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February 11, 2019 – Automotive News Canada
TORONTO — Jim Carr, federal minister of international trade diversification, says that newly signed trade deals — particularly with fast-growing Asia — hold potential for Canada’s automakers and parts suppliers to find new export markets beyond the United States.
But a burning question is whether Canadian businesses are so historically wedded to the U.S. market that they have enough, or any, experience to blaze trails in new frontiers.
“Asia is all about future economic prosperity, including high technology in auto parts,” Carr told Automotive News Canada. “There’s real opportunity for distributors and manufacturers there.”
In November, the federal government pledged $1.1 billion over six years to help producers in all sectors expand beyond the increasingly protectionist U.S. market.
The goal is a 50-per-cent boost in overseas exports.
Carr didn’t know whether the auto sector, which now sends all but a trickle of its exports to the United States — 97 per cent of vehicles and 90 per cent of parts produced — can reach that target.
Although based on a relatively small percentage, the goal will be a struggle, said Walid Hejazi, an associate professor at the University of Toronto’s Rotman School of Management, who specializes in global competitiveness.
CANADA MUST BE ‘INNOVATIVE, PRODUCTIVE’
“The problem is that in order for Canadian companies to bear the costs to enter these markets and be able to compete effectively, they must be innovative and productive. And when you look at both of those measures, Canada does very poorly.”
With the exception of “bright points” such as Magna and Linamar, Canada-based auto suppliers have been made complacent by a low dollar and easy U.S. access, he said. At the same time, government protection of industries such as banking and telecommunications stifles innovation and makes Canada less competitive. But attitudes can change as the country is forced to diversify.
Carr said that shift is already happening as the country considers its place in the world and the opportunities in overseas markets.
“I can’t remember a time — and I’ve been around a while — when Canadians are talking about trade and trade diversification in conversations they have in the grocery stores and around the kitchen table,” he said.
When Carr received the trade portfolio in July 2018, U.S.-Canada trade relations were strained, largely by President Donald Trump’s volatile U.S.-first attitude toward the North American Free Trade Agreement. The auto sector, at least, breathed a sigh of relief when the United States-Mexico-Canada Agreement (USMCA) was reached in late September.
Mark Nantais, president of the Canadian Vehicle Manufacturers’ Association, said the integrated supply chain preserved in USMCA is critical to the health of manufacturers across North America.
“That’s what makes them competitive,” said Nantais, who represents the Detroit Three automakers. “That’s what ultimately will make us, hopefully, competitive relative to other jurisdictions.
“Because ultimately we would like to be able to take advantage of these other export markets as well.”
Canada is pushing to reduce freight bottlenecks and add financial support and other resources to help exporters capitalize on the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) signed in 2016 and a revised Trans-Pacific Partnership that was approved in September.
“In only 14 months Canada has increased its consumer base within a free-trade zone of 1.5 billion people,” said Carr: “That’s extraordinary. We are the only G7 nation with a free-trade agreement with the other six.”
One early sign of promise: Automotive exports to Europe jumped 96 per cent in the 10 months after CETA took force in September 2017, albeit from a low starting point. Driving the gain was a $424-million increase in shipments of the Ford Edge, which is built in Oakville, Ont.
Will products from the Honda and Toyota plants in Ontario follow? “It could be an interesting study to see what the prospects are for the Civic or Corolla there,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association of Canada (APMA).
CANADIANS WILL HAVE TO BE INVENTIVE
Parts makers breaking into longstanding overseas supply chains could face major hurdles, however: The just-in-time delivery system that works so well between Ontario and Michigan, but not so well between Ontario and Stuttgart. The costs and logistical challenges of shipping products across oceans as well as the difficulty in breaking into the long-established supply lines, or “value chains” that feed auto plants on other continents.
And any that can win foreign contracts would probably follow the lead of Canadian-based giants Magna and Linamar and build the product close to the customer to avoid shipping and warehousing costs.
“If you are a parts supplier and you win a new business in Europe, you probably set up in Eastern Europe,” said Volpe. “The cost structure in Eastern Europe is more competitive than a sourcing cost from Canada, never mind the logistics and everything else.”
The terms of the trade deals could also be problematic. Canadian manufacturers are generally positive about CETA, which allows content from unified North American supply chains to qualify for tariff exemptions. But they are critical of “side-door” provisions in the Pacific Rim agreement that allow automakers and parts producers to bring in parts from low-cost nations as long as an operation such as welding, heat-treating or final assembly is carried out in a TPP country.
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