Great shakes in the Great Lakes

Ontario has the honour of being the largest automotive production hub in North America, with a vibrant economy and a regional government that is very proactive in attracting investors to the region

With 12 million people or 39% of Canada’s population and half of Canada’s manufacturing output, the province of Ontario contributed 40 per cent of the country’s GDP growth in 2006. At more than 410 billion Canadian dollars (CAD), its economy is larger than that of Switzerland, Belgium, Sweden or Austria.

It is North America’s third largest financial centre but perhaps the most surprising statistic of all is that in 2004, Ontario became the largest automotive production hub in North America. Since then, it has has continued to see large-scale manufacturing investments from OEMs and suppliers.

What is the drawcard of this is often overlooked but constantly growing manufacturing cluster in the south east of Canada? A combination of a business-friendly regional government, excellent infrastructure, a stable and well-educated workforce, and a long track record of attracting leading vehicle makers and suppliers. Perhaps the trump card is a focus on specialist automotive tertiary education that works hand-in-hand with vehicle makers, government and suppliers alike.

Major investments made in Ontario

In the past two-and-a-half years, two major investments by the world’s two largest vehicle makers were made in this region. In March 2005, General Motors announced the largest automotive investment in Canada’s history, with its Beacon Project designed to strengthen automotive engineering, research and development, and manufacturing capabilities.

The CAD 2.5 billion (US$ 2.5 billion/£1.29 billion) project was a milestone for the company and Ontario. To date, it remains unaffected by GM’s large-scale restructuring of its North American operations – a point underlined by the decision to build the new edition Chevrolet Camaro coupe and convertible models at its giant Oshawa complex.

Three months after GM’s investment, Toyota released plans for a CAD1.1 billion plant in Woodstock to supplement its existing facility in Cambridge that builds Corolla and Matrix models as well as the Lexus crossover.

The latter plant – the only Lexus manufacturing facility There is a huge amount of optimism for developing India as a small carmaking hub. It would enable domestic and global vehicle manufacturers to capitalise on the market for small low cost cars, to some extent smaller and cheaper than those already manufactured elsewhere in the world. Supported by a strong domestic market, vehicle manufacturers are seeking to set up sizeable manufacturing operations from which they can also export. Export potential is significant. If manufacturers can get products right for India they are also likely to be suitable for China and other high growth emerging markets such as Brazil and Russia. According to Roland Berger Strategy Consultants, the market for vehicles priced below $10,000 is likely to reach 18 million cars by 2010, up from 12 million today. This would be equivalent to a fifth of world car sales.

In November 2005, meanwhile, the then DaimlerChrysler (now Chrysler) announced details of an investment programme totalling CAD 768 million for its Canadian operations, the majority of which are located in Ontario. The total includes upgrading facilities, flexible manufacturing and automotive research and development.

Some CAD 610 million went into refitting the company’s Windsor Assembly Plant to prepare it for new products and to build an all-new paint shop. Production of the first vehicles to benefit from the investment programme started in September with job one of the 2008 Dodge Grand Caravan and Chrysler Town & Country coming off the line. The former is the long-time best selling minivan nameplate in both the Canadian and US markets.

Around the same time that DaimlerChrysler was opening its cheque book to bring the Windsor plant up to date for the next decade, Ford made a commitment to spend in excess of CAD 1 billion to completely overhaul its Oakville Assembly operations. The previous product, the Freestar minivan (which had been a relatively inexpensive reskin of the Windstar) never really caught buyers’ imaginations in the US and Canadian markets so this time, the company has had a major rethink about challenging the Dodge Town & Country, Honda Odyssey and Toyota Sienna.

Build of the 2009 Ford Flex, due to start in April 2008, is scheduled to be 103,000 units per year of which 12,000 will be a hybrid derivative, which will follow later in the year. Ford has worked closely with several suppliers on innovations such as rocker panels built into the bottoms of the doors, for example, so there is nothing to step over, as in most conventional cars. Underlining the fact that this is not a minivan, the rear doors are conventionally hinged, not sliding arrangements.

