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Cablegate: Strong Loonie - Cross-Border Shopping Hurts Canadian Auto

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FM AMCONSUL TORONTO
TO RUEHC/SECSTATE WASHDC 2268
INFO RUCNCAN/ALCAN COLLECTIVE
RUEHME/AMEMBASSY MEXICO 0133
RUEHKO/AMEMBASSY TOKYO 0063
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RUEAHLC/HOMELAND SECURITY CENTER WASHDC

UNCLAS SECTION 01 OF 02 TORONTO 000457

SIPDIS

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ETRD ELAB PGOV SENV CA
SUBJECT: Strong Loonie - Cross-border Shopping Hurts Canadian Auto
Producers

Ref: (A) Toronto 450 (B) Toronto 414 (C) Toronto 358 (D) Toronto 53

(E) Toronto 11

Sensitive But Unclassified - Please Protect Accordingly.

1. (SBU) Summary: The strong Canadian dollar and weaker U.S.
consumer demand are challenging Canadian-based auto assemblers'
efforts to remain globally competitive. Sales to Canadians of new
and used autos from the U.S. are up by 21% to 136,666, setting a new
record for the first 10 months of the year. The auto parts sector
is asking the Ontario provincial and Canadian federal governments
for assistance to stay afloat. Ford Canada has condemned the
pending Canadian -- South Korean Free Trade Agreement. The auto
sector employs more than 130,000 people in Ontario, and represents a
large portion of the manufacturing sector (20% of provincial GDP).
We believe provincial officials will continue their efforts to help
auto companies adapt to the challenging economic reality of a strong
Canadian dollar and weaker U.S. consumer demand. Provincial efforts
to persuade the Conservative federal government to help the sector
may be less immediately successful. End Summary.

-------------------------------------------
Canadians Importing More Cars from the U.S.
-------------------------------------------

2. (SBU) The strong Canadian dollar and resulting lower auto sticker
price has prompted Canadians to import more cars from the U.S. and
buy fewer cars in Canada. Vehicle sales in Canada dropped 3% in
September to 132,165 vehicles from 136,057 in the same period last
year, only to show a slight recovery in October (ref (A)). The Bank
of Montreal recently estimated that the price of Canadian goods is
roughly 25% higher than in the U.S.

3. (SBU) Imports of new and used autos from the U.S. are up a record
21% to 136,666 cars for the first 10 months of the year compared to
the same period last year, according to the federal Registrar of
Imported Vehicles. In October, a month after the Canadian dollar
surpassed the U.S. dollar for the first time in more than 30 years,
auto imports doubled over the same period last year. Ontario and
B.C. accounted for two thirds of overall imports this year, which is
proportionately higher than in past years. The industry has
responded to the surge in imports by introducing incentives to
reduce new car prices in Canada by roughly 5%.

--------------------------------------------- ---
Auto Parts Sector Asking for Government Bail Out
--------------------------------------------- ---

4. (SBU) Canada's auto parts suppliers, led by Gerry Fedchun,
President of the Canadian Automotive Parts Manufacturers'
Association (APMA), have asked the Canadian federal and Ontario
provincial governments for C$400 million in "emergency" financing to
help survive the surge in the Canadian dollar. Canadian auto parts
makers employ about 90,000 people, primarily in Ontario and Quebec,
and manufacture more than C$30 billion worth of goods and services
annually.

5. (SBU) Many parts manufacturers have already been forced to cut
jobs or close plants because of declining production at their
largest customers, the Detroit Three -- GM, Ford, and Chrysler. The
auto parts makers have been squeezed by production cuts and
shrinking margins as the Detroit Three demand price cuts from their
suppliers while commodity input prices, such as steel and plastic
have been increasing. The APMA says it would direct the C$400
million in loans for new equipment purchases to improve the
productivity of smaller member companies. Larger players like
Aurora, Ontario-based Magna and Guelph, Ontario-based Linamar have
capitalized on the rising Canadian dollar (from US$0.85 to more than
US$1.00 in seven months) to purchase and install new equipment to
boost productivity. Smaller companies lacked the margin to take
advantage of the stronger Canadian dollar.

---------------------------------------
Ford Condemns Proposed Canada-Korea FTA
---------------------------------------

6. (SBU) On November 22 at the Economic Club of Toronto, Ford Canada
President Bill Osborne joined other Canadian auto manufacturers and
the Canadian Auto Workers union in criticizing a pending free trade
agreement between Canada and South Korea. Osborne said a
Canada-South Korea free trade agreement that does not include more
open access to the Korean auto market would make it difficult for
Ford to justify making more investments in Canada. He warned that,

TORONTO 00000457 002 OF 002


if Canadian negotiators emulate the proposed U.S.-South Korea deal,
which would reportedly end the U.S. tariff on small Korean cars, it
could result in "serious economic harm" to Canadian auto
manufacturers. Because Canada's market is more heavily skewed to
compact cars than the U.S. market, he argued, Canadian auto
manufacturers would be harder hit by a trade agreement that does not
effectively open Korean markets to North American autos.

7. (SBU) Comment: On November 27 Ontario Premier Dalton McGuinty
reportedly said the federal government should sit down with
provincial officials and auto industry leaders to decide how to help
the struggling sector. Citing federal funding of infrastructure
projects, work to harmonize fuel efficiency standards with the U.S.,
elimination of the federal capital tax, accelerated capital cost
allowances for manufacturers, and a federal corporate tax rate cut,
federal officials reacted coolly to the suggested talks. Ontario
claims its C$500 million five-year Automotive Investment strategy,
announced in April 2004, has so far resulted in C$7 billion of net
new investment and creation of 7,000 new jobs. Because the auto
sector employs more than 130,000 people in Ontario, and represents a
large portion of the manufacturing sector (20% of provincial GDP),
we believe the provincial government will actively intervene to help
the auto sector in the coming months as small to medium-sized
companies continue their efforts to stay afloat with small or
non-existent profit margins. Provincial officials are also likely
to continue seeking assistance from the federal government, though
the Conservative federal government is ideologically inclined toward
broadly-based tax relief, rather than subsidies, and is likely to
delay any such measures until the announcement of its FY08-09 budget
(February 2008 at the earliest). End Comment.

NAY

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