INDU Committee Report
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Avenues of Government Assistance: Industry-Specific Measures An Automotive Industry Strategy and the Long Term The automotive industry is a key driver of Canada’s economy, a fact that the Government of Canada emphasized in its budget plan of 2009. The industry currently faces significant challenges in the form of the U.S. economic recession, changing consumer preferences and increased global competition. The Government of Canada has thus decided in favour of taking action. Its action begins with the Minister of Industry who is charged with developing a strategy to position Canada’s automotive sector for sustainable, long-term success. The principles of this strategy were laid out in the budget plan:
Motor Vehicle Assembler Financial Assistance As part of this strategy, on 20 December 2008, the Governments of Canada and Ontario promised General Motors of Canada and Chrysler Canada with up to $4 billion in short-term repayable loans managed by Export Development Canada. The federal government’s contribution was to be $2.7 billion. These two companies have not, however, taken up either of these loan offers. Instead, both have decided to independently submit a business restructuring plan that includes a request for financial assistance from both Canadian governments. The total financial assistance requested is believed to be between $7.3 and $9.3 billion in loans. These two requests for Canadian government financial assistance are loosely tied to similar requests made of the U.S. government by their parent corporations, though the latter requests are between four and five times greater in size than the former. If the U.S. government decides against any further financial assistance – the least likely case – clearly any financial assistance offered by the Canadian governments would involve considerable risk. If the U.S. government instead decides in favour of providing further financial assistance – the more likely case – whether in the amounts requested or in a scaled back version, then the Canadian governments must weigh many potential scenarios that include, in addition to a sound and viable industry and other positive outcomes that may result from the implementation of the proposed corporate restructuring plans, the possibility of bankruptcy, the extent of plant closures and shutdowns, the number of potential job losses, a smaller motor vehicle parts manufacturing industry that employs far fewer people, the possibility of a complete or partial failure to repay any loans advanced, as well as redistributive effects such as other parties acquiring existing Canadian assets, other automobile and automotive parts manufacturers increasing their production and partially offsetting lost production by others, and the rehiring of a portion of the previously laid-off workers. Both General Motors and Chrysler proposals assume a rebound in U.S. motor vehicle sales beginning in late 2009. Their proposals also assume success in their new product launches. But no government loan could possibly guarantee that these companies will succeed in their transition. Indeed, it is very conceivable that such loans might merely buy them more time and forestall the possible events set out above. At the same time, the U.S. government loans are likely to include conditions on the application of these funds, ensuring that there are no formal financial leakages to places beyond U.S. national borders. Such loans (with their protectionist-like conditions) can have similar economic effects to a tariff: they can separate or split an integrated continental market into two national markets, in which case Canada could end up the loser. For this reason, Canadian governments might want to make loans available to GM Canada and Chrysler Canada in the same proportion as their production makes up North American production and on similar conditions to the U.S. government loans. In such a case, a competitive balance is maintained. The Committee notes that the witnesses appearing at its hearings were generally in support of the Canadian governments providing loans to GM Canada and Chrysler Canada, particularly given that the U.S. government was already doing so and is committed to do more. Even GM Canada and Chrysler Canada’s competitors – Ford, Honda and Toyota – did not object to the financial assistance with the proviso that the loans are strictly provided to finance their corporate restructurings and cannot be used either to extend a competitive advantage or finance car leases or loans to its customers. At the same time, the Committee would be remiss if it did not acknowledge that the witnesses appearing at its hearings were not representative of the nation’s population at large. Given that these witnesses were drawn exclusively from the Canadian automotive sector, it is a highly skewed distribution of the population. In the end, the Canadian governments face a dilemma. However, without access to the confidential elements of both proposals and, therefore, being unable to undertake the due diligence review itself, the Committee cannot (at this time) offer a fully informed opinion on whether or not the Government of Canada should extend the requested financial assistance or a scaled down amount to GM Canada or Chrysler Canada. Automotive Parts Manufacturers and Consumer Credit Facilities The Government of Canada is also targeting support to automotive parts manufacturers by improving their access to credit through Export Development Canada’s (EDC) accounts receivable insurance. While generally supportive of this extension of EDC credit, Canadian automotive parts manufacturers are further requesting financial support. The Automotive Parts Manufacturers Association (APMA) is seeking $1 million in repayable loans for Canadian firms from Canadian governments. By way of example, APMA pointed to the United States, where the U.S. Treasury recently announced a US$5 billion aid package for U.S. automotive parts suppliers. Tool, die and mould makers argue that the current payment terms under the Production Part Approval Process (PPAP) used by the “Detroit Three” are inequitable. Traditionally, the automobile manufacturers or original equipment manufacturers (OEM), typically the largest customers of tool companies, place a production program with its preferred Tier-1 supplier, who in turn would place a tool to be built with their preferred tool shop. The tool would be built and the parts that are produced from that tool would be approved for installation in cars by the OEM. The Tier-1 supplier would receive monies from the OEM to pay for the tool or the mould. Payment typically takes from 18 to 48 months, depending on PPAP or delays. The Canadian Association of Mold Makers (CAMM) and the Canadian Tooling and Machining Association (CTMA) propose an end to the current PPAP payment term system and have advanced an alternative, what they call the Tooling Proposal. The Tooling Proposal would have payment of 90% of the price of the tooling upon delivery to parts supplier with a holdback of 10% until the final payment date. The Government of Canada