:
Thank you very much, Mr. Chairman.
On behalf of Chrysler and Chrysler LLC, it is our privilege and pleasure to be here in front of the committee this evening. We will have 10 to 15 minutes of opening remarks, if that is okay. Mr. LaSorda and I will tag-team these remarks. I will start them off.
There is no question that these are very challenging times, not only for the global economy but also for the automotive industry, and Chrysler Canada in particular. I'd like to provide and start off with an overview of Chrysler Canada's operations and then speak to some of the critical factors affecting our competitiveness in Canada, our future Canadian manufacturing plans, our restructuring and long-term viability, and then speak briefly about our pending alliance with Fiat.
Following our remarks, we will be happy to answer any questions from the committee.
To begin, Chrysler Canada is headquartered in Windsor, Ontario, and we have a significant presence in Canada and a significant impact on the Canadian economy.
Chrysler operates vehicle manufacturing facilities in Windsor and Brampton, Ontario, and a castings plant in Etobicoke. In addition, we operate an award-winning research and development centre in Windsor, in partnership with the University of Windsor. Over the past 20 years, this centre has led and supported many advanced technology development programs, such as propane-fuelled vehicles, natural-gas-powered vehicles, and more recently, electric vehicle technology.
Chrysler Canada also has office and distribution centres in Toronto, Montreal, Calgary and Red Deer. Including our Chrysler Financial operations, the current direct employment by Chrysler is about 9,400 employees.
There are also 451 dealer locations throughout the country, employing close to 26,000 employees, who are exclusively dependent upon the sale and servicing of Chrysler vehicles for their livelihood.
From a supplier standpoint, there are 407 supplier locations providing parts to Chrysler manufacturing facilities. These suppliers employ approximately 50,000. Last year, Chrysler purchased $5.5 billion in goods from these companies.
Last, with 13,000 retirees in total, there are approximately 100,000 Canadians who are directly or indirectly dependent on Chrysler Canada for their well-being.
Chrysler Canada assembles over half a million vehicles a year and sells approximately 230,000 vehicles in Canada each year. In 2007, Chrysler Canada became the second-highest-selling vehicle manufacturer in Canada, and in the same year it gained more market share and incremental sales than any other vehicle seller in the country. With sales revenues of $5 billion and manufacturing revenues of approximately $13 billion, Chrysler Canada is one of the largest companies in our country.
The current lack of credit availability in the Canadian market is having a dramatic impact, not only on Chrysler Canada but also on the Canadian economy in general. In July 2008, prior to the full onslaught of the global credit crisis, Chrysler Canada had experienced 23 consecutive months of year-over-year sales growth—an unprecedented event in the history of our company and unmatched by any of the major vehicle sellers in Canada we compete against.
Today, Chrysler dealers throughout the country have indicated that upwards of 20% of potential new car buyers are unable to secure financing to purchase a new vehicle. Furthermore, lease financing in the Canadian marketplace for many automotive manufacturers is currently not available. During the first six months of 2008, approximately 50% of Chrysler Canada's vehicle sales were leased, whereas today that number is zero.
Credit for our dealer organization is also under extreme pressure. At a time when the current Bank of Canada interest rate is at a historic low, dealers are experiencing unprecedented increases in the costs associated with “flooring” or financing their new vehicle inventory. Further, it is virtually impossible for a prospective Chrysler dealer to secure flooring, which in turn results in a drag on the country's economic activity, and it prevents a new dealer from the having the ability to enter into the business. It is also very difficult for a Chrysler dealer to secure a mortgage to construct a new facility or to finance an amalgamation with another dealer.
The availability of credit is critical for the return of the automotive industry and the Canadian economy to good health. Further, a more stable U.S. economy will also directly impact Chrysler's success. Chrysler Canada's operations are inextricably linked with Chrysler LLC and our United States operations. For example, 85% of the products manufactured by Chrysler Canada are exported to the United States, 60% of the products we sell in Canada are produced in the United States, and approximately 20% to 27% of Chrysler's worldwide production currently occurs in Canada. Therefore, in our opinion, it is unrealistic and, frankly, improper to examine Chrysler Canada's operation without consideration of the larger context in which we function.
With that said, I'd now like to pass this over to the president of Chrysler LLC and our vice-chairman, Mr. Tom LaSorda, who's going to speak to some of the critical factors for our ongoing competitiveness in Canada.
:
Good evening, everyone.
I'm a fellow Canadian as well. I live in the U.S. and became a U.S. citizen three years ago, but I'm a proud Canadian as well.
I'm here on behalf of Chrysler Corporation and Chrysler LLC, as the president and vice-chairman of the company.
The current success and long-term viability of Chrysler's manufacturing operations in Canada are very much dependent on three critical factors: the transfer pricing clarity that we need from the Canadian government, labour costs in this country, and government assistance. Chrysler LLC cannot afford to manufacture products in a jurisdiction that is uncompetitive relative to other automotive jurisdictions.
Let me turn to the first major area, that of transfer pricing. In the fall of 2007, the Canada Revenue Agency, CRA, issued assessments asserting that for 1996 through 1999, Chrysler Canada should have earned greater profits than were reported in Canada and, correspondingly, should have reported reduced profits in the United States.
I'd like to make a point that's not in the script: Chrysler paid the taxes. The issue is that the CRA is issuing the thinking that more taxes should have been in Canada versus the U.S.—thus the dispute.
