Special Report

2008 Year in Review

“Everybody in shock? I know I am.”

The words belong to Buzz Hargrove and they were spoken nearly a year ago as he presided over his last set of labor negotiations as president of the Canadian Auto Workers union.

Yet, if they were repeated today, as Canada’s auto industry buckles under the weight of a global recession, the words would still be in context.

After a string of years when Ontario was the dominant North American region for finished-vehicle assembly, the fallout from Wall Street’s meltdown drifted northward and triggered a run of shutdowns and shift cancellations.

As unemployment in Canada trended upward, light-vehicle production plunged 19.4%, compared with 2007, according to Ward’s data.

The decline allowed Mexico’s full-year output to surpass that of Canada, 2.18 million vehicles to 2.08 million.

Canadian exports of finished vehicles and vehicle components slowed to the point where Canada suffered its third consecutive annual automotive trade deficit – and the largest of the three at C$13.8 billion ($11.3 billion), according to the Canadian Auto Workers union.

Imports were valued at C$68 billion ($55.6 billion), whereas exports totaled C$54.2 billion ($44.3 billion), adds the CAW, which found itself at the center of nearly every critical event in 2008 – beginning with Hargrove’s prophetic outburst.

Spirits were raised when the union reached a tentative agreement with Ford of Canada Ltd. some four months ahead of schedule.

The deal marked a milestone because neither the CAW, nor its predecessor, the United Auto Workers union, had ever hammered out a labor contract so far in advance of an existing contract’s expiration.

When Hargrove broke the news at a hastily called press conference, normally vociferous journalists were stunned into silence. His remark – “Everybody in shock?” – produced a chorus of laughter, which soon turned to anger.

The deal, ratified within weeks at Ford, General Motors of Canada Ltd. and Chrysler Canada, failed to erase what the CAW conceded was a $7-per-hour all-in labor-cost cap that favored the auto maker’s U.S. operations, $67 to $60.

But Hargrove predicted the cost of the 3-year CAW agreement would remain stable, while the U.S. operations would see their outlay inflated by legacy costs, despite a UAW deal that established a union-administered fund that offered relief from key obligations such as retiree health-care benefits.

And in a break with the past that mimicked the landmark 2-tier wage structure set out in the UAW’s 2007 contract, the CAW agreed to a “grow-in system” that would pay new hires 30% less than current employees. But the CAW scale was back-loaded to assure parity after three years.

In addition, base-rate wage increases were held in check, cost-of-living adjustments were frozen for five quarters, vacation pay was reduced by 40 hours and workers agreed to take on a 10% co-pay for prescription drugs.

In return, Ford agreed to extend through 2011 the life of its assembly plant in St. Thomas, ON, while Chrysler promised to bring a new-generation of passenger cars into production at its Brampton, ON, plant in 2010.

Chrysler also declared its plant in Windsor, ON, to be the hub of its minivan production – a fortuitous designation given Chrysler’s decision, two months later, to mothball Windsor’s sister plant in St. Louis, effective Oct. 31.

However, the CAW’s GM bargaining unit arguably made the biggest gains, only to suffer the most severe losses later.

While the union negotiated the closure of a transmission plant in Windsor, the historic 2008 contract saved the jobs of some 900 workers scheduled for layoff from the truck line at GM’s massive assembly complex in Oshawa, ON. The jobs were spared when GM agreed to maintain two production shifts there.

The auto maker also confirmed it would use Oshawa to launch output of its hybrid pickups and pledged to build an additional product at the adjacent Oshawa car-assembly site, home to the Buick LaCrosse, Chevrolet Impala and – as of March 2009 – the Chevrolet Camaro.

However, 19 days after CAW workers ratified the agreement, it was undone by a massive restructuring effort unveiled just before GM’s annual shareholders meeting.

GM CEO Rick Wagoner declared the sinking U.S. market, on which Canada is highly dependent, was not the product of a cyclical dive. Instead, Wagoner said he believed the sudden, dramatic shift away from high-margin large trucks to be “permanent” and announced the Oshawa truck plant would close in 2009.

The move touched off a war of words between the CAW and GM, with the union charged the Detroit-based auto maker of allowing jingoism to affect its decision-making.

Said Wagoner: “This isn’t about, ‘We like this plant better than another one.’ It’s about the fact that the market has radically changed, and for the good of the company we have to adapt to it.”

The CAW responded by blockading GM’s national headquarters.

The protest was shut down by court order, but not before an Ontario judge scolded the auto maker. Judge David Salmers accused GM of engaging in “deceitful” bargaining to gain a favorable labor contract – an allegation the auto maker vigorously denied.

