Canada needs to actively plan despite uncertain climate
In thinking about how to sum up a summer in the automotive industry as I have never seen in my more than 30 years working in it, Northern Irish singer-songwriter Van Morrison’s “Dweller on the Threshold” came to mind. The chorus of that song goes like this:
I’m a dweller on the threshold
And I’m waiting at the door
And I’m standing in the darkness
I don’t want to wait no more
To me, that chorus sums up not only the current state of the automotive industry in Canada, but also Canada as a nation — and indeed the nations of the world as they come to grips with a U.S. President that seems intent on creating not only a new economic order, but a new world order.
In that sense, we are all dwellers on the threshold waiting to see what happens next. We are all standing in the darkness as well because of the President’s proclivity to change his mind, such that what might have been clear direction on an issue or particular policy one day is turned 180 degrees the next.
Lack of certainty and the ability to rely on a tried and true rules of business and trade are anathema to any kind of business, but I would argue that this is amplified with the automotive sector.
Automobiles, by and large, have planning cycles of up to 10 years for new vehicles. Negotiating with suppliers for parts and components is done years in advance of the model’s launch and is predicated on manufacturer forecasts — based on the current business and regulatory environment, and what they anticipate both will look like when the vehicle enters the market.
These contracts, along with the contract prices, are usually long-term and predicated on sales volume forecasts for the vehicle. Therefore, it is understandable why the current environment is bending companies and their product planners into pretzels in trying to find some level of certainty in an environment where we have witnessed the more than year-long NAFTA renegotiations. The trade agreement remains unresolved despite statements since May that a deal is at hand, the threat of 25 per cent Section 232 tariffs being imposed on vehicles imported into the United States, and the roll back of fuel economy and GHG emission standards in the U.S.
While some might think the automakers would be ecstatic that the President is looking to hold the fuel economy/GHG standards at 2021 levels for the 2022-2025 period, the reality is that vehicle manufacturers around the world have spent hundreds of billions of dollars investing in R&D with respect to propulsion and light-weighting technologies in order to try and meet the 2025 standards.
That certainty around the standards has just evaporated, and in addition to changing the standards, the U.S. Administration has picked another battle with California with the potential to unbundle the deal struck by the previous administration — which had essentially developed a North American GHG standard supported by both Canada and the U.S., as well as California.
So perhaps it’s easy to understand why, in the face of so much uncertainty, that businesses either are not making capital investments or if they are, they are choosing to make them in the U.S. Anything else at this juncture is too risky and they are tired of waiting in the darkness.
In that sense, the President may well have achieved his objective of bringing business back to the U.S. by creating such global chaos, that the only way of ensuring access to the huge U.S. consumer market, is to invest in that country. That said, one wonders how long it will take American consumers to make the connection that their country cannot repatriate manufacturing and other industries with high wages and still have low cost consumer goods.
For Canada and the Canadian automotive industry, being on the outside looking in — dwelling on the threshold — all of these issues present real disruptions given that free trade, and essentially unfettered access to the U.S. market that started with the automotive industry more than fifty years ago, is now being threatened.
Likewise aligning our GHG emissions regulations and safety regulations with those of the U.S. may have been fine when you had all governments looking at North America as a “region,” but a blatant “American First” world may be giving policy makers pause to consider whether or not that approach makes sense.
Of all of the issues raised that could negatively disrupt the Canadian automotive industry, it is the proposed Section 232 tariffs on autos that threaten to eviscerate the industry from the manufacturers through to the retail dealers.
With 85 per cent of Canadian vehicle production bound for the U.S., a 25 per cent tariff on those imports would be devastating to manufacturers. Should Canada retaliate on a like-for-like basis — similar to what it did on the Section 232 steel and aluminum taxes, then a situation can be envisaged where consumer prices for vehicles could go up $6,000-$10,000 dollars. This would undoubtedly significantly reduce new car sales, thus adversely impacting the 3,300 new car dealers across the country — not to mention the challenges for auto manufactures and finance companies, etc.
If we really don’t want to wait and don’t want to be a dweller on the threshold any more, Canada needs to seriously consider what its options are in dealing with the U.S. This is particularly the case if they are wanting to find an off ramp for the imposition of the potential 232 auto tariffs.
The best way to avoid these taxes is to secure a new NAFTA as quickly as possible. Some have argued that Canada needs to show some flexibility on so-called “poison pill” issues like the five-year sunset clause, and the chapter 19 and chapter 20 dispute resolution mechanism.
The hope here being that after five years you can tweak the agreement again with a new administration to make it more reasonable and logical for businesses like the auto industry, which have a long-term planning horizon for their products.
That positioning, however, is based on two assumptions: one, that there will be a new administration after five years and two, that the new administration would be willing to consider tweaks to the agreement.
The other train of thought is that yes, we need to get a NAFTA as quickly as we can. But we are only going to get one shot at this, so we need to ensure that we have a good deal — and one that will not be prejudicial to us in the future.
The stakes could not be higher, but for the moment it appears that we will need to continue to be patient and remain a dweller on the threshold.