When Daimler sold a controlling interest in Chrysler, Daimler agreed to indemnify Chrysler against, among other things, these transfer pricing tax assessments. Under Canadian law, even though Chrysler Canada is duly pursuing challenges to the assessments, the company became obligated to post cash and assets to secure 50% of the assessed amounts.
Daimler has stated that it will not pay the indemnity until the contest over the validity of the assessments has been concluded, leaving Chrysler Canada to post the necessary collateral to the CRA. This obligation to pay or secure these assessments has severely impacted the company's ability to operate at this critical time.
The CRA issue has been referred to a dispute resolution process, which includes both the IRS and the CRA, and it will determine what the proper allocation of value is between Chrysler's U.S. and Canadian operations. However, in order to provide Chrysler with the assurance it needs in order to continue to keep Chrysler's Canadian operations running while this dispute resolution process is under way, Chrysler needs the CRA to provide assurance to Chrysler that during this process CRA will be satisfied with the existing security provided to it by Chrysler Canada—a lien on our Brampton manufacturing assembly plant, valued at $500 million, and over $335 million of cash collateral, GST funds owed to Chrysler and being held back—and that the CRA will not seek additional security until the dispute, which they've agreed to with the IRS, is settled and resolved.
Once the dispute over the transfer pricing assessments has been concluded, the amount found to be due and owing to the CRA will be paid by Daimler, pursuant to its indemnity obligation.
Let me go to issue number two,which is labour costs. Currently Chrysler/CAW's all-in labour rates are not competitive. The CAW has been provided with alternative approaches by us, as well as a detailed proposal for closing the CAW labour cost gap of approximately $20 per hour. The labour cost gap is a measure comparing Chrysler/CAW facilities with the Canadian transplants, such as Honda and Toyota. It also includes Chrysler/UAW manufacturing operations and transplant facilities in the United States. As part of the labour cost gap reduction, a 50% reduction of other post-employment benefits is also required.
In addition to the considerations outlined herein, it is imperative that the CAW labour cost gap is closed in order to preserve Canadian operations by Chrysler.
The third area is government assistance. As a result of an unprecedented downturn in automobile demand brought about by the global financial crisis, Chrysler Canada on December 5, 2008, requested Canadian and Ontario provincial assistance.
Chrysler Canada requests proportionate support from Canada to what our parent company, Chrysler LLC, is seeking in the United States on the basis that our two organizations are highly integrated.
In the December 2, 2008, submission to the U.S. Congress, we requested a $7 billion working capital loan to support our short-term restructuring and long-term viability. This request was based on a 2009 seasonally adjusted annual rate--SAAR, we call it--of sales in the United States of 11.1 million units.
On January 2, 2009, the United States Treasury advanced $4 billion of our requested amount, and it required Chrysler to submit a restructuring plan to achieve our long-term viability.
On February 17, 2009, Chrysler submitted a viability plan to the U.S. Treasury that revised our SAAR projection for 2009 down to 10.1 million units and assumed more gradual growth in the out-years.
As a result of the continued deterioration in the United States market, we requested an additional $2 billion in bridge loans beyond the original $7 billion.
On December 20, 2008, the Canadian and Ontario governments pledged a repayable interest-bearing loan of $1 billion Canadian to Chrysler Canada. The governments, recognizing that we are an integrated company and industry, indicated that they too wanted their support to be parallel in form and conditions and proportionate in amount with the U.S. support. To this end, Chrysler Canada continued to mirror, where applicable, the restructuring and transformation efforts required by the U.S. Treasury.
Failure to satisfactorily resolve these three factors--the labour cost, government assistance, and of course the transfer tax--will place our Canadian manufacturing operations at a significant disadvantage relative to our manufacturing operations in North America and may very well impair our ability to continue to produce in Canada. As a corporation with operations in multiple jurisdictions, we cannot afford to manufacture products in jurisdictions that are not competitive.
I'd like to turn it back to Reid to talk about the Canadian plans and an outline of our viability plan and what we're doing with Fiat. By the way, I'm sure you all know that the chairman and CEO of Fiat is another Canadian.
As previously indicated, Canada has always been an important manufacturing and sales market for Chrysler. It is significant to note that Canada is the largest vehicle sales market for Chrysler outside of the United States and that no other vehicle manufacturer has a larger portion of its total manufacturing in Canada than Chrysler.
Currently, Chrysler Canada builds the Dodge Grand Caravan, the Chrysler Town and Country, and the Volkswagen Routan at our Windsor assembly plant. As well, we produce the Chrysler 300, Dodge Charger, and Dodge Challenger at our Brampton assembly facility.
Subject to achieving the three critical factors outlined by Tom, Chrysler envisions a bright future for our Canadian operations. Specifically, Chrysler Canada intends to continue with current investments in our Windsor and Brampton assembly plants.
I'll recap some of those investments in Windsor. In 2008, for the 2008 minivan program, we invested close to $1 billion. Also in 2008, we put in a close to $240 million paint facility. For the 2009 model year minivan, we're in the process of investing another $41 million to manufacture minivans for the international marketplace. And for model year 2011, we intend to upgrade our existing minivan portfolio by investing a further $153 million in our Windsor assembly plant.
