Trump, trade and technology’s impact on the auto sector.
December 4, 2017
by Jeff Brownlee
Whatever the uncertainty and impact “tweaking” NAFTA and presidential tweeting may have on North America’s most integrated industry, Canada’s auto sector is negotiating some sharp curves as it adapts to digital disruption and environmental imperatives that will set the stage for the future. Yet the outlook is promising.
“Canadian companies are showcasing their leadership in the development of advanced technologies shaping the future of the auto industry,” said Navdeep Bains, Canada’s Minister of Innovation, Science and Economic Development at January’s North American International Auto Show in Toronto.
“Canada is uniquely well-positioned to lead on the design, development and production of the cars of the future,” he said.
Those cars will be lighter, more fuel efficient, and in many cases are powered by electricity or hydrogen, digitally connected and operating autonomously.
“We are seeing a merging of ICT (information communication technologies) and the automotive space,” says Christian Bertrand, automotive sector specialist at Export Development Canada (EDC). “The trend the past few years has been that a lot of these companies start to look at automotive.”
Why? Stringent pollution emission targets for autos established by former US President Barack Obama and changing customer demand related to vehicle connectivity.
While companies are gearing up for a digital future, the Trump administration is covering the traditional industry in a bit of a fog. Calls to tweak NAFTA, a more protectionist sentiment and a commitment to repeal Obama’s EPA standards are keeping the industry on its toes.
“You have 51 years of absolute, total integration of the second-most complex manufactured product in the world,” says Dennis DesRosiers, a Canadian automotive expert, analyst and principal of DesRosiers Automotive Consultants Inc., in Richmond Hill, Ont. “You can’t undo that – you can’t take a genie out of the bottle here.”
DesRosiers is referring to the Trump administration’s promise to renegotiate NAFTA, rules of origin (raise the requirement from 62.5% to 85%) and content rules (half from the US). Starting with the AutoPact in 1965, free trade between Canada and the US has been defined by the automotive industry. Since NAFTA came into force in 1994, complex supply chains between the three countries are deeply integrated within the North American economy.
“If you were to do something at the border that would disrupt the (degree of) integration like get rid of NAFTA or change content requirements, it would destroy the integration and everything integration has brought to the marketplace,” DesRosiers says. “The number one thing integration has brought to the marketplace is stable pricing.”
By singling out Mexico in terms of “getting a better deal” in NAFTA renegotiations, the US administration is toying with disrupting automotive supply chains in all three partner countries. That’s left many auto-based companies north of the 49th parallel wondering what the overall impact will be on their operations.
“This new wave of ‘America-first’ thinking is not just troubling Mexico. Canadian producers are worried that the ill feelings might also shift our way, forcing, or subtly coercing increased production stateside,” explains Peter Hall, EDC’s vice-president and chief economist, adding that Canadian companies are worried about their existing operations in Mexico, where tier one suppliers are setting up shop to co-locate with customers.
“Industry is on the defensive, and seriously wondering what their next investment moves might be.”
To date, the Big 3 haven’t wavered on investment plans. Ford is still planning to invest $700 million into its Ontario operations, while General Motors Canada’s $554 million-boost for Ontario operations is still on the table. And Fiat Chrysler still plans to inject $325 million into a new paint shop at its Brampton plant.
Playing the waiting game is a good strategy, according to international trade lawyer Lawrence Herman.
“My advice to auto companies would be to think about the worst-case scenario, but to wait,” he says. “It’s not in their best interest to make decisions right now, at least until we know more precisely what the Americans have in mind.”
The Trump administration is also set on eliminating stringent fuel emissions standards put into law by the Obama administration. But doing so risks slowing the pace of innovation and technology development related to advances in alternative fuel sources and parts lightweighting. Naturally, Trump says the standards threaten auto jobs, a popular tone among his nationalist supporters and a portion of American auto workers who fear a rise of the robots that will once and for all eliminate traditional manufacturing jobs.
“If the standards threatened auto jobs, then common-sense changes could have and should have been made,” Trump said. “We are going to restore the originally scheduled midterm review, and we are going to ensure that any regulations we have protect and defend your jobs, your factories.”
Trump’s comments were spurred on by CEOs of the Big 3 OEMs who have suggested the standards – without tweaking – could put 1 million jobs at risk.
This is creating more uncertainty in Canada because of the country’s commitment to reduction targets outlined by Obama in 2012. And because of the industry’s integrated nature across the US/Canada border, harmonizing regulations makes sense.
Things could get tricky, however, as Trump and Prime Justin Minister Trudeau are on opposite ends of the environmental spectrum. It’s unlikely Trudeau would concede to Trump’s demands to eliminate fuel emissions standards completely. That’s not just from an environmental standpoint, but also from an innovation angle, where much of Canada’s R&D and technology development focus, in the auto sector at least, has been on products that mitigate the environmental impact of cars and other modes of transport.
Canada is, at least, well positioned to mitigate the shockwaves of a potential Trump disruption, particularly as it relates to technology. The demand from consumers for a more connected vehicle will drive future opportunities, and it comes at a time when Canadian technology companies are forming a new, super information highway between the tech hot-bed of Waterloo, Ont. all the way through Windsor’s rich auto manufacturing history and into the Big 3-dominated metropolitan area of Detroit.
“A decade ago, the big advances in auto innovation and technology were found inside the car and under the hood. Now innovation extends well beyond the car through mobile connectivity and business model transformation,” Steve Carlisle, president and managing director of General Motors Canada wrote in a 2016 Montreal Gazette opinion piece. “The future of the automobile is increasingly electric, connected, autonomous (or self-driving) and an integral part of the sharing economy.”
EDC believes Canadian companies are well positioned to play a leadership role in these developments.
“I’m encouraged by the number of innovative companies I meet that are marketing directly to OEM automotive companies,” says Bertrand. ”
In the meantime, automakers, parts suppliers and other players would be wise to continue business as usual while Trump, trade and technology play out.
Jeff Brownlee is a business writer based in Ottawa.
This article appeared in the print version of AutoPLANT, October/November 2017.