Why Mexicans Don't Drink Molson. Andrea Mandel-Campbell

start of an unstoppable shift in the global automotive sector,”³³ China’s Geely, which already ships cars to thirty-four countries in the Middle East, Africa and South America, will begin exporting hundreds of thousands of cheap compact cars to the United States sometime between 2009 and 2011. For Canada, which ships 92 per cent of its domestically manufactured cars and parts to the United States, the implications are huge.

      “China is a time bomb,” says Jim Stanford, economist with the Canadian Auto Workers union. “There is no way we will be able to compete once they get the infrastructure. They will be able to export vehicles and sell them for half the price.”

      While Chinese car manufacturers, still grappling with design and quality issues, have been forced to temper their export ambitions, not so for the auto parts industry. China is looking to become the world’s low-cost parts producer, with a stated goal of exporting us$100 billion in parts by 2010, up from us$5.6 billion in 2004.³⁴ The country’s largest manufacturer, the privately owned Wanxiang Group, which counts GM and Ford among its customers, has built up an international supply chain with stakes in more than one hundred companies, including dozens of overseas parts makers in the United States, United Kingdom, Germany and even Canada. At the same time, Germany’s Volkswagen announced plans in 2006 to increase its exports of Chinese-made car parts from just us$100 million to us$1 billion, while Ford announced that it was set to double the value of components it sourced from China to us$3 billion in 2006. “There will be a permanent shift of certain component manufactures,” says Felix Pilorusso, a Toronto-based auto industry consultant. “It’s already happening.”

      The inevitable tug towards lower-cost areas of production is even uprooting the natural-resource industries, supplanting Canadian salmon with Chilean sea bass and softwood lumber with Latvian spruce and Brazilian loblolly pine. Massive new pulp mills in South America, Eastern Europe and China are not only tapping into fast-growth forests and low-cost logging but are fundamentally changing traditional trading patterns, says Clark Binkley, a forestry industry expert and former dean of the University of British Columbia’s Faculty of Forestry.

      Until very recently the forestry industry was segregated into three regional trading blocs, which flowed north–south. Canada supplied the United States, Scandinavia sold to its more southerly European neighbours and Russia exported to Japan and Korea. But as production ramps up, particularly in the southern hemisphere, new “variegated” trade patterns are developing, says Binkley. New Zealand is now supplying the United States with wood, and Brazil is selling pulp to Europe and the United States. “Global trade is emerging,” he says, “and there’s a lot more opportunity for somebody else to be the lowest-cost producer.”

      Canadian softwood lumber producers learned that lesson the hard way when the U.S. government, under pressure from its domestic industry, slapped import quotas on Canadian wood. Both the Americans and the Canadians assumed the quota would constrict supply, pushing prices up to the benefit of both sides, says Binkley. Instead, it opened up a window of opportunity for a slew of imports from Brazil to Estonia. The newcomers managed to grab a chunk of the market, keeping prices down. And even though the original quota system is gone, the newcomers are not. European imports, virtually non-existent a decade earlier, reached record highs in 2005, accounting for nearly 5 per cent of U.S. sales,³⁵ while Canada’s share of the U.S. forest products market dropped from 69 per cent in 2000 to 62 per cent in 2004.

      “They’ve gotten in and they aren’t going to go away,” says Binkley. “We don’t have any exclusive access to the U.S. Wherever the wood is the cheapest, it’s going to come in. And it’s gotten more competitive.”

      In fact, Canadian industry is slowly waking up to the fact that what it thought was a lifetime warranty under NAFTA actually has an expiry date. Among the hardest hit has been the Canadian furniture sector, which had successfully transformed itself from a sluggish, domestically oriented industry before free trade into the number one exporter to the United States. After out-competing American furniture makers, its hard-won but short-lived leadership was quickly usurped by China, which now commands 50 per cent of the U.S. wood bedroom furniture sector, up from just 4.8 per cent in 1996.

      Until now, Canadians have comforted themselves with the idea that somehow the Canadian and Chinese economies were “complementary”: China was poor in natural resources, which Canada could happily supply. But while that assumption is true, it leaves out a crucial part of the equation, not to mention entire swaths of the economy. Not only are the Chinese manufacturing increasingly sophisticated products, from bicycles and barbecues to handsets and pharmaceuticals, that compete directly with Canadian goods, but foreign multinationals, Americans in particular, are moving to China to manufacture. “The U.S. companies are going to China big time, and we need to be there to support our U.S. clients, whether it’s in the auto industry, banking, whatever. We need to be there because we are part of the North American fabric,” explains Neil Tate, a special adviser to the Bank of Montreal on Asia. “We need to do that to protect ourselves, to survive, to increase our business not only in China, but in the U.S. and to increase our two-way trade between Canada and the U.S.”

      Yet we don’t seem to be doing it. Canadian companies, large and small, have been slow to sign up for the new game in town: global supply chains. Canadians have lagged behind their peers in offshoring and outsourcing, thus betraying a reluctance to tap into lower-cost markets as sources of cheap components or manufacturing bases. While the world’s stock of foreign direct investment expanded a hundredfold between 1990 and 2002, Canada’s increased just 4.4 times³⁶ — an indication that Canadian companies are neither creating their own global supply chains nor becoming part of someone else’s.

      According to a 2004 survey conducted by Canada’s Automotive Parts Manufacturers’ Association (APMA) of its members, Asian facilities accounted for a minuscule 0.29 per cent of their production and Asian suppliers represented less than 5 per cent of inputs. Perhaps not surprisingly, 71 per cent of the respondents admitted that one or more of their major customers had threatened to switch to overseas suppliers in the previous three years.³⁷

      During apma’s 2005 annual convention in Hamilton, a GM vice-president warned that Canada’s decades-long decision to rely on a sixty-five-cent dollar instead of increasing competitiveness was costing billions in new business. GM was expected to award just $200 million in new supply contracts to Canada in 2005, down from $2 billion in 2003, he said.³⁸ “China is nipping at our heels, and standing still is a recipe for disaster,” says Gerry Fedchun, apma’s president. “A lot of companies in our industry say, ‘I’m all right Jack.’ But it’ll catch up to them, and they will not be around. If you don’t think you have to change, you’re screwed.” The proof is in the pudding: with a slew of auto parts makers in bankruptcy protection, Canada recorded a deficit in automotive trade in the second quarter of 2006 — the first since 1991.

      With some 60 per cent of all Chinese exports produced by foreign multinationals, putting the nation on track to become the world’s largest exporter by 2010, billions of dollars’ worth of foreign investment pouring into Brazilian steel capacity from China, South Korea and Europe, and more going into building India’s back office to the world, opting out of the loop is akin to the “kiss of death,” says Lorna Wright, associate professor of international business at York University’s Schulich School of Business. “The world is getting more interconnected. If you are not careful, if you cut yourself out of the chain, you’re dead.”

      Howard Balloch is willing to bet money on it. The former ambassador who now runs his own investment boutique headquartered in Beijing says it’s only a matter of time before the Chinese are producing higher-quality parts more cheaply than they can be made in Canada. And those parts won’t just be put into the cars coming off assembly lines in Shanghai — they’ll be in the vehicles rolling out of Detroit and Oshawa.

      “The auto parts companies that come to China establish themselves early, bring technology and, because they have a head start, end up owning the Chinese production facilities — they win,” says Balloch. “Otherwise Chinese companies are going back to Canada and buying up what’s left of our industry, and that’s as inexorable as the tides.”

       THE ANTI-BRANDERS