Toyota, Honda, Ford the new Big Three?

Canada’s automotive landscape is poised for a historic realignment as Chrysler LLC and General Motors Corp. retrench and make way for three major rivals that will power the industry in the year ahead.

Chrysler is down but not out, facing a wrenching restructuring in bankruptcy court with new partner Fiat SpA that will see the automaker reborn with its most-prized assets if it can avoid liquidation. GM faces its own possible bankruptcy filing and will get radically smaller, employing barely 5,500 people in Canada by 2014 -- fewer workers than property insurer ING Canada or manufacturer Siemens AG.

But it’s the remaining three of the country’s five largest automakers that now face a monumental test as the industry teeters in crisis. Honda, Toyota and Ford all have to make sure they can keep building cars in Canada without a serious interruption that the mayhem at GM and Chrysler might cause. And they have to figure out how to maintain sales amid the economic dislocation in a market that should normally be hitting its stride.

"The buying season over the next four months is your most important part of the entire year. And we’re kind of blowing that off right now with all this bad news," said Bill Pochiluk, president of consultancy AutomotiveCompass in West Chester, Pennsylvania. "We’re not going to get any serious stability to the industry before fall."

The enormity of the challenge is not lost on Jerry Chenkin, executive vice-president of Honda Canada.

"There is no doubt the impact will be huge," Mr. Chenkin said about the events at Chrysler and GM. Honda’s top priority is to ensure the supply of auto parts to its assembly facility in Alliston, Ont. Workers there build Canada’s top-selling car, the Civic.

Roughly 59% of Chrysler’s suppliers also supply Honda and other Asian-based manufacturers and 54% also supply Ford, according to one estimate. For the last several weeks, Honda has been working to protect itself by making sure those parts companies are on solid footing and won’t cease operations if revenue from GM and Chrysler suddenly dries up. It is also making contingency plans. To date, Honda’s talks with suppliers have not included offering them direct financial support, Mr. Chenkin said.

Each car manufacturer can have hundreds of suppliers providing them with everything from crankshafts to clutches. The key is to make sure there is no break in the chain.
Even with the Canadian government’s move to boost protection for auto-supplier shipments by $700-million, a move designed specifically to stabilize the supplier base in the event of a GM and Chrysler bankruptcy, some parts makers could fall through the cracks.

Many suppliers are already staring down bankers unwilling to lend them any more money. With Chrysler shutting down for two months while it reorganizes under bankruptcy protection and GM idling various factories at different times over the next 12 weeks to cut inventory, lost income has pushed some to the edge.

Chrysler supplier Mark IV Industries of Amherst, N.Y. filed for creditor protection just after the automaker did. Other suppliers will follow.
"Production levels are [declining]," said Craig Fitzgerald, a financial consultant who advises car-parts companies at Plante & Moran in Southfield, Mich. "At some point for a supplier, even though you collect your receivables, you simply are bleeding cash. You don’t have enough revenue coming in and you go into liquidation. That is going to happen to a number of companies. The question is who does that happen to and how quickly can supply be reassigned?"

Honda built 58,000 vehicles in Canada in the first quarter this year while Toyota built 55,900 at its Ontario plants in Woodstock and Cambridge, according to Ward’s Automotive Reports. Both automakers outpaced GM, which built only 41,600 units.

It’s the same trend line on jobs. Honda employs 5,400 workers in Canada directly and Toyota employs 5,600. Both companies have added jobs over the years while their Detroit rivals are cutting workers in a bid to regain profitability.

Dennis DesRosiers, president of DesRosiers Automotive Consultants in Richmond Hill, Ont., has noted the perversity of Canadian governments plowing billions into GM and Chryler to help them shrink. "The groups killing jobs in Canada are rewarded and the group preserving and or creating jobs in Canada are punished. Someone has to explain the logic of this to me."

Don Walker, co-chief executive of supplier Magna International Inc. counters that the governments are protecting their future revenue streams by supporting the companies and suppliers, which pay billions in direct taxes the governments would otherwise lose. Jim Stanford, economist with the Canadian Auto Workers union, argues that the Japanese automakers have benefited from generous sectorial aid in their own right from the Japanese government.