Like Toyota, Honda and GM, Ford is increasingly looking at its Ontario facilities less as a producer of low-priced/low margin mainstream models and more as centres for mid-high volume manufacturing of slightly upscale vehicles, each with slight premium pricing.

Certainly, the Dearborn-based company’s decision to also locate a new fuel cell research and development centre at Oakville appears to underline its belief in both this technology and the ability to easily source and retain leading experts in the field of research.

Large-scale investments haven’t only been made by vehicle makers. In May 2006, Linamar announced it would invest CAD 1.1 billion in automotive powertrains and related research, development and plant upgrades. The company, which has its headquarters in Guelph, Ontario, specialises in precision machine components, modules and automotive systems. Jim Jarrell, President and CEO, is tasked with, among others, expanding the business into new areas – one of his main goals is to try and capture 15% of the North American medium- and heavy-duty truck market.

Big players in the supplier sector

Linamar, owned by the Hasenfratz family, no doubt has its sights set firmly on Ontario’s number one supplier (and the world’s number three behind Bosch and Denso), Aurora-based Magna International. For the moment, Magna is safe but with Linamar controlling 36 separate companies – 22 of which are in Ontario – and with 11,000 global employees, there are signs already that this could an increasingly big name in the supplier world.

As well as for the company’s engine divisions, which including McLaren Performance Technology in Michigan and Linamar Antriebstechnik in Crimmitschau, Germany, Jarrell sees major opportunities in Europe. “Our facilities in Hungary . . . are a great base for growth in the Eastern and Central European markets. Countries like Poland and Slovakia, where we’re seeing continued large scale investments by the major vehicle makers, means opportunities for our business especially as component outsourcing continues to expand there,” he explains.

Thirty minutes’ drive from Linamar’s offices and nearby plants is the Waterloo University’s Faculty of Engineering. The university works closely with both Tier 1 suppliers and OEMs in automotive research and operates several programmes, thanks partly to sponsored research funds of over CAD 32 million (2005-2006 financial year).

According to Dr Michael Worswick, Associate Dean of Engineering, the faculty is a leader in mathematics, engineering and computer science. On campus are test cells for welding and microjoining, stamping and hydroforming and a facility for fuel cell development.

“The university is recognised as a leader in technology transfer to the private sector; in fact, it’s a source of some 250 spin-off companies,” he says. “The Waterloo Centre for Automotive Research (WatCAR) promotes worldclass research in support of the automotive sector. We also like to think of the centre as a common interface for strategic interaction with OEMs and Tier 1s,” adds Dr Amir Khajepour, a specialist in mechatronics and manufacturing.

Linking and private sector and research facilities

Close to Chrysler Canada’s minivan plant and the US border is the other major tertiary institution facilitating partnerships between industry and academic researchers – the University of Windsor and its innovative ‘AUTO21’ programme. With 110 industry, government and institutional partners, AUTO21 links 230 researchers at 37 academic facilities, government research facilities and private sector research laboratories across Canada. The programme is industry-driven and is divided into six key themes: health, safety and injury prevention; societal issues; materials and manufacturing; design processes; powertrains, fuels and emissions; and intelligent systems and sensors.

Research takes a multi-disciplinary approach, pairing non-traditional fields to spark ‘innovative solutions’,” Dr Peter Frise, AUTO21’s programme leader and CEO tells AMS. “Our job is to encourage partnerships between these bright minds and the private and public sector to ensure that Canada’s auto industry stays at the forefront.”

As well as the joined-up thinking applied to industry and university research, Ontario has been an innovator in commercialising ground-breaking research. To accelerate the commercialisation of new technologies and materials, the province has so far provided CAD 800 million in funding to support research, commercialisation and cluster development.

One interesting aside is the philosophy of offering flexible, company-orientated terms that allow OEMs and suppliers to acquire the rights to intellectual property developed at public research centres.