In Brampton, the investments are even more significant. We intend to continue to move forward with investments for the next generation of Chrysler 300 and Dodge Charger vehicles at our Brampton assembly plant, beginning in the 2010 calendar year. These platforms would also be adapted for international markets, including right-hand drive production. To recap, in 2008 we also invested $332 million in our Brampton assembly plant for our Dodge Challenger; and for the next generation 300 and Charger, we anticipate an investment of slightly over $1 billion.
Quickly, on a restructuring and viability standpoint, since Cerberus acquired our organization from Daimler in August 2007, we've taken immediate steps to redesign our business model, enhance our product portfolio, and create a more competitive cost structure.
From an operational improvement standpoint, we've reduced fixed costs by $3.1 billion; we've eliminated 32,000 employees from our workforce; our manufacturing capacity has been reduced by 1.2 million units, reducing 12 production shifts and eliminating two manufacturing facilities, our St. Louis and Newark manufacturing plants; we've discontinued four vehicle models; we've sold $700 million of non-recurring assets and, closer to home, shut down our Vancouver, Winnipeg, and Moncton parts distribution centres. This was all intended to lower our cost structure.
We've also requested all the key stakeholders that have a vested interest in the long-term viability of Chrysler Canada and Chrysler LLC to step up and make concessions. Concessions have been sought and received from the executives and management of Chrysler LLC and from our dealer organizations, not only in Canada but also in the United States. In Canada alone, our Canadian dealers have stepped up and committed in excess of $30 million of concessions to help the long-term viability of our organizations.
Regarding our unions, as Tom mentioned, we're currently in discussions and negotiations with the CAW. But in the United States, we have been able to move our labour rates to be competitive with transplant labour rates south of the border.
Supplier concessions are also under way.
Second lien holders are requested to convert 100% of their debt into equity, and shareholders are also being requested to convert their debt and obligations into equity in the company.
We're also looking to enhance our restructuring obligations by entering into a strategic partnership with Fiat. We currently have over two dozen joint ventures and alliances, but the proposed Fiat alliance would enhance our restructuring plan, provide Chrysler with substantial cost-saving opportunities, and provide us with distribution capabilities in key growth markets.
The Fiat alliance would also help Chrysler achieve fuel economy improvements, as Chrysler gains access to Fiat's smaller fuel-efficient platforms and power train technologies. Given that the Canadian marketplace is 42% small and compact cars, this would be a disproportionate benefit for Chrysler Canada.
In conclusion, Mr. Chairman, thank you very much for the opportunity to present to this subcommittee and for your patience with our going over the time limit.
We are fully aware that the loan we've requested from the Canadian government and the taxpayers is substantial. However, we feel the investments we intend to make in Canada are also substantial. We strongly believe that the government's fully collateralized loan will also deliver a positive return for the taxpayers.
And thank you to the guests for coming today.
I'm going to start, as I've started several meetings now, by setting a bit of a global context and seeing what your thoughts are on it.
There are several international publications that have commented on the situation in Canada.
The Economist, for example, stated that “in a sinking world, Canada is something of a cork. The big worry is the fear that an American recession will drag Canada down with it.”
The Daily Telegraph stated: “If the rest of the world had comported itself with similar modesty and prudence, we might not be in this mess.” They were talking about Canada compared with the other G8 countries.
Newsweek said: “If President Obama is looking for smart government, there is much he, and all of us, could learn from our...neighbor to the north.”
Even the President of the U.S., President Obama, said: “One of the things that I think has been striking about Canada is that in the midst of this enormous economic crisis, I think Canada has shown itself to be a pretty good manager of the financial system in the economy in ways that we haven't always been here in the United States.”
Those are four comments from independent external sources that say there's a global context to this problem.
The slowdown in the States has really impacted the situation in Canada. From my thoughts on the problem, it seems there are two impacts to that. There's a direct U.S. impact, and that's on the manufacturing sector. In other words, when Americans stopped buying cars, it immediately affected our manufacturing sector. And then there's the indirect U.S. impact, where Americans generally stopped buying all things. We manufacture many of those things. Therefore, Canadians' jobs were less certain and we stopped buying cars in Canada. That's the sales impact.
Is that a fair assessment of the situation and the challenges we face?
I would like to know whether, in your restructuring plan, you thought about the post-crisis period.
You know that, currently, in the United States as in Canada, there have been numerous job losses, and wage cuts. In fact, workers have agreed to these wage cuts to help companies, in all sectors.
You also know that the purchasing power of all these consumers has dropped exponentially. This evening on the news, I saw that, in the United States, 300 people are now living in tents. And it seems that a whole host of others will be doing the same, because they no longer have a place to live or a car; they now have nothing.
In light of all this, will you continue to manufacture the same kinds of cars or will you manufacture a new model, given the economic crisis?
Purchasing power has dropped and the banks or credit unions can no longer lend money as easily for vehicle purchases. Workers' salaries have dropped, and the debt that they have already contracted has reached a saturation point. These banking institutions no longer want to lend money for vehicle or other types of purchases.
Have you, in your plan, decided to manufacture a new kind of car, a smaller, sub-compact, less expensive model in order to try to seduce consumers into believing that they can purchase such a vehicle? If so, sales could be quite high.
There is still a potential market for cars like the Chrysler 300, the Charger or the Challenger, for example. However, I imagine that the purchasing power for cars will drop below $25,000 or $30,000. Have you already thought of this, that is for the post-crisis period?
