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York University
Administrative Studies
ADMS 1010

Business in the Canadian Context ADMS1010 – Summer 2012 – Troy Young Lecture 6 – Automobile Industry & Impact of Globalization – June 14 2012 The Automobile - Canada is the only major car producing nation to not produce a domestic car. o USA: Ford, Chrysler and GM o France: Citroen, Bugatti, Peugot, Renault o Italy: Fiat, Ferrari, Lambourghini, Alfa Romeo, Lancia, Maserati o Germany: BMW, Mercedes Benz, Volkswagen, Opel, Porsche o UK: Jaguar, Land Rover, Aston Martin, Vauxhall, Bentley, Rolls Royce, Lotus o Sweden: Volvo, Saab o Japan: Honda, Toyota, Mazda, Nissan o Korea: Kia, Hyundai, Daewoo A History of Car Manufacturing in Canada - The world’s first car was built in Germany by Karl Benz in 1885. - 25 of his vehicles were sold between 1888 and 1893. - By 1899, Benz was producing 572 cars a year. - The first car built in North America was built by the Duryea brothers in Massachusetts in 1893. - The first large scale production of automobiles in North America was in 1902, when Ransom Olds started building his Oldsmobile. - The car was here to stay. - The first Canadian foray into car manufacturing was Gordon McGregor’s licensing of Henry Ford’s Model C in Canada in 1904. - Henry Ford had founded his company the previous year. - The Ford Company was located in Detroit; Ford of Canada was started in Windsor. - Ford of Canada produced 117 cars its first year of operation. - In Oshawa in 1907, Robert McLaughlin founded the McLaughlin Motor Car Company, and started producing cars using engines built by Buick. - McLaughlin produced 154 cars in 1908. - The Buick Motor Company had been incorporated in 1903 in Detroit. - Other car companies began to spring up in Canada. - Many were small companies that switched from producing carriages to motor cars. - All of them, but for Ford of Canada and General Motors of Canada failed; there is no domestic production of a truly Canadian car today. - Why did these succeed while others failed? Why did two US-based car manufacturers license their products to Canadian manufacturers, when in the case of Ford, they were just across the river from each other? - It goes back to the National Policy and protectionist policies of the British Empire (imperial preference). - As you know by now, the National Policy had high tariffs on manufactured goods produced in the US and sold in Canada. - This tariff reached 35%; this means that cars produced in the US were 35% more expensive to purchase in Canada. - Licensing their cars to established manufacturers of carriages was cheaper than building new plants in Canada. - Cars built in Canada could not only be sold in Canada without having the tariff applied, but also could be sold throughout the British Empire without being assessed additional tariffs. - By the 1920’s, 80% of Canadian auto exports were to imperial markets. - Locally produced cars, without the benefit of the much larger US market and dependent on the limited domestic market in Canada, had more difficulty being successful. Some that were successful became the target of acquisition by foreign investors. - Some wholly Canadian car companies include LeRoy, Russell, Tudhope, Thomas and Galt. - The Russell Motor Car Company, for example thrived in Canada until 1915 when it was purchased by the Willys-Overland Company (makers of Jeep; Willys- Overland became part of American Motors in 1970 and Chrysler in 1987) - Car companies began to amalgamate to form larger companies, more capable of competing internationally. - Bill Durant, the owner of Buick and Robert McLaughlin formed General Motors as a holding company. - Eventually GM would acquire a variety of other car companies: Oldsmobile in 1908, Cadillac and Pontiac (Oakland) in 1909, Chevrolet in 1917. - McLaughlin Motor Car Company became General Motors of Canada in 1918. - From 1918 until 1923, Canada was the second largest vehicle producer in the world, and a major exporter. Those car companies allied with American producers were thriving. Foreign Investment in Canada - Foreign investment is larger in Canada than anywhere else in the world. - Why is this? o Proximity to the much larger US o Holdover from our days as a British colony - The British supplied capital to help establish Canada, looking to reap the benefits of the natural resources here. - Americans opened branches of their domestic companies, often to better access Canadian natural resources, or to avoid the tariffs of the National Policy. - Foreign investment then has a long history in Canada, so when it came to cars this was considered a normal way to do business. - Why didn’t Canadians start their own companies? o US firms had the enormous advantage of much greater capital and experience and strongly established, valuable connections in the larger