Caterpillar Inc has decided to close its Electro-Motive locomotive plant in London, Ontario, and lay off at least 450 workers following several months of unsuccessful contract negotiations with the Canadian Auto Workers union.

The move deals a tough blow to the Canadian labor market, which has been under pressure from a strong Canadian dollar and the struggle to persuade unionized workers to accept deep concessions in a relatively stable economy.

Peoria, Illinois-based Caterpillar said on Friday the closing is taking place because the cost structure of the operation is not sustainable. A contract with Electro-Motive Canada workers in London expired December 31, and Caterpillar had been looking for wage and benefit concessions from the CAW.

Electo-Motive was acquired by Caterpillar for $820 million in 2010 and is a part of its Alabama-based Progress Rail Services unit, which competes with General Electric Co and Bombardier Inc. Workers at the London plant have been locked out of the plant since the beginning of 2012 due to the contract dispute.

About 200 people are employed in salaried jobs at the London operation. Those employees are expected to help wind down operations following Friday's decision, but it is unclear how long they will continue working for the company.

The union is negotiating severance deals for the hourly workers, CAW President Ken Lewenza said Friday.

'REGRETTABLE,' BUT NECESSARY

It is regrettable that it has become necessary to close production operations at the London facility, Caterpillar said in a news release. Progress Rail's global manufacturing network assures its customers that delivery schedules will not be impacted by this decision.

Electro-Motive makes diesel-electric locomotives, and has facilities in Mexico and Illinois, in addition to London.

In an interview, Lewenza said the CAW had not engaged in meaningful conversations with company officials since late December.

We were never in the ring here in a meaningful way, Lewenza said, in reference to what he believes was a lack of interest at Caterpillar to save the London plant after acquiring the Electro-Motive unit in 2010.

They designed this a year ago, no doubt in my mind, he said.

LABOR IN SPOTLIGHT

The plant closure was raised by opposition legislators in the Canadian Parliament on Friday as it coincided with a dismal report on January employment.

We do sympathize with those that have lost jobs but we are creating jobs and we need the Liberals to get on board to help us do that, said Shelly Glover, parliamentary secretary to the minister of finance.

Lewenza will remain in the spotlight in 2012 as the CAW engages in negotiations with the auto sector - including General Motors Co and Ford Motor Co.

We know how to negotiate, he said. And Canadian workers are a highly productive, highly skilled group and they should be on solid ground because these companies are going to make good money.

However, Lewenza said the CAW cannot sway companies looking to chase the lowest-cost manufacturing base. In Caterpillar's case, company officials were looking for at least a 50 percent wage cut, a doubling of health-care costs for workers, and a significant rework of pension arrangements, he said.

Pat Byrne, the managing director heading management consulting at AlixPartners LLP in New York, said labor unions in Canada need to show more willingness to adjust.

The labor unions (involved) - I'm not sure they really get it in terms of globalization, Byrne said Friday. When the Canadian dollar was 65 cents .(Canada) was a near-sourcing opportunity. It's a whole different ball game.

On Friday, the Canadian dollar was roughly on par with its U.S. counterpart.

Lewenza said the Canadian government needs to show more support for the manufacturing sector by holding companies, such as Caterpillar, accountable for decisions after tax incentives have been granted.

You have to have the carrot to entice investment in Canada, but once you produce the carrot, you've also got to provide the stick.

(Reporting By John D. Stoll and Louise Egan; Editing by Derek Caney, Matthew Lewis and Tim Dobbyn)

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