FCA CEO Sergio Marchionne took to The Globe and Mail's editorial pages to make his case for government investment in Chrysler's assembly plants in Canada. Marchionne is seeking government funds to upgrade the Brampton plant (which builds Chrysler's rear-drive cars) and the Windsor plant (which builds minivans, and would be upgraded as a flexible plant) as part of a $3.6 billion investment.
For readers of TTAC, the facts and figures will be familiar. Marchionne correctly asserts that of the $42 billion in recent automotive investment in the NAFTA zone over the past 5 years, just $2.4 billion has come to Canada. According to Marchionne, this new Chrysler investment would be larger than anything Canada has seen in recent years, securing thousands of jobs and the future of both plants for years to come. All it will cost is a reported $700 million.
Marchionne is correct in asserting that "every global automotive jurisdiction around the world" is giving significant handouts to auto makers, Canada is a small player globally, and cannot afford to keep pace with the United States and Mexico, which foot as much as 50 percent of the bill for new auto plants.
At one time, building cars in Canada made sense. Legacy plants left from the pre-Auto Pact era cranked out cars in an era of Detroit 3 dominance and a relatively low Canadian dollar. Health care costs, long a bugbear of the auto makers and the UAW, were covered by the government, eliminating a major financial sore point.
Now, times have changed. NAFTA has superseded the Auto Pact, and that means auto makers can set up shop in Mexico, where workers are content to build cars for mere dollars per hour, or in the South, at $14-$16 per hour, versus the $32 per hour figure that some estimate it costs in Canada. Marchionne could even utilize capacity in Europe, thanks to a Canada-EU free trade deal and minimal tariffs in the United States, to import Chrysler vehicles if he so chose to, though that's a far-out scenario.
The question is whether Canada can afford to play the subsidy game, with its ever-increasing stakes. The prevailing view among many pundits is a firm "no". The $700-million figure seems outsized in relation to the 10,000 or so jobs it might save in Ontario, and there is a strong sentiment against "corporate welfare" for an industry that constantly has its hand out looking for assistance.
There is simply no assurance that upon receipt of government funds, Chrysler or any other auto maker will make a long-term commitment to Canada, rather than simply hit up the government in a few years time looking for more money. And the fact that the CAW failed to secure any product investment during the last round of contract negotiations (unlike Ford and GM) only serves to leave Marchionne in a stronger position to pick up and leave when the contract expires in 2016 (coincidentally, the same time as the new minivans are set to debut).
But one proposal, being floated by media and finance types (as well as a couple of industry figures, off the record) and others I have spoken to in the past, involves receiving equity in an auto maker in exchange for government funding – an "investment" in the truest sense. From a free market standpoint, I find the notion of "Government Motors" rather troublesome. But we live in the real world, where ideology must take a back seat to what is happening on the ground right now.
And in this world, Canada cannot compete with Mexico and other low-cost jurisdictions, let alone the United States. A loan, tax credits or other forms of "investment" provide minimal upside with plenty of downside risk. Canada has no leverage, but is effectively funding FCA as an auto maker.
At least with some equity (such as preferred stock, like the bailout-era TARP program), the government can benefit from the upside in share price and have a seat on the board of directors. If FCA threatened to leave Canada, then the government could do something like threaten to sell their stake to a Carl Ichan or a Bill Ackman, the kind of activist investor that no company would actively court. Again, such a scenario is hypothetical, but it demonstrates the leverage that equity gives.
Viewed through that lens, the alternatives – continuing to act as an ATM for the auto industry, or telling FCA to get lost and risk losing a giant chunk of Canda's auto industry – somehow seem less palatable.
from The Truth About Cars http://ift.tt/Jh8LjA
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