US marketplace. o A Canadian firm catering only to the domestic market could not compete with the economies of scale enjoyed by US branch companies. - Why didn’t Canadians start their own companies? o Canadians were already familiar with American products through advertising in American publications readily available in Canada and due to the extensive travel that Canadians did to the US. o Given these advantages, Canadian firms had a tougher time establishing themselves. o Many that did become successful were ultimately purchased by larger US firms. Negative Aspects of Foreign Investment - Higher level functions (research and development, finance, marketing) are often done at the parent company’s head office depriving Canada of this high skilled labour. - Any profits from the business activities conducted in Canada reside with the parent company, meaning these profits are leaving Canada. Why does Canada Encourage Foreign Investment? - Foreign investment is preferable to no investment. - Canadians reap the benefits of foreign investment through jobs, taxation and access to lower priced goods due to increased competition. Protectionism and Car Manufacturing in Canada - National Policy and the 35% tariff is the first protectionist step. - In 1926 (The Robb Budget of 1926), this tariff was eased somewhat to 20%, due in part to a complaint that cars sold in Canada were more expensive than the same car sold in the US. The Robb Budget of 1926 - There was a feeling that the auto industry had more protection than it needed. - Canadian content (i.e. 50% of the value of the completed car must be made in the British Empire) offered a 25% reduction in duties. - It becomes far more profitable to make a car in Canada than to import it. - This move had the added benefit of encouraging a domestic parts manufacturing base. - Eventually the move was supported by Ford and GM o Other companies like Dodge Bros, Studebaker and Chrysler opposed it because they did not have high enough Canadian content. - Prices dropped. - Canadian Parts producers almost doubled their sales by 1929; sales of cars did double. Protectionism and Car Manufacturing in Canada - The main reason behind the lowering of the tariff and the addition of Canadian content was political expediency. o Prime Minister King needed the support in the House. - In Week 3 we discussed that the government has to balance the needs of regional interests and that government intervention can sometimes distort market forces. - We already saw this in the automotive sector with the licensing of cars to be produced in Canada rather than imported directly. - We are seeing this again today with the large buyouts given to GM and Chrysler by the Ontario and Canadian Governments. The Great Depression - When the Great Depression hit, car sales plummeted. o People held on to old cars longer rather than buy new. - The tariff returned: 30% on vehicles over $1,200 and 40% on vehicles over $2,100 - Used vehicles were no longer allowed to be imported. - There was a concern that increased protection would actually hurt the industry, as global markets were closed to Canadian cars. - Tariffs were eventually reduced again. Smoot-Hawley Tariff Act: A Warning against Protectionism - The Smoot-Hawley Tariff Act was introduced in the US in 1930. o It was in response to the Great Depression. o Instead of helping, it shows the retaliatory nature of protectionism. o Global trade decreased, making it harder to get out of the Great Depression. o Lead to the wave of more open global trade that occurs with the introduction of GATT after World War 2. Protectionism and Car Manufacturing in Canada - In 1960, a number of issues were plaguing the Canadian automotive sector: o Tariffs were still high, driving up prices for cars o There was a large and growing trade deficit o The parts sector was in severe trouble - Even though the industry was relatively strong, it could be performing even better. - In 1960 the federal government initiated the Royal Commission on the Automotive Industry. - In its findings, it recommended that the Canadian content laws be continued, and the size of the tariffs on vehicles be tied directly to the amount of Canadian content. - The US challenged this under GATT. The Auto Pact - The Auto Pact was signed in 1965 to prevent a trade war over the findings of the Royal Commission. - It was agreed the production in automobiles in Canada could not fall below 1964 levels. As many cars had to be built in Canada as were sold in Canada. - Canadian plants began to build single models instead of a variety. This further integrated them into the North American market. - Canadian cars were mainly shipped to imperial nations; only 7% of vehicles made in Canada were exported to the US in 1964. - By 1968, 60% of cars built in C
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