Regardless, the sands are shifting in Canada’s automotive hierarchy.

GM has been the country’s top seller and the top builder for years, a dominant industrial force that at its peak in 2000 employed 20,000 people and pumped out nearly 1 million cars. Now that power is fading as new corporate champions emerge.

As it revamps its worldwide operations and balance sheet under the guidance of the U.S. Treasury, GM will retreat to one lone assembly plant in Oshawa, Ont. as well as another nearby that it shares with Suzuki. The company will terminate agreements with 300 of its 700 Canadian dealers and phase out its Pontiac brand. It will be a shadow of its former self.

Analysts say Chrysler, which produced 73,200 cars and trucks in the first three months of the year at its two Ontario assembly plants, will undergo a similar reckoning.

"It’s a major shift in the auto industry the likes of which we have not seen for a long, long time," said Doug Leighton, an auto historian at the University of Western Ontario’s Huron College. "[Honda and Toyota] are the new heavyweights in the auto industry. People will now buy Hondas and Toyotas the way they used to buy GMs and Chryslers and Fords because they’re seen as domestic."

Neither Honda nor Toyota is new to Canada. Both have been making vehicles here since the late 1980s. But analysts argue that a tipping point has taken place in the consumer psyche that may favour them and other international brands in the months ahead.

For the first time, Canadians bought more automobiles from Asian and European-based producers than from the Detroit carmakers last year -- a direct result of the perception that they build better quality vehicles that use less gasoline.

The events of the last week could add another dimension to that picture. The corporate overhauls announced by GM and Chrysler is now hitting home for many people.

Even a few months ago, there was still the expectation among buyers that GM and Chrysler will get through their financial hardship and things will be the same, said Richard Cooper, Canadian vice-president for market research firm J. D. Power & Associates. "But when you have a brand like Pontiac being taken off the table, when you have Chrysler actually filing for bankruptcy, those are the kind of signals that say to consumers "All the stuff that has been going on is very real.'"

Whether that will translate into more sales for Honda or anyone else is unclear. Consumers who have been loyal to North America’s home-grown manufacturers have not tended in the past to consider the cars of so-called import brands.

Still, that gate is creaking open.

Toyota, for one, has been able to maintain aggressive lease offers while the freeze in credit markets forced some rivals to pull out of leasing.

The company is making a deliberate effort to link its Canadian manufacturing footprint to the vehicles it sells here. Earlier this year it began offering zero percent financing for the first time in its history on Ontario-built Corolla, Matrix and RAV4 models.

"Everything that we have done in the marketplace has been geared to trying to encourage Canadians to buy our Canadian-made products," said Stephen Beatty, managing director of Toyota Canada Inc. "If we can drive up sales of those Canadian-made vehicles, then we ensure production levels at the Canadian plants and it feeds back into the supply network here. It’s an economic feedback loop."

The auto company in the trickiest position is Ford.

The maker of Canada’s top-selling truck has been deliberately trying to distance itself from its Detroit-based rivals.

It hasn’t asked for government aid. It insists its $24-billion in liquidity is enough to weather the storm. And in Canada, it has grown its market share for six straight months on the strength of vehicles like the Fusion compact and F-150 pickup.

Ford is now Canada’s second largest automaker by sales behind GM, and the gap on its larger rival is closing. It is rolling out seven new vehicles over the next six months and has snagged key Canadian managers from other firms.

The company has boosted its spring production forecast and said it has slowed its cash burn by cutting debt and labour costs.

On March 24, investors cheered its US$1.4-billion first quarter loss because they were expecting worse. Now the cheer is turning to fear.

According to consultancy IHS Global Insight, Ford may pick up 40% of any sales lost by GM and Chysler in bankruptcy protection. But the company may not avoid the effects of the supplier shakedown.

"We share President Obama’s hope that Chrysler’s bankruptcy will be controlled and quick, while we continue planning for all contingencies as a prudent business measure," Ford said in the aftermath of Chrysler’s creditor protection filing. "Our industry is highly interdependent, and the health of the supply base and dealer network is critical for all automakers."

Source;
http://www.canada.com/Cars/Toyota+Honda+Ford+Three/1561739/story.html