:
I was asked just this afternoon to come here, so my preparation time has been a bit short. I will give a general overview of the two main statutes that govern restructuring in Canada. It's a little difficult for me to know what level to pitch this at, because I'm not sure what the general knowledge its, but I'll try to make it simple, and if there are questions, you can pepper me with them later.
There are two statutes that really govern insolvency restructuring in Canada. One is the Bankruptcy and Insolvency Act and the other one is the Companies' Creditors Arrangement Act. They are alike in some ways, but very different in some ways. The intention of both is to keep companies operational in an insolvency situation and avoid a bankruptcy. But that doesn't mean you can not liquidate with the statutes. And it's important to know that you can have a proposal under either statute, which ends up just being a liquidation at the end of it. So the idea of keeping on in business is the intention, but it's not a necessary corollary of using one of the two acts.
In the Bankruptcy and Insolvency Act, most of the rules are written in the act itself, so it's easy to follow. And if you can read the act, you know what it is you're allowed to do as a creditor, what you're allowed to do as a debtor, and sort of what the guidelines are. It's not as often used in complicated restructuring as is the CCAA.
The CCAA is more a court-driven process. It starts off with an application to court. You get a court order, and that's now been streamlined so that the court orders are pretty well pro forma at the beginning. The first order lasts 30 days, and then you go back for subsequent orders. And because it's a court-driven process, there is a lot more flexibility in the type of deals or arrangements that can be reached. But it also means you get a lot more time built into it, a lot more appearances to convince a court of the aspects you're trying to sell, and the rules aren't as constrained. It's usually, though, the statute of choice in any large or complicated restructuring, which is probably what would be used in an auto industry restructuring.
The Bankruptcy and Insolvency Act has time limits associated with it. You can keep your creditors at bay, but for a limited period of time. Usually that is six months and no greater; whereas under the CCAA, the stays can apply much, much longer.
Both statutes require creditors to vote on whatever it is you're arranging, and after the creditors approve the plan, a court has a second chance to approve it. So it's sort of a two-step process.
Secured creditors are treated a little bit differently in the arrangements than unsecured creditors, and that's also important to know. If secured creditors don't vote in favour of the plan, there's no necessary bankruptcy, but it just means they're not stayed and however they were being kept at bay ends, and they can basically take their collateral and walk away with it.
The plans are approved basically by the unsecured classes of creditors. Those are the ones that count for the vote. But the secured creditors still have to be satisfied or else they take their goods back.
In a nutshell, those are probably the differences between the two. I'm not sure how much more detail you want or if there are particular questions about the operations that you want to get into.
:
Thank you very much for the opportunity to speak to everybody on the committee.
I wrote my first paper on this industry in November 1969. That's 39-plus years of experience and about 5,000 studies later. That first paper built a mathematical model of this industry and came up with this phrase that you hear to this day and is true to this day, that one in seven jobs in Canada is dependent directly or indirectly on the auto industry.
I am the responsible person, and I wanted to bring that up first, because you're dealing with a pretty serious issue here. That number is very, very real. There are 800,000 direct jobs in our industry, and if you look at the permutations through what I call the butcher, the baker, and the candlestick maker jobs, you're looking at millions of additional ones. Keep that as a broad framework.
I've submitted a comprehensive deck. You'll be glad I'm not going to go through it. I tried to dumb it down as best I could, because I knew Jeff was here.
Some Hon. Members: Oh, oh
Mr. Dennis DesRosiers: So I'll let you read it on your own.
:
I have followed your committee fairly carefully, and you've been hearing a lot of testimony on what I call the “here now” issues and the cyclical issues. I cover off some of those in my deck, and I'm going to avoid those today. I'll gladly answer questions on them. I have some opinions, but I think it would take too long. I would like to focus more on the structural issues in the sector, where the industry is heading in the next dozen or so years, Canada's position in the industry, the future, and the framework we need for government policy in our industry.
Let me tell you categorically that this industry is going to survive its current crisis, absolutely 100%, there's no doubt about it. Vehicles are ingrained into our lifestyle. Vehicles wear out. Did you know that 240 million people in North America this morning got up and drove to work and drove home tonight, and they're ultimately going to have to replace those vehicles? We will have demand. This industry is going to get through this.
At the same time, the level of demand—which you got into a discussion on with Chrysler—and the growth of demand over the next few decades is definitely going to be lower. Americans have been buying vehicles at a ridiculous rate; it is not sustainable in any way, shape, or form. It's not a Canadian problem; we have been very responsible. It's an American problem.
A couple of things reinforce this. We measure vehicles per driving age population: in America it's 101%; in Canada it's closer to 70%. We get along quite well with 70% vehicle ownership. How is it that the Americans need 101%?
I could use many, many examples. The best second example I will throw out is that somewhere between two million and three million Americans a year, every year for the last decade, took out a second 35-year mortgage on their house and used that money to buy a vehicle with, a vehicle that will have largely depreciated within 10 years. How do you sustain that?
So there's been a lot of debate in this committee about demand levels. You can count on, even in the best case scenario, demand likely being at two to three million units for the next 12 years approximately, every year, and there's no way around that. Chrysler's actual forecast in their submission is the most conservative and the most realistic. I back what they were saying.
I could get into other examples, but I won't.
