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NTRODUCTION

The Automotive industry (including auto components) is the largest segment of the manufacturing sector and is a key constituent of Canadian economy . The Canadian automotive sector is the eighth largest in the world (in production terms) and account for 6.71% of the countries GDP (see Annexure I). The sector is also a key source of employment providing jobs to over 570,000 Canadians in 12 light assembly plants and more than 900 auto parts manufacturers .

The automotive sector is highly export oriented in nature - the export figure for the sector for 2006 stood at CAN $49.93 bn (Annexure II) which constituted over 80% of the domestic production . A lion's share of the exports is directed to the US market - approximately 97% of the total auto exports are made to the US market .

The automotive sector in North America is in a state of flux and the sector is witnessing a major restructuring at this point of time. The future developments in this sector will have important economics and social ramifications for both the US and Canadian economies. Thus in this paper we have decided to provide a brief background to the sector and analyze the competitive landscape and the key competitive issues facing Canadian Auto manufacturers.

PROBLEM DEFITION

The Canadian automotive sector witnessed a boom in foreign investments during the 90's - the substantially lower labor costs and the weaker Canadian dollar. However much of the competitive advantage enjoyed by Canada has since been eroded by a stronger Can $, increasing costs and changing competitive situation in the US.

The last few years have seen a decline in the fortunes of the Canadian automotive industry on account of the restructuring and downturn in the US market. Between 2000 and 2005 the production of passenger cars and light trucks in Canada fell by more than 9% to 2,688,363 units (Annexure III) - this resulted in Canada slipping from the 4th largest vehicle manufacturer in 1999 to 8th by 2004 . With eroding competitive advantage Canada has also witnessed increased competition and diversion of investment dollars to Mexico which has seen a significant improvement in its share of the US market (Annexure IV). Canada's auto parts sector also has encountered difficult conditions. The Canadian parts output (as measured by real GDP at basic prices) fell by 8% in 2006 compared to a 5% decline in the vehicles output (Annexure V).

The overall downturn in the automotive sector is reflected in the job cuts that have happened till date - there have already been - 5000 jobs cuts in the parts sector and over 3000 in the assemblies sector . While the downsizing in Canada has been on a much smaller scale than in the US, however it has to be seen in the context of the deep crisis faced by the Big 3 auto manufactures (GM, Ford, Chrysler) as it can precipitate into a much deeper crisis in the future. This downturn has also led to a significant decline in the trade surplus from auto and parts which was down by 70% to $3 bn in 2006 vis-Ðo-vis $10 bn in 2005 .

Thus the automotive sector that has been an important contributor to economic progress in Canada, and especially in Ontario, is facing a severe downturn - with loss of share in its key market the US, job cuts and downsizing, declining profits/surplus etc. In order to suggest a solution to this pressing issue it is imperative to first diagnose the key competitive issues surrounding the sector.

KEY COMPETITIVE CHALLENGES: In order to understand the key challenges before the industry we decided to perform a SWOT of the sector and the Canadian economy (see Annexure). This exercise will provide us with a background to the ground realities facing the industry and the macro economic environment in the Canadian economy. The SWOT analysis helped us identify the key challenges facing the automotive sector:

1. Lack of Diversification - the Canadian automotive industry is almost entirely built around the US market - the biggest auto market in the world. Most of the increase in vehicle production can be attributed to FDI investment by the Big 3 in US who outsourced a part of manufacturing to Canada to take advantage of the lower cost of production that accrued here on account of government incentives, lower labor costs and the weak Can $. This led to development of an industry segment totally dependent on the US (the Big 3 auto manufactures in the US in particular) which is reflected in the fact that almost 98% of exports from Canada (which constitute 80% of the total domestic manufacturing ) are directed to the US market (see Annexure VII). The dominant role of the Big 3 is reflected in the fact that - 2/3rd of assembly in Canada; 100% of power-train; 3/4th of employment in OEM segment and 85% of the parts shipment can be attributed to the Big 3 . Thus while the Japanese and subsequently the Korean manufacturers persisted and over time successfully managed in marketing their brands in both the US and the Canadian market there has been no such successful initiative from Canada. While Canada has seen emergence of best in class companies like Magna in the auto components segment there has been no such initiative in the automotive side. This lack emergence of any strong domestic brand to compete in the US or international market has meant that the fate of the Canadian automotive sector is closely intertwined to the US market and particularly to the competitive position of the Big 3.

The last few years have seen a slide in the competitive standing of the Big 3 who have been unable to face up to the competition from the Japanese's manufacturers in coming up with a product range in line with consumer demand. This has seen a slide in the share of the Big 3 in the domestic markets from a near dominant position of 75% in 1995 to approx 52% in 2006 (also see Annexure IX). This problem has been compounded by rising costs of production mainly from pension and health costs (see Annexure X) - today health cost per vehicle for GM infact is higher than the steel input cost - which have proved crippling to their bottom line (see Annexure XI). Thus given the industry structure the severe downturn in the fortunes of the Big 3 has a significant impact on the future of the Canadian automotive industry also.

2. Increased competition from emerging economies: Canadian manufacturing set up enjoyed a competitive advantage over their US peers on account of the overall lower wage expenses in Canada. The Canadian wage expenses for a factory floor labor (8%-30%); engineering wages (25-40%) and management wages (25%-50%) cheaper than in the US (See Annexure XII). However the entry of new players like China, India, Eastern European countries has changed the competitive position of the sector. These nations are able to provide quality