The second in a three-part series on the auto industry.

The North American auto industry casts a huge footprint on the economies of United States and Ontario — and now it is shrinking. Just how much it shrinks will depend on whether the Detroit 3 — General Motors Corp., Ford Motor Co. and Chyrsler LLC — can hold on to 50% market share.

Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. in Richmond Hill, Ont., expects the auto industry to contract by 15%. And the effect of the restructuring and downsizing in the auto industry — brought on by plunging cars sales — will be felt not only by car makers, he says, but also by auto parts manufacturers and car dealers. The spotlight may be on auto assembly workers but it is workers at parts manufacturers and car dealers who are particularly vulnerable and whose incomes are less protected.

Historically, two auto parts jobs are lost for every auto assembly job, says Carlos Gomes, auto industry economist at Bank of Nova Scotia in Toronto. That ratio has been reduced slightly recently but there are still many more jobs lost in auto parts than in assembly.

For example, Canadian assembly jobs dropped to about 42,000 in 2008 from a peak of 50,000 in 2004, while auto part jobs fell to around 75,000 vs 98,000 in the same time frame. Gomes expects that to fall further, as assembly plants in Canada and the U.S. are closed. The means the loss of another 3,000 assembly jobs in the next few years, reducing employment in that sector to 39,000. (GM has already announced the closing of a GM truck plant in Oshawa as of May, which will affect 2,600 workers.) Auto parts employment, on the other hand, is likely drop to closer to 60,000.

Gomes’s analysis suggests that for every 10,000 assembly jobs lost, real gross domestic product contracts by 0.2%.

Car dealerships are also reeling with the plunge in sales. About 1,000 dealerships closed in the U.S. in 2008, leaving about 20,500. Another 1,000 are expected to close this year and Tony Faria, professor at the Odette School of Business at the University of Windsor in Windsor, Ont., expects that pace to continue through to 2014, resulting in 15,000-16,000 U.S. car dealerships by 2015.

In Canada, there are about 3,500 dealerships; Faria expects the same kind of shrinkage as is the U.S.

The problem is not just low sales but also the difficulty new car buyers are having getting financing, thanks to the credit crisis. Small dealerships are the most vulnerable but some big dealerships are also running into problems and have closed.

The auto companies are no help, says Faria. They want to reduce the number of dealerships and are encouraging consolidation into fewer but large multi-brand dealerships. He notes that about 65% of car dealerships are Detroit 3 dealerships while those companies account for only 50% of vehicle sales.

An important question is whether the Detroit 3 will be able to maintain market share. Both Gomes and Richard Cooper, vice president Canada with U.S. auto consulting firm J.D. Power in Toronto, think their share of the North American auto market could slip to around 40%, from 50% in 2008.

Analysts say most of these lost sales will go to “transplants” – foreign companies making their vehicles in North America – rather than to imports. Certainly transplants are increasing capacity. Witness the new Toyota plant in Woodstock, Ont., which increases transplants’ annual vehicle production by 19% to 950,000, and boosts transplants’ share of the 2.8 million in total vehicle assembly capacity in Ontario to 34% from 30%.

At the same time, Japanese auto parts manufacturers are increasing their North American capacity to provide inputs for this additional production.
On the bright side, as transplants increase capacity and production, they will hire suppliers and workers laid off by the D-3, lessening the impact on employment numbers. But, because the D-3 automakers pay higher wages, it will affect incomes.

D-3 assembly worker earn, on average, $34 an hour or $55,000 a year, vs $20-$24 an hour or $32,400-$38,800 a year for an auto parts worker, says Jim Stanford, economist at the Canadian Auto Workers Union.

Furthermore, most auto workers get supplementary benefit payments — SUB payments — if they are laid off. This tops up employment insurance benefits to about 65% of what the auto worker was making after-taxes for up to one year, and lesser amounts after that, depending on the worker’s seniority. Most auto parts workers don’t get these benefits.

@page_break@Assembly worker pensions are also bigger, with retirees on average receiving $68 a month for every month worked up to 30 years vs $35-$40 for auto parts workers. Thus, the average pension for an auto worker is about $24,500 a year, vs $12,500-$14,500 for auto parts.

Furthermore, if an assembly worker is laid off a year or two before he or she reaches 30 years service, the union will negotiate with the company for supplementary payments, which will allow the worker to qualify for full pension. This option isn’t available for auto parts workers.

This assumes that the autoworkers pensions will be paid. If GM and/or Chrysler go bankrupt, that is questionable. In theory, the Ontario Pension Benefits Guarantee Fund will ensure that the first $1,000 a month due to each worker is provided. But that fund only has $100 million in funds, a fraction of what would be required if one or both companies go under.

Premier Dalton McGuinty has said that the Ontario government would never have all the money needed to meet the demands of all Ontarians whose pension plans were not able to provide promised payments. The province is looking at how to put the OPBGF on a sound financial basis.

The pension shortfall will be greatest at GM. The Ontario government allowed GM to underfund its pensions to a greater extent than other companies on the assumption that GM was too big to fail. If GM Canada dissolves, its pension plan will have an estimated shortfall of almost $5 billion, or 43.5%. Pensioners will receive only 43.5% of what they expect.

At Chrysler, the pension shortfall is expected to be smaller but there are no firm estimates. It is believed Ford’s Canadian pension plan is not in trouble.

Wednesday: How low will U.S. auto sales go?

Today: The auto industry’s shrinking footprint

Friday: Autoworkers feel anger, frustration and fear

IE:TV: DesRosiers points to job losses from dealership contraction



Denis DesRosiers, owner and president of DesRosiers Automotive Consultants Inc., discusses the effect of poor auto sales on the dealership network, the contraction of sales and the outlook for the industry. He spoke at his office in Richmond Hill, Ont.

IE