If ownership levels in the United States were to drop down to Canadian levels, that's when you get into these nightmare scenarios that you see out of the CIBC, for instance, of eight million or nine million units of demand, and things like that. It won't happen. Technically, since we overbought by 15 million to 20 million vehicles, we could buy zero next year and survive quite nicely...[Inaudible--Editor] It's not going to happen. There's going to be a base level of demand that Chrysler is probably in the ballpark about.
I fully believe that despite this current crisis, we have an unprecedented opportunity in Canada for growth and to sustain this industry. We're potentially facing the best decade in the history of our industry, looking out to 2020. I wanted to make six points on that.
Peter can talk to you more about this than I can. The product that we will drive over the next 10 to 12 years has to be completely reinvented, top to bottom. We won't recognize it by 2020. We have an American government saying that we have to be at 35 miles per gallon. We can't meet that unless we reinvent our product. Right now, we're investing $30-plus billion a year in North America on innovation—in research, design, development, and testing. That's going to escalate. The fastest growing aspect of the Canadian auto industry today is the intellectual jobs and the many developments happening with them. Again, Peter could document a dozen, or two dozen, of these, where Canada is way up in the value chain and doing a very good job on it. I honestly believe that every single blue-collar job that we lose in our industry in this current crisis can be replaced over the next four or five years—and maybe it might take 10 years—with a higher-paying intellectual job. The potential is there. So I'm very positive.
Yves Landry was my mentor. He left this world more than 10 years ago, and I quote him from 15 years ago when he said that the future of the Canadian auto industry is the six inches between our ears. He was right then. He would be more right today. It just shows you how great a man he was to be thinking 15 years ahead of the curve.
Secondly, this industry has become global and will become more global. There is absolutely nothing Canada or the Americans can do about this. So Canada is going to have to compete and to find a way to compete in a global footprint. We have no choice, top to bottom, and there's no way around that. You cannot protect yourself from it. You can't run. You can't hide. This is a global industry. That's the baseline.
My third point is that auto policy in Canada has been very protectionist in the past. There are dozens of protectionist policies that have helped this industry through the last 20 or 30 years--I'm the expert on it. In fact, I drafted some of them--led by the Auto Pact. Those tools are not available to us. Most of those tools are, indeed, illegal. You can't go back to that era.
This is our real challenge. For the first time in the history of the Canadian auto industry, we have to find a way to secure investments based on our competitive position, pure and simple--not on protection, not on all of the policies and crutches we had in the past.
I believe that is doable with the right kind of policy framework. I sense more of a lack of confidence, and maybe that's the Canadian thing--that “Oh boy, we need this, we need....” Well, you're not going to have it anymore. It's a confidence issue in many respects, not just a policy issue. Don't forget that.
Fourth--and I'll be very quick here--government needs to focus its policy on promoting efficiency in every possible way. That's investment promotion to get the latest and greatest technologies into this country, infrastructure investments, tax, regulatory regimes, human resources, etc. Everything has to be focused on efficiency. To be able to compete in a global framework, you have no choice but to be efficient and take advantage of the opportunity.
My fifth point is to be very careful with regulation and taxation of our industry. Quite frankly, our governments--and it's not just the Canadian government, it's also the Ontario government, the U.S. government--have used tax, used the auto sector as their piggy bank. They have taxed and taxed and taxed--and I could go through them in Canada--air conditioning to fuel-efficiency tax, luxury tax, tire tax, GST, PST, etc., and always under the guise that, oh well, the auto industry is big and can support and pay these taxes; it has to pay its fair share.
As we've come to find out, we can't. Many politicians--and it's not specific to your government or previous federal governments, it's across--have used the auto sector to demonstrate to the electorate that they're on top of other issues, the environment being the best example, saying “We're environmentally sound, we're making the auto industry do X, Y, and Z”, with very little regard for the cost of that. And as we've also come to find out through the hard reality of the last six months, that wasn't sustainable or affordable.
So if you want to take advantage of this opportunity, you have to be very cautious on the taxation and regulatory front.
The sixth point--and I'll wrap up with this--goes right back to what Chrysler was saying. The first level of comfort you have to get as you move forward comes down to three words: product, product, and product--all aspects of product programs. If you become comfortable with Chrysler, Ford, General Motors, or any other company that comes to you with where they're heading with product.... Companies, every time, 100% of the time throughout the history of this industry, get themselves into trouble with product and they get themselves out of trouble with product. That is the first step. Without the product, you have nothing.
There has been a lot of discussion and the conclusion that Canada needs some sort of all-encompassing Canadian automotive policy. It's impossible. You will never get it. It doesn't exist.
Every single ministry in your government touches this auto industry in some way, positively or negatively. Your policy is an accumulation of putting every minister together with this industry and finding out what can be done to take away barriers, what can be done to help--and that's Environment, Agriculture, Industry--every one--putting them together, and perhaps in a patchwork fashion. If you go through all of those, government is really critical. But you're not going to get an automotive policy in Canada.
Thank you very much.
:
I'm not going to speak extensively about the current market difficulties of the auto industry except to say that without any doubt, as others have said, the problems being faced by our auto sector are being played out around the world in every auto-making nation and region, from Asia to Europe and, of course, here in North America. This is not unique to us at all.
I think one of the key points--and I suspect others have made it too, so I won't belabour it--is that this crisis happened at the same time as the industry was making big efforts to create future vehicles that are cleaner, safer, and more efficient. Those efforts can only be financed by the cashflow generated by strong sales, which were taking place in the 1990s and up until early last year or the middle of last year. When those sales dried up, the availability of funds to create new products became very scarce.
