The Trans-Pacific Partnership trade pact has not been universally applauded by Canadian auto-parts makers.Getty Images/iStockphoto
They're the tiny details: the bits of netting in the trunk, fitted floor mats, added strips of leather along the front instrument panel.
Even Brian Robbins, president of the Canadian auto parts manufacturer Exco Technologies, acknowledged that they "don't seem very high tech."
But for Exco, these are the stuff of international trade pacts.
The negotiated, but as-yet unsigned Trans-Pacific Partnership between a host of Pacific countries, including Canada, has not been universally applauded by Canadian auto-parts makers.
Despite the lower loonie, many worry that smaller Canadian parts makers, particularly those more focused on the North American market, could face lower-cost competition from Pacific countries.
Yet, Exco, which also has a high-end aluminum tooling business, as well as its auto-trim manufacturing, expects to fare much better, with its global network of low-cost, parts-making plants, Mr. Robbins said.
From South America to Bulgaria, Morocco to Mexico, Exco has a number of plants tapping cheaper labour markets. Yet it still has a floor-mat plant in Halifax, which continues to do well. (Auto interior trim has proven to have strong appeal, especially among female car buyers, after the experiments in bare-bones interiors by some auto makers a decade ago, Mr. Robbins added.) And the company still has three high-end aluminum tooling factories in Ontario, all near each other in Markham, Newmarket and Uxbridge.
But with or without a new Pacific trade deal, Mr. Robbins said it all comes down to producing at the lowest cost. "Inevitably there will be winners and losers. And those losers long-term are going to be losers anyway, because they are not competitive on an international basis.
"So, I don't see it [the TPP] as a threat. I see it as a huge opportunity for us. We're not making car parts in downtown Toronto or in Detroit. All of our car parts are produced in places like Mexico, Morocco, Bulgaria," lowering transportation costs because they are closer to the foreign car makers buying Exco goods, Mr. Robbins said.
Bigger parts makers, such as Exco, "aren't the same as the smaller ones, is the short answer," said David Tyerman, an analyst at Canaccord Genuity Corp. in Toronto. "They're much bigger. They have the resources to play in all the countries that they want to play in and take advantage of things like TPP."
Auto parts is also an industry dictated by just-in-time manufacturing. Auto makers do not want a lot of parts warehoused, thereby adding to costs. It is another reason why parts makers have moved closer to auto makers' plants.
But if the TPP is ratified by Canada, the question is whether Exco and major Canadian parts companies, such as Magna International Inc. and Linamar Corp., will be hit by new competition under freer trade, such as those making aluminum drive trains, which are increasingly in demand because of the need for lighter vehicles.
The demand for lighter vehicles is not only coming from consumer demand, but legislated fuel-efficiency requirements, notably U.S. Corporate Average Fuel Economy regulations, which call for cars and light trucks to run on an average of 54.5 miles per gallon. Current requirements are about 34.
"So, that's all about power trains, performance and light-weighting, which is all about aluminum and magnesium. The demand is huge, and it's legislated," Mr. Robbins said. "It's got nothing to do with how many cars they produce. If the sales dropped from 18 million to 12 million [cars sold], they'd still have to re-engineer the automobile. And that's all about re-engineering the tooling."
But regardless of lighter-vehicle regulations, he reiterated that he expects Exco to remain competitive because of its lower costs. In Mexico, labour is $2.50 an hour, he said. "If you're not the global, low-cost producer, you're always going to be threatened by these issues."
One potential obstacle to this strategy is sharp changes in foreign exchange. The lower Canadian dollar is, of course, good for some of the high-end tooling it still manufactures and exports from Canada, but bad for buying in U.S. dollars the high-end technology that's needed or simply raw materials globally, also in U.S. dollars.
"The rapid movements in currencies these days are just a nightmare. Keeping your pricing relative to the marketplace is a challenge, because we're getting currency swings of 20 and 30 per cent," Mr. Robbins said.
The cost of new technology can particularly be a problem during currency swings, diminishing new tech investment.
"You have to take a total look at the impact of a currency," said Pete Mateja, co-director of the Office of Automotive and Vehicle Research at the University of Windsor's Odette School of Business.
"When the Canadian dollar was above the U.S. dollar, there was a lot more incentive for Canadian companies to invest in new technology and new equipment, particularly when they were buying it from the United States or from Europe.
"But now that the dollar has come down, it can hide a lot of inefficiencies. The cost of keeping the latest technology, it's gone up, because you're paying 20, 30 per cent more than you were paying two and a half years ago," Mr. Mateja said.
With currency swings and the possibility of heightened competition, auto-parts makers will need to continually juggle their global strategy, regardless of the effect of new trade pacts.