key auto-parts manufacturers, the only segment of the industry with significant Canadian ownership. Although the premier issued his invitations long before Clinton met with the Big Three in the United States, the main topic of discussion turned out to be the same: co-operation between government and industry. Although no details were available, Neil De Koker, president of the Auto Parts Manufacturers Association, said that he was “pleasantly surprised” by the outcome. Clearly, the auto industry, like the rest of the economy in Canada and the United States, is about to replace the freemarket rhetoric of the 1980s with a friendlier new vocabulary of partnership and cooperation.

BRENDA DALGLISH in

Detroit

CANADIAN PRODUCTION OF MOTOR VEHICLES

Other