The key thing to understand--and it is probably a bit surprising that I would say this--is that R and D is not going to fix this problem right now. This is a short-term consumer credit issue. But R and D, research and development and innovation, is vital for positioning Canada's automotive companies to be viable in the future, to be there when the economy recovers and when sales recover, so that we have great products that people will want to buy and that will keep our citizens working. And that's what I want to talk about today.
I would say that the investments being made today--and they are being made today--are really important for positioning Canada's automotive industry for the future. Each day, a dedicated community of Canadian researchers is helping automotive companies take advantage of the opportunities presented by the present challenges, and the ones coming forward in the future, to which our sector has to respond.
The other key thing to understand about the innovation efforts of Canada's auto industry, and the public sector organizations that work with it, is that the young Canadians who are in school today--my kids and your kids--will need jobs in the future. And those jobs are going to be high technology jobs, as Dennis has very correctly said. We need to make sure we have prepared our young people for those high technology jobs so that not only are the companies positioned with great technologies but we have the people who can go in there and take those jobs and help our country progress in the future. That's why again, I think, even during this period of difficulty, it's important to continue to invest in innovation, because a good part of our innovation efforts are actually training activities for young people.
Through AUTO21's industry-driven, industry-supported research program and our dedicated, award-winning student development program, which, incidentally, won the Yves Landry Foundation award for program of the year in 2006, we've already trained more than 1,200 young engineers for the automotive sector and for other great careers in the idea end of the business, which is really where the business is headed, as Dennis has said. Our present and future programs will help to train thousands more people. This will be a vital contribution during the time when jobs are scarce and our best and brightest have to contribute and have to get on with their lives in any way they can.
So we are providing a place where our best and brightest young people can keep the pot boiling during this very difficult time. I think that's not to be undersold.
When the market returns to more normal levels, the companies that have remained viable and that have retained their key technical staff members and have developed new products, processes, and methods will be well positioned for success, thanks to the new technologies and knowledge developed in partnership with Canadian research experts.
AUTO21 is Canada's national automotive research program, stretching from coast to coast and encompassing 44 universities and research institutes. We support the work of over 300 researchers across Canada. Over 500 graduate students get their living stipends from AUTO21. And more than 240 private and public sector partners support our research programs--I mean financially--and receive the knowledge we create. I think that's a core aspect of AUTO21 that really has to be borne in mind. It's a program that pays its way, because we create knowledge that companies commercialize and use to improve their product lines in the future. And that keeps people going.
In my little brief—there are some copies available here—there are four or five success stories that will illustrate the kinds of benefits that have come from AUTO21 research over the years. I won't read all of them. I just want to feature one of them, really, and these are just representative of the more than 90 patents and licences that have been generated from AUTO21 research, in partnership with our industry supporters.
The one I wanted to feature was just an example of how we work. We were the first Canadian research organization to support a large-scale effort in automotive biomaterials, and that was back in 2001, before biomaterials were really on the scene. At that point they were somewhat of an academic curiosity, but there was industrial interest in them and so we made an investment in this research.
The project has been led by a University of Toronto forestry professor, and it involves a multi-disciplinary team of researchers at a number of schools across the country, in collaboration with the Ontario Centres of Excellence. This has resulted in a spin-off company called GreenCore Composites, which was named one of Canada's top 10 Cleantech companies last year, and it has resulted in a number of new product innovations that are just entering the market now, albeit at a slow pace because of the sales, but they're there. The Woodbridge Group has a new product out called BioFoam, which is going to be used in the headliner of the car, which is the overhead part, inside the roof of the car. Decoma International, a division of Magna, is involved in this research program, as well as Canadian General-Tower, and so on.
So on these research projects, it's not a bunch of professors doing curiosity-driven work. It's real work that is generating real outcomes for Canada's economy and, in the process, creating training opportunities for, at this point, over 1,200 young Canadians who are now becoming experts in these new technologies. And as I say, there are other success stories in the back of the brief.
This is what we call a knowledge-pull model. We don't start a research program until we have a knowledge receptor company that is interested in the work, making an in-kind financial commitment to the work and a commitment to receive the knowledge and to commercialize it in Canada first. Over 160 private sector companies have participated in our research projects, and that number has grown significantly over time.
Other countries are recognizing this model and are adopting it, and I have a lot of contacts around the world, as does Dennis and other auto industry people, because as Mr. LaSorda said, it is a global industry. The German and American models are terrific, but they're very large countries, operating on a scale that is difficult for us in Canada to replicate. But I think one of the best models I've seen on a scale that's commensurate with Canada is called the AutoCRC, or the Cooperative Research Centre, which is in Australia.
Now, Australia's auto industry is literally about a tenth of the size of ours. The AutoCRC was founded in 2005, which is four years after AUTO21. They actually have a larger budget than we do, but they have adopted a very good model. It was actually founded on the layout of AUTO21, but they've done some really interesting things there that have been very good. I just participated in a review of that program in its third year of operation. It was very good, very well done.
I'll just conclude, because I know we're short of time, by saying that government investment plays a key supporting role in innovation by providing specialized people and facilities that industry simply doesn't need all the time and really can't afford to maintain, especially Canadian companies that are generally of a scale that doesn't support large in-house R and D efforts.
