Canada's Auto Transplant Trouble

EVERY morning at 8 a.m., Michael Nylin lines up for exercises with hundreds of co-workers here at CAMI Automotive Inc., a two-year-old Japanese-run automobile assembly plant in the heart of southern Ontario's auto belt.After half an hour Mr. Nylin, vice president of finance, is back at his desk grappling with his main problem: how to convince United States officials the factory isn't just a scam from Japan. "You see these parts," Nylin says, flipping plastic overlays showing car parts made in Japan outlined in colors different from Canadian and US parts. "The green means that this is bonafide North American metal from the day we started production." He had better be right. US Customs Service officials are auditing the plant, looking at everything from windshields to wipers to determine whether 50 percent of the value of the parts in CAMI cars and trucks is North American - or whether the majority is actually from Japan. It is a crucial distinction because CAMI, a joint venture between Suzuki Motor Company and General Motors Corporation, could lose millions of dollars in duty-free access to the US market for its Geo Metros, Suzuki Sidekicks, and other vehicles if found in violation of the 1989 US-Canada Free Trade Agreement (FTA). How this debate over the 50 percent "rule of origin" on autos is resolved is vital for Canada as it struggles to remain competitive with low-wage countries like Mexico, keep manufacturing jobs at home, and investment flowing in. The tough political and economic lessons being taught at CAMI are the same ones facing three other so-called "transplant" auto assembly plants in Canada: Toyota in Cambridge, Ontario; Honda in Alliston, Ontario, and the Korean Hyundai factory in Bromont, Quebec. The Japanese companies represent about $1.5 billion in foreign investment and about 4,600 manufacturing jobs. Though just a fraction of the Canadian industry, this sort of investment was to be Canada's automotive growth opportunity. The sad thing, almost all observers say, is that the damaging disagreement was avoidable - if the FTA had nailed down the specific wording instead of leaving ambiguities. A key issue, for example, revolves around how to allocate certain interest expenses that the transplants say are part of their carscontent." "There's a serious difference of opinion [between governments] on what counts and how to count," says Dennis DesRosiers, a leading Canadian auto analyst. "Unfortunately, now that [the FTA] is established, it's virtually impossible to change because it favors one player: the US." The furor over auto content began in June after Honda's Alliston plant was audited by the customs service and a report saying it was cheating on the FTA leaked to the press. Since then, Honda has been on the cover of Business Week magazine and on the lips of congressmen arguing that GM, Ford, and Chrysler need protection from transplant cars. But some observers say such talk is really aimed at consolidating the US trade position at Canada's expense. "There is an intimidation process being followed by the US in order to send signals to the Japanese that, if they are going to invest in North America, it is not going to take place in Canada or Mexico, but in the US," says Patrick Lavelle, an automotive consultant and past president of the Automotive Parts Manufacturers' Association of Canada. Reinforcing that assertion, Japanese automakers moved last month to counter growing US pressure by announcing plans to increase by billions of dollars purchases of US-built auto parts. Toyota said its US spending will grow to $5 billion next year from $1.1 billion in 1988. Nissan Motor Company said US purchases would rise by $2 billion, Honda by $1.7 billion, Mazda by $1.6 billion (over two years), and Mitsubishi by nearly $1 billion (by 1995). (See related story, left.) "If you're a foreign investor it's coming down crystal clear you better play to Washington," Mr. DesRosiers says. "It doesn't matter whether you're right or wrong. Honda has already lost - it's gotten bad publicity." Canadian officials involved in North American Free Trade Agreement (NAFTA) talks aimed at making Mexico, the US, and Canada one large marketplace worry about US proposals to raise content levels to 60 percent or more. "We might lose companies," Trade Minister Michael Wilson said recently. "We would certainly cut ourselves off from future [foreign] investment." The irony of this developing free-trade backlash is especially apparent to Canadians who embraced the FTA as a way to hitch the Canadian economy more securely to the US economic juggernaut. Opinion polls in Canada show Canadians now blame the FTA for most of Canada's economic woes, though economists blame high interest rates and unfavorable currency exchange rates as much or more. Many say that even though the FTA was supposed to accelerate trade, investment, and jobs, it is actually doing the opposite. "There may be an overzealousness on the part of some American officials and a bowing to political pressure," says Ed Philip, Minister of Trade, Industry and Technology for Ontario. "Free trade may not be as free in some ways as it was before." Canadian labor groups and partsmakers seem pleased the US government is taking a hard line on North American content. "Our problem in Canada is that we're Boy Scouts when it comes to trade," says Buzz Hargrove, a Canadian Auto Workers Union spokesman. "Canada's market is not that important to [the Japanese]. They'll respond to pressure from America." But concern remains that no matter how tough the FTA enforcement, it may only cause the Japanese to build auto-parts plants in the US, or buy in the US. Analysts worry about the long-term impact on Canada's $14 billion auto-parts industry, which employs 88,000 Canadians - and on the $25 billion auto-assembly industry that employs 55,000 - as investment shifts to the US. An August report by the Canadian Centre for Policy Alternatives cites the loss of 12,500 jobs in the auto-parts industry and 15,600 in the auto/truck manufacturing sector between June 1989 and March 1991 - long before the flap over content. Despite the loss of jobs, CAW's Mr. Hargrove says, "We don't want screw-driver factories from the Japanese, thank you very much - where they ship all the parts and we put them together." But even on the assembly front, Canada's strongest auto segment, some wonder how Canada - with $11- to $15-an-hour wages - can hold on against Mexican assembly plants paying $5-a-day once the NAFTA kicks in. "Canadians feel quite vulnerable to the idea of a North American Free Trade Agreement," says David Cole, an auto industry specialist at the University of Michigan. "They realize they could lose even more of their assembly and parts business." Professor Cole foresees Canadian plant closings as manufacturers like GM try to go from two shifts to three at some plants - while closing others - to approach full plant utilization. CAMI's Nylin, meanwhile, is trying to convince inspectors it is fair to include the company's interest costs on plant and equipment as North American content. "Is CAMI doing a flim-flam operation or is it a real, productive facility with real jobs and real North American content?" he asks. "There's not another competitor for our [subcompact] car who makes anything onshore in North America."