“GM should have been at least aware of the possibility that plants, possibly including the Oshawa truck plant, might have to be closed,” Salmers said. “In the future, it may be difficult to expect the CAW to negotiate confidently and trustingly with GM Canada representatives.”

The GM-CAW pact was like the first domino to fall in a game with no winners. As light-vehicle sales spiraled further downward, culminating in a 21.2% fourth-quarter plunge, other auto makers shredded their production plans.

By year’s end, Chrysler’s Brampton plant went from three shifts to two, dampening the enthusiasm that greeted the spring production launch of the Dodge Challenger line of muscle coupes.

Meanwhile, Ford postponed plans to add a third production shift at its Oakville, ON, plant – home to the Ford Edge and Lincoln MKX cross/utility vehicles, as well as the larger and radically designed Ford Flex CUV.

Not even the rugged heavy-truck industry was spared as Daimler Trucks North America announced in October it would close its plant in St. Thomas, ON, as it phased out its Sterling brand.

And in an inauspicious beginning for Toyota Motor Mfg. Canada’s new plant in Woodstock, the auto maker stalled the scheduled launch of a second production shift.

Toyota’s vision was to supplement output from its Cambridge, ON, plant, 20 miles (32 km) away, with production of the RAV4 CUV from Woodstock. Cambridge was home to the Toyota Corolla and Matrix small cars, as well as the Lexus RX350.

“We are not sure when the market will rebound, but we are optimistic,” Ray Tanguay, president of Toyota Motor Mfg. Canada, told The Free Press of nearby London, ON. “If any vehicle will do well, it is the RAV4.”

Toyota recorded a 23% sales uptick for the nameplate, with all but 445 of the 20,522 units coming from Japan because of Woodstock’s late launch, according to Ward’s data.

Ford dominated the small CUV segment with 32,898 deliveries of its Escape, good for a 4% sales jump over 2007. But as Canadian pump prices paralleled the upward trajectory of U.S. gasoline, light trucks fell out of favor, evidenced by a 5.9% sales decline, according to Ward’s.

A 3.7% surge in car deliveries prevented a steep drop in overall sales, which ended the year nearly flat at 1% below 2007 levels.

Ford claimed the best-selling truck prize with 67,649 deliveries of its F-Series pickup.

The Honda Civic was the most popular new car of 2008 with 72,463 unit sales.

The Civic’s production picture was the opposite of the RAV4’s, with 97% of its volume originating from Honda Mfg. of America Inc.’s plant in Alliston, ON. Increased demand for the Civic throughout North America prompted the auto maker to announce Ridgeline pickup output would shift from Alliston to Lincoln, AL, in 2009.

Canada sales had been “fairly decent” until late in the year, says Carlos Gomes, auto industry analyst with Scotiabank. “Then, as happened in most other places, they just started to fall.”

And as with other regions across the globe, the decline in new-vehicle sales sank with the plummeting economy.

“Because our main trading partner is the United States, our exports started to take a hit and employment growth started to moderate as conditions started to weaken south of the border,” Gomes tells Ward’s.

December marked low points for national unemployment and gross domestic product as the former peaked at 6.6% and the latter recorded its sharpest decline at 1%, according to Statistics Canada.

So, following the lead of their U.S. parent companies, struggling auto makers reached out to Canada’s governments.

In a bid to keep their Canadian operations viable through the economic downturn, Chrysler and GM requested about C$6 billion ($4.8 billion) in combined financial aid from Canada’s federal government and the province of Ontario

Ford made no formal application but indicated it might require access to an emergency line of credit if the market continued to weaken.

Documents detailing the need for assistance, a combination of loans and credit lines, were submitted to a government-appointed “special advisor on auto restructuring.”

Jim Arnett, the Harvard-educated chairman of Ontario’s publicly-owned power company, Hydro One Inc., was named to help evaluate the condition of Canada’s auto industry and serve as counsel to Prime Minister Stephen Harper and Ontario Premier Dalton McGuinty.

The federal and provincial governments jointly decided to provide C$4 billion ($3.3 billion) in emergency loans to the ailing auto makers, while Ottawa also promised accounts-receivable insurance to struggling suppliers.

Additional aid was said to be contingent on effective restructuring within the industry. And all eyes expectantly turned back to the CAW which had in August witnessed a transfer of power.

Hargrove, who followed CAW founder Bob White into the president’s chair and guided the union for 16 years, retired at age 64. His successor, a 53-year-old firebrand from Chrysler’s Windsor operations, vowed to hold the line on further concessions.

