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Auto parts makers on long, slow comeback trail

When Lear Corp. turned out the lights nearly two years ago at a plant in Ajax, Ont., that made seats for GM pickup trucks, Steve Batchelor knew it was game over. There was no hope of it ever reopening, he believed. "We were finished."

In the grim days of May, 2009, leading up the Chapter 11 bankruptcy filing by General Motors Corp., it was hard to see how the auto industry could be turned around.

As it turns out, Mr. Batchelor, the president of local 1090 of the Canadian Auto Workers union, was wrong. Thanks to a Canadian and U.S. taxpayer bailout of tens of billions of dollars for GM and Chrysler, a catastrophic collapse of the auto industry was averted and it is clearly on the road to recovery. And a small piece of that recovery is evident in Ajax, east of Toronto, where the Lear factory is running again, making seats for Chrysler Group LLC.

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The mood in much of the industry is buoyant, especially at this week's North American International Auto Show in Detroit, about a 20-minute drive from Lear's corporate headquarters in Southfield, Mich.

Ford is adding 7,000 factory jobs in the United States, GM has returned to profitability and Chrysler Group would also be reporting profits if not for more than $1-billion (U.S.) in interest payments annually to the governments that bailed it out in 2009. One senior executive at a multinational auto parts maker - an industry veteran who has seen both its slumps and its prosperous times - describes the prevailing sentiment as "almost giddy euphoria."

The question is how much of that euphoria will translate into new investments by auto parts makers in Canada - creating new jobs here and returning the industry to its pre-crisis days, when the auto sector was an eight-cylinder engine driving manufacturing in Canada.

"It's not clear we can get back to that eight-cylinder level," says Doug Porter, deputy chief economist at Bank of Montreal. "Ultimately, the question hinges on whether U.S. auto sales will return to pre-crisis levels on a sustained basis. I think that's questionable. At the very least, it's going to take a number of years."

Before surging gas prices and the liquidity crisis hammered auto makers in 2008, ultimately sending Chrysler and GM into Chapter 11 bankruptcy protection and causing a massive restructuring of the entire industry, auto makers enjoyed sales of 16 million vehicles annually in the U.S. market.

Parts makers went along for the ride, with employment in the sector holding above 87,000 in Canada as late as 2007. Then it began to shrink, and quickly. For every 10 jobs in Canadian parts factories then, only seven still exist today, as employment shrank to 61,235 as of last October.

For 350 workers at the Lear plant, the ride ended on May 14, 2009, when GM closed its pickup truck plant in Oshawa, Ont., the only customer for the seats they put together in Ajax. The Lear plant was up for sale at one point, Mr. Batchelor says.

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After it closed the plant, Lear won a contract with Chrysler to provide seats for the auto maker's redesigned large sedans, which are assembled in Brampton, Ont., northwest of Toronto.

Lear was looking for a non-union supplier paying wages in the $14 (Canadian) to $15 range, Mr. Batchelor says.

CAW negotiators won the work for Ajax by agreeing to cut wages to $19 an hour from the $28 they were earning when they made seats for GM, and by shifting to a mix of defined-contribution and defined-benefit pension plans from a straight defined-benefit plan

Some workers view that as accepting concessions, Mr. Batchelor acknowledges. "I certainly take a different view of that. We were out of work so we went from a wage rate that used to be applied to the GM to zero, to nothing, to not having any work or potential work coming into the plant."

The plant began cranking out seats for Chrysler last October and 300 people have been rehired. Lear is building a bank of potential new employees to be ready for the addition of a third shift at the Chrysler plant if the new cars take off, Mr. Batchelor says. That would mean hiring of another 120 to 150 people at the Lear plant.

Lear itself has recovered from a trip through the U.S. bankruptcy courts.

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While the reopening of the Lear plant means the return of some jobs that were thought to be gone forever, the effects on Canada of the North American auto industry restructuring are still being felt.

Ford's assembly plant near St. Thomas, Ont., is scheduled to close later this year, which will cause another Lear plant to close and vaporize about 150 jobs.

Lear and other parts makers, including Magna International Canada's largest parts company, presented bullish forecasts this week at a conference in Detroit. But they're not pointing to Canada and the United States as centres of growth.

"The BRIC countries, which offer great opportunity for us - Brazil, Russia, India and China - have grown significantly in the last five years from less than $600-million (U.S.) [in revenue]to almost $2-billion today," Bob Rossiter, Lear's president and chief executive officer, told the conference.

Magna estimated it will open 16 new plants in China and South America by 2013. It will realign its operations in Canada, the United States and Western Europe that involved closing 74 plants in those areas over the past five years.

Other Canadian parts makers have undertaken similar actions.

Nick Orlando, president of Vaughan, Ont.-based Martinrea International Canada's third-largest parts maker by revenue, says employment at the company is about 7,000 people, approximately the same as it was before the crisis.

But several plants in Canada have been closed or downsized, while job numbers have grown at U.S. and Mexican operations. Martinrea, which makes metal parts and fluid management systems, also opened a factory in Slovakia.

Three fundamental changes at both the macroeconomic and industry-wide level are likely to mean that trend will continue, says Mr. Porter, the Bank of Montreal economist.

The restructuring of the Detroit Three - traditionally the largest customers for Canadian parts makers - combined with the rise of the Canadian dollar against the U.S. currency and the increase in competitive pressure from China and other emerging economies will make it tough for parts companies, he says. That means many of those lost jobs in Canadian parts plants will not come back, even as auto sales rise.

"The sector may be able to maintain output, but it's likely going to do [so]with less labour."



The auto industry is expected to rebound strongly this year from the crisis that almost led to a catastrophic collapse in 2009. Among the themes that will be evident are:

Jobs creeping back

Parts employment grew 1.3 per cent in October to 61,235 from the dismal level of 60,469 a year earlier.

Ford is adding 7,000 jobs at its U.S. factories.

Growing sales

Merrill Lynch analyst John Murphy is forecasting sales of 15 million vehicles in the U.S. market, up from 11.5 million in 2010.

Barclays Capital analyst Brian Johnson projects sales of 13 million.

Production boost

Mr. Murphy is again bullish, calling for an 18-per-cent increase in North American output to 14.04 million vehicles, while Mr. Johnson comes in at 12.5 million.

Canadian parts maker Magna International expects auto makers to produce 12.9 million vehicles in North America and 13.3 million in Western Europe.

Parts industry shakeout

"Further industry consolidation is likely in the coming years and could be accelerated as strong 2011 results drive supplier cash balances higher, providing the means to execute strategic acquisitions," Mr. Murphy states.

Greg Keenan

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About the Author
Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More

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