Mexico is expected to produce more vehicles than Canada in the next three or four years, putting thousands of Canadian jobs at risk, industry experts warn.
The move comes at a time when North America is facing its worst cyclical downturn since the early 1990s, with sales and production numbers both down about four million units from its peak in 2000, auto industry analyst Dennis Desrosiers says in a note to clients.
Production in 2000 was 17.7 million units, compared with an estimated production this year of about 13.5 million units.
"Obviously, when consumers don't buy vehicles the (manufacturers) do not produce vehicles, so production declines," he says. "Canada is more centred on the U.S. market than Mexico so Canada takes more of a cyclical hit than Mexico."
The U.S. market took another sharp hit in June with GM reporting selling 265,937 vehicles for the month, according to The Associated Press, representing an 18-per-cent drop over the year before. Toyota officials released figures showing a 21.4 per cent drop for June over the same time last year after selling 193,234 units.
Canada didn't fare much better. General Motors of Canada Ltd. reported sales of gas-guzzling trucks fell to 32,365 units for the month of June, a whopping 35.3 per cent drop over the year before.
"GM Canada's June sales reflected the significant ongoing market impact of rising gas prices and the resulting further consumer shift toward cars and smaller crossovers," Marc Comeau, GM's vice-president of sales, told The Canadian Press.
Honda Canada Inc. showed a two- per-cent year-over-year drop, selling 16,518 units during June.
A J.D. Power and Associates researcher told Business Edge its analysis forecasts the balance in production will switch to Mexico by 2010 while consulting firm Automotive Compass predicts Mexican production will surpass Canada by 2011.
Mexico is also better equipped to manufacture smaller, more fuel-efficient vehicles at a time when gasoline prices are reaching record highs and consumer demand for trucks and SUVs has dropped, Desrosiers says.
General Motors of Canada employees blockaded the company's offices just east of Toronto last month when officials announced they were halting production at four factories in North America next year, including a large pickup truck plant in Oshawa. The decision will put about 2,600 employees out of work.
The automaker signed a contract with employees May 15 where they agreed to a number of concessions in exchange for keeping the plant open. GM executives said they had no choice but closing the plant after U.S. pickup truck sales dropped a surprising 38 per cent in May.
An Ontario judge ordered the union to clear the blockade after 12 days and union officials have had at least two meetings with company executives since.
But the shutdown is still scheduled to go ahead as originally planned in 2009.
Desrosiers says Canadians should be concerned about the trend to move more production to Mexico, but not "hysterical, like some are reacting."
"It may take a few years to work through this cycle, but the cyclical downturn will eventually end and this four million units of lost market will come back in its entirety, plus, plus, plus. North America will eventually buy north of 20 million vehicles per year again and this will require a lot of plant capacity in North America ... " So when the consumer does come back to the auto dealerships, where will those vehicles be produced - Canada, Mexico or overseas?
Desrosiers said overseas production is not much of a threat to Canada because of higher shipping costs.
"The real threat to Canada is from U.S. and/or from Mexican plants," he explained. "In addition, the (Canadian Auto Workers) CAW's unwillingness to face the reality of the lower labour costs in the U.S. puts Canada into a very vulnerable position to attract new investments in three to five years as most of our existing (vehicle) product mandates come to their conclusion."
Desrosiers added that United Auto Workers' wages at U.S. plants are between $10 per hour to $25 per hour less than their counterparts at CAW plants.
"To think that Canada would ever be able to complete with $4-an-hour wages in Mexico is foolish. But we can compete with plants in the U.S. industrial north and other regions," he writes in his analysis.
He asks whether Canadian labour leaders be more accepting of initiatives like two-tier wages, "be working to eliminate millions in feather bedding in existing contracts and be working towards the elimination of selected benefits that are no longer affordable in today's automotive sector like DB (direct benefit) pension plans and a dozen others?" Desrosiers says another factor in Mexico's favour is wage differences. Mexican wages are in the $4.50 per hour range while General Motors, Ford and Chrysler pay about $78 per hour in Canada.
He added this includes costs for retirees and benefits not included in the Mexican hourly rate, but still described the difference as "massive."
Even Mexican union officials had to scramble last month to compete against downward wage pressure from China.
Ford Motor Co. employees at a plant just outside Mexico City agreed to a two-tier system that saw starting wages at around $2.25 per hour.
It was an effort to keep many of the 4,500 jobs involved in manufacturing the new Ford Fiesta in the area. And it was working, until negotiators heard workers at other plants were accepting as low as $1.50 per-hour wages, with substantially less benefits.
"You can start that kind of game," CAW economist Jim Stanford said in an interview from Toronto. "Wages keep spiralling downward until you become a country that pays its workers Third-World wages and nobody wins.
"We've heard the argument that Canada is superior to countries like Mexico in terms of productivity levels, too, and that's just not true. Their productivity and quality levels are almost indistinguishable from their other counterparts throughout North America," he says.
In a news release issued late last month, CAW national president Buzz Hargrove said the Canadian auto industry (including both assembly and parts) has lost a total of almost 30,000 jobs since peaking in 2001, including companies that have added new staff during that time.
Hargrove and other CAW officials are calling on the federal government to bring back principles of the former Canada-U.S. Auto Pact, which required companies to produce one vehicle in Canada for each one they sold here.
"Without an active effort by our government to control this huge and growing trade imbalance there is little hope for saving Canadian auto jobs," Hargrove says in the CAW news release.
"The fact that Canada's national (gross domestic product) is now declining, and our overall trade balance is rapidly crumbling, proves that the federal government cannot continue to ignore this sector, which is so vital to our overall economic performance."
However, Statistics Canada released its latest GDP numbers last week that surprised many analysts. It showed gross domestic production was slightly up this past April to 0.4 per cent.
The announcement was contrary to what most people were expecting, a second quarter of negative growth, which would fall within the technical definition of a recession.
Even more surprising was where most of the increase was coming from: Canada's troubled manufacturing sector, which registered 1.9-per-cent growth in April, including a large seven-per-cent increase in automobile production.
But analysts were still not impressed, saying it didn't reflect the true picture of what was happening in the manufacturing sector overall. "These are definitely tough times for Canadian manufacturers," said Luc Martin, national manufacturing industry leader for Deloitte Canada. "Most of the effect will be felt in Ontario and Quebec, where 80 to 85 per cent of your production takes place. B.C. has its forestry sector, which isn't really affected and Alberta has oil and gas, which isn't that vulnerable either."
The study surveyed 321 executives across different manufacturing sectors in Canada.
(David Hatton can be reached at hatton@businessedge.ca)