Those facilities and people are often at universities, and so organizations like AUTO21, which can broker the relationships and help buy down the risk of doing innovation work in Canada, really can make the business case very attractive to do it here, and that will help our companies to be viable and competitive in the future.
I look forward to your questions.
Thank you.
:
Thank you, gentlemen, all of you, for appearing tonight on short notice. We very much appreciate it.
You know the crisis we're in essentially and what were're trying to address. We're trying to address the balance between investing taxpayers' money, should the government decide to loan the money, with the expectation that as a bank of last resort we're going to get it back, and the need to preserve jobs right now.
I'm comforted by the fact, Mr. DesRosiers, that you say this industry is going to survive. I agree. Cars aren't to go away. They'll transform, but they're not going to go away. And in essence I agree with this idea that we'll be thinking our way to prosperity in the future.
Having said that it's going to survive, though, we have to think about the short term here.
You're the expert. Given the 5,000 submissions you said you've made and that you are considered the expert in the industry, I would be remiss of I didn't ask you something quite bluntly. You've no doubt looked at the Chrysler proposal. You've looked at the General Motors proposal. Do we support it, or do we not support it?
Take your time to discuss all the reasons why or why not--the deficiencies as well as the strengths.
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I will try to be very tight with my answer.
Canada is incredibly important in this equation, but the future of GM, Ford, and Chrysler resides in only one person's hand globally. That's it. That is Mr. Obama, period. If he does not play, then GM, Ford, and Chrysler do not survive. There is not a scenario that anybody, not just me but anybody, can come up with where GM and Chrysler survive and probably Ford would fall in at some point—longer term, mind you, as they are in much better shape—without the U.S. federal government or the U.S. treasury.
The amount of money currently being asked for is probably light. If you look at it all-in—GM and Chrysler money, supplier requests, and Ford asking for money to help convert to fuel-efficient vehicles—it's already at close to $150 billion and growing. It's a very significant commitment. In order for them to make that commitment, they have some pretty critical issues they have to get their heads around.
It comes down to, first, that they have to decide whether they want part of the North American industry to be American-owned, because it's the American-owned companies that are in trouble, not the import name plate companies. That is a big decision, and also whether they want one or two or three to survive. That is one level.
Then you come into two other very important things that have to be determined. What will indeed happen to the market? I've touched on some of that. We will, quite definitively, see probably two million to three million fewer units of demand every year for the next 12 years, minimum. As you get into worse and worse case scenarios all the way down to the nightmare scenario, on a North American basis, on a U.S. basis, it could go down to 15 million, 14 million, 13 million, 12 million—stop me. That is the second one. You have to get comfortable with that, and that really is hard to do because it is making a prediction on the culture of cars in America.
Most of us are optimistic that this culture is not going to disappear. It may just come down to sustainable levels, and thus we're calling for two million to three million units. That's what Chrysler is at. I looked at and I have studied in depth General Motor's submission—Ford hasn't made one—and I thought it was much too optimistic and unrealistic. Chrysler's is more realistic, even though Chrysler itself is a little on the high side, but still manageable.
That is the second one. Do you want an American-owned company? Will the demand ultimately be there to support it? On the level of demand, can you support the industry at the level of demand we are going to get to?
The third is that no amount of help to these companies will allow them to succeed unless at some point they turn around their market share losses. It wasn't that long ago they had a 90% market share in North America. They're now down into the mid-40% level. They've lost almost 50 points of market share, and since September, every month over the previous year's month they have lost seven or eight points more. So they had been losing two or three points a year; now they are at seven or eight points, and if they cannot find a way to turn around their market share losses, they can't survive, period. That is a very big if.
The solution to that and the answer to that comes down to those three magic words: product, product, and product. People like me—and I could put you in contact outside of the committee with four or five other experts in the U.S. who study their products to death—for the most part, we are optimistic that the product programs are coming together well. The issue they have is that it's all there on the drawing board, but they have had to cut back billions of dollars out of their product programs today to survive.
Lee Iacocca, who saved Chrysler in the early 1980s, had a very famous statement that is being violated today. He said, when Chrysler was in its dire, centimetre-from-bankruptcy stage in the early 1980s, that he would sell the furniture before cutting a product program, and he did, but he never cut his product programs and thus Chrysler survived. GM, Ford, and Chrysler today, because of their financial condition, are cutting product programs. It is there on paper and there are all the good intentions, but what was going to come out in 2010 is now in 2011 or 2012 or 2013.
So I'm worried. That is a lot of ifs. But ultimately that is the U.S . Department of the Treasury. I'm assuming they've got very good analysts who go through this--I know some of them working on this and they're incredibly bright people--and they will say, maybe for political purposes more than economic purposes, we will support this industry with the kind of money it needs for the next one or two or three years, then you can come in under that.
Welcome. I listened to your testimony earlier, and you were in the room when I was asking the Chrysler representatives my questions. Unless I'm mistaken, you are saying pretty much the same thing that I am.
Also, car manufacturers will have to adjust to today's consumers, particularly given the wage cuts, and so forth. We cannot keep $25,000 or $30,000 vehicles, or even $15,000 vehicles.
Given the plant closures that I referred to earlier, the job losses, the wage cuts, manufacturers will have to open their eyes wider and think of new ways of doing things and of manufacturing new models with a $6,000 or $7,000 price tag, so that people can afford to buy them.