Two foreign suppliers that have both seen their businesses grow in line with that of established OEMs are Autoliv and Amino Corporation, the latter a metal forming specialist. The company marked its 75th anniversary by opening its first North American facility in St Thomas.

“We invested 11 million [Canadian] dollars in our first plant, which measures over 5,000 m2 and we employ 32 workers for GM’s Oshawa and Wilmington, Delaware plants,” says President Hiroyuki Amino. The company is currently finalising plans for expansion of a technical centre and testing and prototyping of over 2,300 m2.

Sweden’s Autoliv also started a small operation in Ontario in 1999 that has rapidly grown to more than six times its original size. The company’s Tilbury plant (less than an hour’s drive to the US border) was chosen primarily for its strategic location and well-trained workforce, according to plant manager, Paul Henderson.

Having started with 100 employees, Autoliv now has a workforce of 650 and has just completed a 4,600m2 addition to its inflatable curtain side airbag facility.

Suppliers a vital part of the economy

Another supplier with a growing business, Presstran Industries in St Thomas, is a far larger operation. A subsidiary of Magna, it focuses on heavy automotive stampings and welded assemblies. General Manager Sam Barraco reveals some history: “We started in St Thomas in 1984 and now have 840 staff. This plant processes 670 tons of coiled steel a day and specialises in chassis and underbody components. Presstran supplies GM for the GMT 900 series vehicles and we also ship parts for the Chrysler Sebring and Dodge Avenger. Future projects include the Ford Flex in late 2007 and the next Mazda 6, for which we’ll start supplying components from April 2008.” Until recently, Presstran also provided pressed parts for the Jaguar S-Type, which will be replaced by the XF sedan from early 2008.

Also based in St Thomas is another Magna subsidiary, Formet Industries, a vehicle frame assembler and the world’s largest hydroforming specialist. Models it supplies include the 2008 Jeep Wrangler, 2008 Ford Expedition and the heavy duty versions of GM’s Chevy Silverado and GMC Sierra pick-ups. The company has also won a major contract to supply frames to Ford for the 2009 F-150, with production scheduled to start in April 2008.

Magna itself has 62 production sites in Canada (the majority of which are located in Ontario) as well as eight engineering and research and development centres. According to Lou Tonelli, Vice President of Investor Relations, the Aurora-based Tier 1, Magna will play an even greater role in component sourcing for what the company predicts will be a global light vehicle production total of 77.7 million units in 2011 (from 66 million in 2006).

He is cautious on the prospects for growth in North America, however.

Using data supplied by JD Power/ LMC, Magna’s forecasting for global vehicle production shows only a 1.2% increase for North America, 0.5% for Western Europe and 0.4% for Japan during the 2005 to 2011 period. By contrast, China production should average 93% growth in the same period, while India (up 71%) and South Africa (up 25%) are also expected to remain strong. The company’s subsidiaries that specialise in powertrain, body and chassis, and electrical and electronics are projected to enjoy the strongest rises in a market that is estimated to reach CAD 700 billion by 2015.

Light vehicle production set to increase

“We also see a further consolidation of the automotive supply base in the medium to long term. Many of our smaller competitors have been significantly weakened in the last few years and are now suffering from a lack of resources for their next generation programmes,” Tonelli says. The Tier 1 forecasts roughly 2,800 global suppliers by 2015, down from 5,500 in 2002 and 8,000 in 1998.

Concurring with the company’s predictions for further consolidation in the supplier chain at local level is the Automotive Parts Manufacturers’ Association (APMA). It represents producers of parts, equipment, tools, supplies and services at a national and provincial level. Founded in 1952, the APMA has more than 400 members, which accounts for a reported 90% of independent parts production in Canada.

According to President Gerry Fedchun, the association’s members accounted for CAD 28.8 billion of automotive parts manufacturing in the country last year. Though he paints a picture of a resilient supplier network, particularly in Ontario, many challenges remain. “The pressure to produce lighter parts, reduce non-renewable resource usage and improve hybrid powertrains via, for instance, lighter batteries, is relentless. OEMs continue to demand better transmissions, so we’re seeing more movement towards CVTs; reducing emissions is another priority, which means more research into better catalysts,” Fedchun tells AMS.