“We’ve said to both levels of government, ‘Take a look at what we did last May,’” Lewenza told Ward’s.

But Lewenza also promised to be part of a solution to the crisis that threatened key cogs in the Canadian auto industry’s wheel.

Meanwhile, Chrysler deflected whispers that it would contemplate a manufacturing pullout from Canada if it did not get cost relief from the CAW and emergency financial aid from government. In a statement issued to the news media, the auto maker said its goals were to:

  • Ensure Chrysler had sufficient funds to complete its restructuring activities during this unprecedented downturn in vehicle sales caused by the global financial crisis.
  • And that Chrysler Canada’s substantial Canadian manufacturing and operational footprint be protected.

As he took the reins of the CAW, Lewenza also declared his priorities were to see Canada’s auto industry recognized in government policy and to organize non-union plants. “Somehow, some way, we’ve got to convince government to enact some manufacturing/industrial policy in Canada that will keep manufacturing in Canada,” Lewenza told Ward’s on the eve of the CAW convention that named him Hargrove’s successor.

His words echoed years of lament from organized labor since the the 2001 expiry of the U.S.-Canada Autopact. The legislation forced auto makers to assemble as many vehicles in Canada as they sold there.

Meanwhile, the CAW was not the only labor union interested in organizing Canadian auto workers in 2008. The International Assn. of Machinists union said in March it had the support of 40% the hourly workers at Toyota’s Cambridge plant, enough under Ontario law to force a vote to determine if the union had sufficient backing to be recognized as the workers’ official bargaining agent.

But the union cancelled balloting when the auto maker allegedly presented a voting list that featured the names of 900 additional workers the union believed to be hostile to its cause.

Said a Toyota insider, noting the plant employed more than 5,000 workers: “It’s not like we surprised them with 900 new names.”

Lewenza was not the only fresh face to emerge in 2008. David Mondragon, 47, replaced Barry Engle as president of Ford Canada.

Engle left the auto maker to take over as CEO of New Holland Agricultural Equipment SpA, a unit of CNH Global NV. And until his appointment, Mondragon had been general manager of Ford’s Southwest U.S. sales region – its largest region.

Despite the troubling economic climate, 2008 also saw some hope on the product horizon. Ford announced the Flex, with its distinctive boxy profile, would be joined in 2009 by a uniquely styled Lincoln-brand platform-mate dubbed the MKT.

The auto maker also expedited plans to launch a new engine program at a mothballed Windsor plant. Ford promised $168 million to prepare the site for a powertrain described by manufacturing chief Joe Hinrichs as “both” an incremental product and a replacement product.

Sources told Ward’s the plant would produce a new fuel-efficient modular aluminum-block 5.0L 3-valve V-8 codenamed “Coyote.”

The new engine was expected to replace the nearly 20-year-old 4.6L V-8, which powers products ranging from the Mustang GT to the Ford F-150 pickup to police-package applications of the Ford Crown Victoria fullsize sedan.

“This project wasn’t on (Ford’s) radar even 18-20 months ago,” Hinrichs said, adding pending restrictions in the U.S. federal government’s corporate average fuel economy forced the auto maker’s hand to build a more fuel-efficient high-output engine.

The Challenger’s highly anticipated debut was accompanied by an internal edict warning dealers not to charge more than the sticker price for the first run of limited-edition SRT8 models. Compliance with pricing was linked to a dealer’s allocation of RT and SE models.

Output of the first SRT8s, designated as ’08 models and available only with automatic transmissions, began in April. Production of the RT and SE trims, designated as ’09s, began in August and heralded the introduction of a 6-speed manual transmission. Production of ’09 SRT8s with manual transmissions began the following month.

While negative news created a dark cloud over Canada in 2008, the federal government endeavored to clear the air by proposing its own fuel-economy standard using the U.S. regulation as a model.

“We made a commitment to implement fuel-consumption regulations for the 2011 model year that are benchmarked against a stringent, dominant North American standard, and we are keeping our word,” said Lawrence Cannon, minister of transport, infrastructure and communities.

CAFE standards signed into U.S. law in 2007 set a combined fleet average of 35 mpg (6.7 L/100 km) by 2020.

“We welcome the U.S. goal but are committed to developing made-in-Canada standards,” Cannon said.

As a hedge against over-reliance on gasoline, Canada opened the door to increased use of low-speed electric vehicles.

Ottawa gave its blessing to the sale of LSVs for use in areas such as parks, campuses and retirement communities, because their speed limits are well below those on public roads. However, the government left in place a measure that prohibit the use of LSVs on public thoroughfares.

emayne@wardsauto.com