Do you think it would be possible for manufacturers to make cars for that price?
:
Thank you for your question.
[English]
I think I'll continue in English, because it's late and I'm slow.
AUTO21 has a number of key goals that we work on. All of our projects are measured against one or more of these goals. One is the enhanced environmental performance of the car and the manufacturing process that makes the car. The next one is the enhanced health and safety performance of the car and the manufacturing processes. The third one is the enhanced economic performance of the companies whom we partner with. So all of our projects are directed at one or more of those kinds of activities. We are always trying to help the companies to develop new processes and materials that will result in better quality cars at lower cost.
Again, I would have to agree with Dennis. I don't think that a $6,000 or $7,000 car is really achievable in North America while, at the same time, being compatible with North American safety standards and environmental performance standards. But I think a lot of our projects are certainly directed at containing costs while enhancing vehicle performance, as measured by safety and environmental performance.
I would have to say as well—and I don't work for the car companies, but work with them—that a modern car is actually a pretty remarkable device, when you measure its performance in environmental and safety terms, as well as its on-road performance, against the performance of a vehicle from the seventies, and then at its cost. It's actually remarkable what you can get nowadays from even the most modest cars on the market.
I'm not sure if I've totally answered your question. We're doing our best on all of those issues—costs, safety, environmental performance—but I don't think anybody really wants to compromise on safety standards and environmental performance, and there is a certain cost below which you really can't go, I think.
Late last year I published a paper called The 30-Year Problem in Our Industry about how it takes 30 years to truly solve most—not all—of the flaws in a business model. For the first 15 years, interestingly, there is denial, and then it takes legitimately three to four product cycles, with some exceptions, to actually solve the problem.
They are way out of the denial stage. These companies have got it. They don't have incompetent management. They have got it, and they have got it very big time. Some of these inferior business model elements are largely solved, and it took 15 years. Quality today has been the mantra for the last 15 years. The quality today is solved. The structure of their supply base is very competitive. There's very little low-hanging fruit in the supply base. They're largely through that. Some of these elements they're just beginning to do.
One of the best examples is restructuring their dealer body, for instance. They're in the earliest stages of that. Their compensation structure, which we're seeing day to day in the media, is not going to be a 15-year problem because they can't live with that, but they legitimately are $20 to $25 behind a competitive compensation structure within the North American framework. They have to address that very seriously.
And when they address their compensation structure, they've got a new paradigm. It used to be that companies like GM or Ford or Chrysler could sit down privately with their unions and work out agreements, and we had the economic capability of paying for that. They've come to you guys, the government, and they've gone to the consumers, and they've gone to the media, and they've opened themselves up and said, “We need your help.” You don't ratify an agreement with the CAW anymore; you ratify it with your workers, with the politicians, who have to vote on it, with the consumers with their pocketbooks, day in and day out, and the hundreds of media articles. That's what they haven't got yet. They think they can sit down with their unions and negotiate new contracts and that's it. That's not the case. That was GM's big problem with this current problem.
:
I'll try to answer you in as general a way as I can.
What effectively happens is that certain contracts can be abolished or terminated in a CCAA restructuring and certain of them can't. It largely depends on the circumstances and what types of contracts you're talking about. Some contracts are more sacrosanct than others, among them collective bargaining agreements. Things like commercial leases of property tend to be easier to disclaim or terminate in a restructuring. It very much depends on the type of contract.
From a broader perspective, though, what happens in a CCAA, or what's intended to happen in a pristine restructuring, is that the company--in a streamlined version, but the same company with the same employment force--goes forward having shed some debt that it couldn't deal with. Of course, the exception is always the rule. What you get as you try to do the restructuring is an attempt at cherry-picking the contracts that will work and the contracts that won't. Sometimes contracts even get put on the table that maybe the company didn't like to begin with, five years before, but there wasn't an opportunity until now. Now they do, because the restructuring opens everything up to negotiation.
But in its pure form, the company should go forward with as much of the workforce as possible. What happens in the real world, though, is that that's a business choice, and the due diligence people, when they're doing the lending and when they're doing the restructuring, will sharpen their pencils and say, “This is where we have to cut.” And you never know where the cuts are going to be without looking at the individual cases--on the workforce side or on the debt side.
I want to start by responding to a couple of things Mr. Masse was saying. He mentioned that we're not doing anything to do with moving vehicles. I found that pretty astounding, because we do have a $12 billion secured credit facility, which witness after witness has identified as the most important thing to move forward on, and he voted against it in the budget. We need to get that budget passed in the Senate so we can start flowing that money.
On the other side of things, regarding the jobs, I would remind the member that of course the reason we're going through this whole process, the reason we're even having these discussions, the whole purpose is to protect jobs. That's the whole purpose, because we can all relate to what it's like to have families and payments and things like that, and we're here to protect jobs. So I just want to clarify those things. That's what this is all about.
I'll give some context here. We talked about this the other day. We're talking about lending as much as $8 billion and possibly more. When you break down those numbers, you're looking at about just under $250 per Canadian man, woman, and child. For a family of four, it's $1,000 we're talking about.
I asked this question of one of the witnesses yesterday, but I'll ask it of Mr. DesRosiers.
I know you're in favour of our going forward and lending this money. What do you say to that family of four from whom we're asking for $1,000 of their money in terms of the loan? What do you say in terms of why they should agree to it, and will they see their money back?