Cablegate: Canadian Auto Sector Adjusting to North American Market

DE RUEHON #0123/01 1151627
R 241627Z APR 08




E.O. 12958: N/A
SUBJECT: Canadian Auto Sector Adjusting to North American Market

Ref: (A) Toronto 32 (B) 07 Toronto 457

Sensitive But Unclassified - Please Protect Accordingly.

1. (U) Summary: Despite being labeled the world's most expensive
auto manufacturing jurisdiction, for the fourth straight year in a
row, Ontario is North America's top automobile-assembly site by
volume (2.542 million light vehicles in 2007), surpassing Michigan
(2.295 million). However, Ontario may lose top spot as its
competitive advantage erodes due to the strength of the Canadian
dollar and the UAW's contract concessions that offloaded healthcare
costs from the Detroit Three to the union, effectively eliminating
Ontario's lower-cost healthcare advantage. During upcoming labor
talks here, the Detroit Three are expected to seek labor cost
reductions through such contract concessions as reduced paid time
off. Despite the pressure of deteriorating economic indicators in
both the U.S. and Canada, relations between the Detroit Three and
the Canadian Auto Workers (CAW) union are said to be positive going
into the upcoming contract negotiations. End Summary.

--------------------------------------------- --
U.S. Economic Slowdown Beginning to Hit Ontario
--------------------------------------------- --

2. (U) According to a recent Export Development Canada (EDC)
forecast, Ontario's exports are expected to decline 7% in 2008 and
grow only 1% in 2009. The declining export numbers are blamed on
the high Canadian dollar and eroding U.S. sales. The auto sector is
among the most vulnerable export sectors in Ontario, accounting for
37.2% of exports, mostly to the U.S. Light vehicle sales in the
U.S. are expected to drop to 15 million units in 2008 from an
average of 16.7 million units over the 2003 to 2006 period. Reduced
sales forecasts and the high Canadian dollar have prompted
automakers to cut production in Ontario. Total monthly vehicle
output was down 24% in January compared with January 2007, while
U.S. production declined 2.2%, and a Mexican production was down 21%
during the same period. Analysts expect Canadian auto exports to
decline 9% in 2008, before posting a modest growth of 3% in 2009.

U.S. Parts Strike Cascades Across the Border

3. (U) On April 16, GM announced that it would be cutting one shift
of production at its Oshawa, Ontario auto plant starting April 21,
laying off about 1,000 workers. At the same time, GM will resume
another shift for two weeks at its Oshawa truck plant, putting 1,200
to 1,300 employees back to work. GM production has been hampered by
disrupted just-in-time delivery from striking parts suppliers
American Axle and Manufacturing Holdings. The GM shutdowns also
have had a ripple effect on other auto parts suppliers like Aurora,
Ontario-based Magna and Vaughan, Ontario-based Martinrea
International. Magna reportedly has had to shut parts of its St.
Thomas, Ontario plant that builds frames for GM's large pickups and
SUVs. Back in February, interruption in just-in-time delivery
crippled Chrysler's Windsor Assembly Plant when parts supplier
Michigan-based TRW's Windsor parts plant went on strike. Roughly
175 TRW workers, members of the CAW union, went on strike for six
days, demanding a C$3.75-an-hour pay raise (from C$11.25 to C$15-an
hour), forcing the temporary layoff of around 5,000 employees at
Chrysler's van plant.

Demand for Ford CUVs Strong

4. (SBU) On April 15, Ford announced that it would hire up to 500
additional workers at its Oakville, Ontario assembly plant by July.
Demand for the Ford Edge and Lincoln MKX crossover utility vehicles
(CUVs) are driving the expansion, along with the new Ford Flex CUV,
which will be added to the production lineup in July. 700 laid-off
Windsor plant workers will reportedly be offered the Oakville jobs
(located 207 miles from Windsor) before applications are opened to
others. The Oakville expansion is Ford's second Ontario hiring
surge since March. On March 31, Ford announced it would reopen its
1981-era Essex Engine Plant in Windsor, Ontario, bringing back 300
of over 900 workers, who were laid-off last November. The plant
re-opening was facilitated by the Ontario government kicking in C$17
million to the C$170 million project. The plant will assemble a new
generation of fuel-efficient V8 engines, and is expected to be in
production by the end of 2009.

