Fate Of Canadian Auto Manufacturing Hangs On CAW-Detroit Negotiations

The Canadian Auto Workers and the Detroit BigThree, General Motors Company (NYSE: GM), Ford Motor Company (NYSE: F) and Chrysler Group LLC, began preliminary contract negotiations on Tuesday. The Detroit Three are hoping for a substantial restructuring of employee compensation, while the union is seeking a reward for its members for the sacrifices they made during the 2009 bailout of the North American automotive industry.

While both sides have made their goals clear, the union may be starting from a deficit with little bargaining power. Although the issue currently on the table between the three companies and the CAW is the next three-year contract, there are also serious existential questions being raised about the continued existence of the Canadian automotive industry that must be answered as well. The current contract runs out on Sept. 17, by which time the union and companies hope to have reached a new agreement.

In the past the CAW was able to present the automakers with three key advantages to building cars destined for the North American market in Canada as opposed to the U.S., says Kristin Dziczek, director of the Center for Automotive Research's Labor & Industry Group. Previously, the CAW relied upon the weakness of the loonie against the U.S. dollar (the CAW would ask for the same annual salary as the UAW and the exchange rate would make it cheaper for the automakers), Canada's socialized healthcare, which decreased costs for the manufacturers, and perceived higher levels of productivity at Canadian plants. But now that the loonie and U.S. dollar have essentially reached parity and productivity levels have equalized between U.S., Mexican and Canadian plants, two of the union's key selling points are rendered moot.

"The big three advantages aren't really advantages anymore," Dziczek said.

In recent months the automakers, most notably GM, have been trumpeting the fact that Canada is now North America's most expensive country to build cars, a view which has been by and large supported by industry analysts. The Canadian dollar has gained strength against the U.S. dollar as a result of rising oil exports from Canada's tar sands, according to Center for Automotive Research Chief Economist and Vice President for Research Sean McAlinder.

The CAW is seeking cost of living payments and guaranteed increases in wages for the new contract, items which the union gave up in 2009 to help the automakers weather bankruptcy and the global financial meltdown, according to the CBC. However, because of the CAW's relatively weak bargaining position, they may be forced by the automakers to accept a profit-sharing agreement whereby increases in pay would be tied to profits. The United Auto Workers in the U.S. already has a profit-sharing agreement with the Big Three, a fact which further diminishes the bargaining power of the CAW.

Chrysler, Ford and GM all want a profit-sharing agreement with the CAW as a way of controlling costs as the companies manage their ongoing recovery. "Certainly these are very profitable companies, but there are still some clouds on the horizon," Dziczek said, noting that the European automotive market in particular is still highly troubled.

Still, though, the CAW says it wants guaranteed raises from the companies. "We've taken more than our share of hardship and adjustments," CAW national president Ken Lewenza said, according to the CBC. The union made concessions on raises, cost of living payments and vacation time as part of the 2009 bailout. The Canadian government also committed around 13 billion Canadian dollars to bail out GM and Chrysler in return for a guarantee that the Detroit Three would continue manufacturing in Canada through 2016. GM and Chrysler are both required to build 16 percent of their vehicles meant for the North American market in Canada.

"GM and Ford are earning record profit margins on their North American business and Chrysler's have come back to profitability faster than anyone dared to hope for in 2009," Lewenza said, according to the CBC.

However, the government requirement that Chrysler and GM build cars in Canada is not enough to ensure the long-term existence of the Canadian automotive industry. The longevity and health of Canadian automotive manufacturing hinges on whether the CAW and Canadian government can convince the automakers to make major capital investments to update factories, according to McAlinder.

"It's a terrible product line that's made in Canada," McAlinder said. "They [the companies] have got a rotten line-up that's going to cost billions to replace, and then you have to go back and justify it to your shareholders."

Canadian car factories now mainly produce older model vehicles and six- or eight-cylinder engines, and the vehicle mix is heavily weighted to full-size vehicles, according to Dziczek.

The only relatively new vehicle currently being produced in Canada is the Chevy Equinox, but half of its production will be shifted to Tennessee, according to McAlinder.

"Everything in the North American market is moving down-segment and down-cylinders," Dziczek said.

Unless the companies invest in upgrading their factories, a major expense when they have more modern factories in the U.S. and Mexico, Canada could see automotive manufacturing begin to wane after 2016. GM, Chrysler and Ford will likely use the specter of a post-2016 departure from Canada as leverage to gain contract flexibility from the CAW and investment incentives from the Canadian government.

"I think the long-term success of the Canadian auto industry is on the table," Dziczek said. The government has not been absent from the conversation though, and will likely be active on the sidelines of the negotiations between the companies and the CAW. "The Canadian government has always understood what the value of their auto industry is."

Ultimately, the current negotiations are not just about the contract between the CAW and automakers for the next three years, they are also about whether the Detroit Three will maintain their commitment to Canadian manufacturing in the long term. Dziczek believes the CAW leadership will come to an agreement for shifts toward profit-sharing, which the automakers will likely accept under an understanding of further negotiation in three years and in concert with investment commitments on the side from the Canadian government.

Whether the CAW's leadership is able to sell a new deal to its members remains to be seen. "Anything you negotiate at the bargaining table is not a contract," Dziczek said. "You've got to know where the membership is at."

The bargaining process between the CAW and automakers is still in its preliminary stage and will not begin in earnest until Aug. 27, after the union's conference. The union and companies will have until Sept. 17 to work out a deal or else the workers may strike. Chrysler may prove to be a sticking point in the negotiating process as it is generally seen as being more aggressive than GM or Ford.

"They've [Chrysler] got their goals for what they want to get here," Dziczek said. "Just because they're more aggressive doesn't mean they're going to be successful." Dziczek does not expect that a CAW strike will take place.

General Motors Company (NYSE: GM) shares closed down 7 cents at $20.14 Wednesday. Ford Motor Company (NYSE: F) shares closed up 5 cents at $9.49. Shares of Fiat SpA (Milan: F), which owns Chrysler Group LLC, closed up 1.43 percent at €4.26 ($5.24).