will create the $12-billion Canadian Secured Credit Facility (CSCF) that will improve credit availability for consumers to purchase and lease new vehicles. Industry officials generally praised the government for the creation of the CSCF and the targeting of access to EDC credit for accounts receivable insurance to automotive parts manufacturers. Some witnesses were satisfied with the CSCF as planned, but insisted that it not be made complex or too bureaucratic so that credit could start flowing as soon as possible and before the current car and truck buying season begins. Other witnesses were quick to remark that motor vehicle leasing was, most recently, a $60 billion business. Some recommended an augmentation of the credit facility. Motor Vehicle Scrappage Incentive Program In January 2009, the Government of Canada unveiled the Vehicle Scrappage Program (VSP) that will be delivered by the Clean Air Foundation and will provide a $300 credit to individuals who scrap their cars and trucks of 8 years or more. The incentive is meant to be an environmental measure but several witnesses questioned its effectiveness in stimulating new vehicle sales. One witness claimed that a 10-year-old car has a resale value of about $3,500, so $300 provides little incentive to scrap one’s car or truck. In Germany, on the other hand, the government offers up to €2,500 or about $4,000 for scrapping a car or truck of 9 years or more. It was suggested that the incentive was at least partly responsible for a 22% increase in February motor vehicle sales, and is forecast to increase motor vehicle sales by 200,000 units, or by 10%, in 2009. Witnesses thus proffered a number of proposals that were similar to the German program. One proposal was for the Government of Canada to offer a scrappage fee of $4,000. Another proposal included a graduated fee, whereby a lower fee would apply to a motor vehicle that is 8 years old and that this fee would increase with the age of the motor vehicle until it reaches the maximum set at $4,000 for a motor vehicle of 10 years or more. Another proposal would have the federal government establish a $300-million scrappage incentive program for a period of one year, with the goal of removing 100,000 motor vehicles that are 10 years or older from Canadian roads. Some witnesses appearing before the Committee pushed for such a measure and argued that it would be good for the economy, the environment and safety. Industry experts claimed that a 10-year-old car pollutes at a rate of 12 to 18 times higher than a new car and a 20-year-old car pollutes at a rate of 37 times higher than a new car. It was further claimed that about 30% of the car fleet in Canada – that is, about 6 of 20 million cars on the road – are 10 years old or older. Although it is clear that such a measure would create a one-time increase in the retail sales of new motor vehicles that would give the retail segment of the industry a much needed “shot in the arm”, it is not sure if it would be of much help to the Canadian automobile assembly industry. The Canadian automobile assembly industry exports about 90% of the value of its production to the United States, meaning that the scrappage incentive may not significantly affect the wholesale sales of Canadian-made vehicles. Indeed, the majority of cars and light trucks sold in Canada are made elsewhere and, therefore, a Canadian scrappage program in isolation would entail considerable leakages in sales to foreign-based automobile manufacturers. An effective Canadian scrappage program that would be of benefit to Canadian automobile manufacturers would have to be part of a coordinated North American-wide program. The scrappage incentive might also lead some consumers to substitute their planned purchases away from other consumer goods and services and towards motor vehicles since a car or truck is a big-ticket item that significantly affects a family’s budget. Hence, the increased retail sales of motor vehicles induced by a scrappage incentive program may come largely at the expense of decreased sales of other consumer goods and services. Not everyone supported the belief that a scrappage program was the best way to deal Canada’s environmental challenges or would improve road safety. The Automotive Industries Association of Canada (AIA) claimed that a scrappage program either as an environmental or safety measure was flawed. Although its members supported the federal government in offering incentives for Canadians to purchase new vehicles, it opposed taking older cars off the road for a number of economic reasons:
Obviously, if the scrappage incentive program is effective and leads to the scrapping of many vehicles, then it will also, by definition, be expensive to the government’s treasury, possibly displacing the provision of other government goods and services. Finally, since the second-hand market for older cars is disproportionately used by low-income individuals within society, it may also have an adverse impact on the lower-income individuals or the “poor”. GST Tax Holiday Some witnesses before the Committee argued for a sales tax holiday on the purchase of a new motor vehicle. Specifically, Toyota Motors Manufacturing Company proposed the suspension of the goods and services tax (GST) and the federal portion of the harmonized sales tax (HST) in the three provinces to which it applies on the purchase of a new motor vehicle for a period of four months. The cost to the federal treasury of such a measure was not provided. Such a provision could stimulate the current demand for cars and light trucks. It has but four things working against it, however. Such a measure is likely to lead some consumers to substitute their planned purchases away from other consumer goods and services and towards motor vehicles – the retail automotive industry’s gain, once again, comes largely at the expense of lost sales of other consumer goods and services. Furthermore, any increase in demand resulting from a GST holiday would likely be short-lived and possibly coming at the expense of lost future sales. Similar to a scrappage program, since the majority of cars and light trucks sold in Canada are made elsewhere, a GST holiday would entail considerable leakages in sales to foreign-based automobile manufacturers. Finally, there is the loss in government revenue that funds public goods and services that must also be assessed. Canada-Korea Free Trade Agreement Some witnesses took the opportunity to advance their opinion on a prospective Canada-Korean free trade agreement that Canadian trade officials have put some time in negotiating. They believe that a Canada-Korea free trade agreement would not be the right deal for Canada. Most of them claimed to be believers in free trade, but they argued not only for free trade but also for what they called fair trade. The primary problem with free trade with Korea, they said, is that it systematically uses regulatory and other non-tariff barriers to restrict vehicles coming into their domestic market. In consideration of all of the above, the Committee therefore recommends:
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