Look beyond hourly labor rates, Tanguay says, and consider total costs
Five months ago, Ray Tanguay took on the challenge of helping Canada attract more investment and production for its struggling auto sector.
Now the retired Toyota executive-turned-auto czar is starting to approach manufacturers with a provocative message: Making cars and parts up north is much more competitive than you think.
“There’s perception, and there’s reality,” Tanguay, 66, told Automotive News. “And the reality is that when you take a holistic approach and look at all the costs, all the indirect costs, we are not that far off” from plants in the Southern U.S. and Mexico.
Tanguay, who retired this year after 24 years with Toyota, readily acknowledged that hourly labor rates in Canada are significantly higher than in Mexico and in the Southern U.S. states — including Tennessee, South Carolina and Alabama — that have been drawing new auto plants over the past several years.
But he argued that if manufacturers focus on total costs, they’ll see a much tighter race. In Canada, he says, health care is less expensive for employers and equals about a $3-an-hour advantage over U.S. costs. Energy is half as expensive as in Mexico, and corporate taxes are lower than in both the U.S. and Mexico.
“You can’t just look at a micro-detail like the hourly rate,” he said.
Canada’s proximity to major U.S. population centers cuts transportation costs, and in-transit security isn’t an issue, Tanguay noted. In Mexico, trains hauling cars have to be guarded, covered or both to prevent them from being stripped of components in transit.
Significant savings also come from the high quality of Canadian production, which cuts recall and repair costs and helps boost a manufacturer’s pricing power, Tanguay said. The most recent J.D. Power Initial Quality Study recognized 29 Canada-made vehicles among top performers — and three that are made in Mexico, he said.
“If a car has longer dependability, that has value,” Tanguay said.
Ron Harbour, a partner at consulting firm Oliver Wyman and publisher of the Harbour Report, a scorecard of auto manufacturing efficiency, said Tanguay raises some valid points. “There’s no doubt Canadian plants have done really well in quality surveys,” he said, adding that “true productivity comes from quality improvements.”
Still, Harbour thinks it will be tough to persuade manufacturers to build new assembly plants in Canada.
It’s a similar outlook for suppliers, said Bob Young, vice president of purchasing for Toyota’s North America manufacturing operations.
Suppliers that already have production north of the border are very competitive in supplying Canadian auto plants, Young said. “But it’s not economical for them to set up [new plants] in Canada today,” he said.
Tanguay said he’s aware of the size of his challenge.
He’s hopeful the new Labour Party government in Canada will be more generous and quicker than the previous government to offer financial incentives and tax breaks to attract and keep manufacturers in the country.
Canada was once the world’s fourth-largest auto-producing nation, but over the past 10 years, automakers have closed and downsized plants because of high costs, unfavorable exchange rates and uncompetitive incentive packages from the government.
Meanwhile, more than two dozen plants have sprouted up across the U.S. South and Mexico.
Canada got a win when Honda chose its Alliston, Ontario, plant to be the “global lead plant” for its next-generation Civic, meaning that it will launch the vehicle and will serve as a model for 10 other Honda plants producing Civics around the world.
At the same time, the future of General Motors’ plant in Oshawa, Ontario, after several downsizing measures, remains uncertain. Fiat Chrysler Automobiles overhauled its Windsor minivan plant on its own after failing to secure financial help from the Ontario and national governments. But its Brampton, Ontario, large-car plant needs a similar upgrade, and the company may not invest there without incentives.
The first step in Tanguay’s effort is to dispel the idea that “costs in Canada are way out of whack.” To that end, he recently traveled to Japan for meetings during the Tokyo Motor Show and has visited suppliers, policymakers and executives around the U.S., too.
Tanguay is working on a highly detailed, longer-term strategy for Canada that he expects to present in the spring. “You have to understand the current conditions,” he said, “what is the competition and what are the pros and cons of other locations.”
Auto czar Ray Tanguay acknowledges the higher wages in Canada but is urging automakers to consider these cost advantages over Mexico or the Southern U.S.
• Employer health care
• Transportation to U.S. markets
• In-transit security
• Corporate taxes
• Production quality
You can reach Neal E. Boudette at NBoudette@crain.com.