5. (SBU) Our contact at Ford told us that the company is still

TORONTO 00000123 002 OF 002

trying to persuade the Canadian federal government to support the
project (ref (A)). They said that the GOC is working out the terms
of possible support through its C$250 million Automotive Innovation
Fund, announced in the 2008 federal budget, which supports research
and development investments in the automotive sector (Note: The
Automotive Innovation Fund is designed to help develop new
environmentally sustainable and fuel-efficient vehicles. The fund
has been criticized by Ontario Finance Minister Dwight Duncan as
being insufficient because a single new plant costs over C$1 billion
to build. End Note). A GM contact told us that the company is in
funding talks with the provincial and federal governments for an
advanced vehicle technology R & D initiative, but no further details
are known at this time.

Ontario Hangs on to Top Spot in Auto Assembly

6. (U) For the fourth straight year, Ontario is North America's top
automobile-assembly site by volume (2.542 million light vehicles in
2007), ahead of Michigan (2.295 million), according to data released
in April by trade publication Automotive News. Ontario's
competitive advantage has eroded because the Canadian dollar is now
around par with the U.S. dollar, up from 63 to 78 cents a few years
ago, and because the UAW agreed to contract concessions last fall
that offloaded healthcare costs from the Detroit Three to the union,
effectively eliminating Ontario's lower-cost healthcare advantage.

Upcoming Union Contracts Talks

7. (SBU) Early in April, CAW union leader Buzz Hargrove told
reporters that he and other CAW negotiators had separately met with
top officials at GM, Ford, and Chrysler in hopes of starting
negotiations for their next three-year contracts. Contract
negotiations usually begin in July for the contracts of 31,000
workers which expire in mid-September. Market conditions are
expected to deteriorate both in the U.S. and Canada, so an early
start might benefit the union. Hargrove has already said the union
will not accept reductions in wages, cost of living allowances,
pension indexing, or healthcare. GM reportedly is seeking to reduce
its labor costs by reducing paid time off, allowing temporary
workers, and eliminating strict work rules. On April 22, a contact
at Ford told us that the company had not formally begun contact
negotiations with the CAW, but that they were exchanging information
on such things as new products and fuel efficiency targets. Despite
public rhetoric by Hargrove, our Ford contact told us that the
company's relationship with the union has "never been better."

8. (U) Comment: We expect the Detroit Three to press the CAW for
significant concessions to improve the competitiveness of their
Canadian manufacturing operations when contract negotiations begin
this summer. CAW President Buzz Hargrove is considered by industry
insiders to be pragmatic, and is expected to work with the Detroit
Three to meet their cost reduction needs. Auto sector executives
are actively in talks with both the Ontario and federal governments
to find public funding for innovation initiatives to boost
competitiveness. End Comment.


© Scoop Media

World Headlines


Werewolf: Gordon Campbell On North Korea, Neo-Nazism, And Milo

With a bit of luck the planet won’t be devastated by nuclear war in the next few days. US President Donald Trump will have begun to fixate on some other way to gratify his self-esteem – maybe by invading Venezuela or starting a war with Iran. More>>

Victory Declared: New Stabilisation Funding From NZ As Mosul Is Retaken

New Zealand has congratulated the Iraqi government on the successful liberation of Mosul from ISIS after a long and hard-fought campaign. More>>

Gordon Campbell: On The Current US Moves Against North Korea

If Martians visited early last week, they’d probably be scratching their heads as to why North Korea was being treated as a potential trigger for global conflict... More>>


Gordon Campbell: On The Lessons From Corbyn’s Campaign

Leaving partisan politics aside – and ignoring Jeremy Corbyn’s sensational election campaign for a moment – it has to be said that Britain is now really up shit creek... More>>


Another US Court: Fourth Circuit Rules Muslim Ban Discriminatory

ACLU: Step by step, point by point, the court laid out what has been clear from the start: The president promised to ban Muslims from the United States, and his executive orders are an attempt to do just that. More>>