Beware the proliferation of models

“Vehicle makers and suppliers need flexibility to assemble more models and parts for different platforms in the same plant. With the exception of GM – which is, as we know, undergoing major restructuring – we’re expecting the major OEMs to move towards increased model lines and shorter vehicle lifecycles in the next year to two years,” he adds.

Fedchun believes the supplier industry has to get used to a new business model that will mean faster vehicle production change-overs, shorter model runs but more vehicles per platform and rapid market change demands – witness the current move to crossovers from body-on-frame SUVs throughout North America, for example.

As for the future of Ontario’s parts makers, Fedchun is optimistic. He believes Mexico is more at risk than Canada from the challenge presented by low-cost start-ups in China and India. “More goods will come from Asia, Central America and Central Europe. Some Mexican production has already moved south. The APMA members can compete in roughly 80% of vehicle parts production for long distance export and we’re ahead of China and India in many ways.

“But to be economic, auto parts have to be offline – they can’t be just-in-time. You also have to make sure they travel well so they’re difficult to damage and won’t corrode in salt air; parts also have to stack well to ensure there’s high value per container. These are the sorts of details we have to keep analysing – our fixed costs are higher than in emerging markets, so we have to find ways to cut inefficiencies but keep our quality,” Fedchun explains.

Suppliers hit by restructuring

A global supplier with an expanding local export business is Germany’s ZF-Lenksysteme. The company manufactures steering assemblies and intermediate shafts for commercial vehicles and is a subsidiary of the joint venture between ZF Friedrichshafen and Robert Bosch. “Although there are less than 100 people working in St Thomas, we have managed to grow the business steadily since we started in 2000. About 50% to 70% of our production goes to GM and Ford, but we are always looking to new customers outside North America. We need to diversify our business, especially as we are seeing a lot of restructuring, particularly in the US market,” says President and CEO Bernhard Freiermuth.

As well as the cluster of suppliers that have established themselves close to the Ford plant in St Thomas, there’s another OEM based in the south western Ontario city: Sterling Trucks, a division of Daimler. Though the only components made at the plant are fuel tanks, Sterling has nevertheless carved a profitable niche for heavy truck assembly. Both Class 6 and Class 8 trucks come down the plant’s single assembly line at the rate of 120 units a day.

The St Thomas plant builds the A-Line, L-Line, Acterra and Car Hauler models, with 26,673 trucks shipped across the world in 2006, though 83% of units produced goes to the US.

The significant drop in truck production at Sterling earlier this year saw necessary staff cuts to a workforce of 2,200. Production is however starting to recover, after the expected slow sales of the first half of 2007, following significant price rises because of new emissions laws in North America.

The pull-forward effects of late-2006 pre-buying gave Sterling a production and profitability buffer, but like other truck makers, it has had to adapt to survive. Production remains on a small scale but the plant now builds right-hand drive trucks for the Australia and New Zealand markets – a great example of the niches that Ontario-based automotive companies seem particularly adept at exploiting.

Parts manufacturing depends on carmakers

The risks for the province’s parts suppliers and vehicle makers persist, particularly from the ongoing difficulties being experienced by GM, Ford and Chrysler. With 75% of assembly output linked to the Detroit Three, about 90% of the province’s parts manufacturing depends on them for business. Japanese makers are expanding but their supply base still is not growing quickly enough to offset the attrition elsewhere.

Other factors, such as the recent rise in the value of the [Canadian] dollar to parity with the US currency and soaring raw material costs present constant challenges to the region’s parts suppliers and OEMs alike. Yet nowhere is a sense of panic visible at the many companies visited to compile this article.

Instead, there is calm and order. That more than CAD 7 billion has been invested in new projects in the past two years seems a convincing indicator that the automotive sector will remain a strong pillar for Ontario’s economy for years to come.