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UNCLAS SECTION 01 OF 02 TORONTO 000457 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ETRD ELAB PGOV SENV CA
SUBJECT: Strong Loonie - Cross-border Shopping Hurts Canadian Auto 
Producers 
 
Ref: (A) Toronto 450 (B) Toronto 414 (C) Toronto 358 (D) Toronto 53 
 
(E) Toronto 11 
 
Sensitive But Unclassified - Please Protect Accordingly. 
 
¶1. (SBU) Summary:  The strong Canadian dollar and weaker U.S. 
consumer demand are challenging Canadian-based auto assemblers' 
efforts to remain globally competitive.  Sales to Canadians of new 
and used autos from the U.S. are up by 21% to 136,666, setting a new 
record for the first 10 months of the year.  The auto parts sector 
is asking the Ontario provincial and Canadian federal governments 
for assistance to stay afloat.  Ford Canada has condemned the 
pending Canadian -- South Korean Free Trade Agreement.  The auto 
sector employs more than 130,000 people in Ontario, and represents a 
large portion of the manufacturing sector (20% of provincial GDP). 
We believe provincial officials will continue their efforts to help 
auto companies adapt to the challenging economic reality of a strong 
Canadian dollar and weaker U.S. consumer demand.  Provincial efforts 
to persuade the Conservative federal government to help the sector 
may be less immediately successful.  End Summary. 
 
------------------------------------------- 
Canadians Importing More Cars from the U.S. 
------------------------------------------- 
 
¶2. (SBU) The strong Canadian dollar and resulting lower auto sticker 
price has prompted Canadians to import more cars from the U.S. and 
buy fewer cars in Canada.  Vehicle sales in Canada dropped 3% in 
September to 132,165 vehicles from 136,057 in the same period last 
year, only to show a slight recovery in October (ref (A)).  The Bank 
of Montreal recently estimated that the price of Canadian goods is 
roughly 25% higher than in the U.S. 
 
¶3. (SBU) Imports of new and used autos from the U.S. are up a record 
21% to 136,666 cars for the first 10 months of the year compared to 
the same period last year, according to the federal Registrar of 
Imported Vehicles.  In October, a month after the Canadian dollar 
surpassed the U.S. dollar for the first time in more than 30 years, 
auto imports doubled over the same period last year.  Ontario and 
B.C. accounted for two thirds of overall imports this year, which is 
proportionately higher than in past years.  The industry has 
responded to the surge in imports by introducing incentives to 
reduce new car prices in Canada by roughly 5%. 
 
--------------------------------------------- --- 
Auto Parts Sector Asking for Government Bail Out 
--------------------------------------------- --- 
 
¶4. (SBU) Canada's auto parts suppliers, led by Gerry Fedchun, 
President of the Canadian Automotive Parts Manufacturers' 
Association (APMA), have asked the Canadian federal and Ontario 
provincial governments for C$400 million in "emergency" financing to 
help survive the surge in the Canadian dollar.  Canadian auto parts 
makers employ about 90,000 people, primarily in Ontario and Quebec, 
and manufacture more than C$30 billion worth of goods and services 
annually. 
 
¶5. (SBU) Many parts manufacturers have already been forced to cut 
jobs or close plants because of declining production at their 
largest customers, the Detroit Three -- GM, Ford, and Chrysler.  The 
auto parts makers have been squeezed by production cuts and 
shrinking margins as the Detroit Three demand price cuts from their 
suppliers while commodity input prices, such as steel and plastic 
have been increasing.  The APMA says it would direct the C$400 
million in loans for new equipment purchases to improve the 
productivity of smaller member companies.  Larger players like 
Aurora, Ontario-based Magna and Guelph, Ontario-based Linamar have 
capitalized on the rising Canadian dollar (from US$0.85 to more than 
US$1.00 in seven months) to purchase and install new equipment to 
boost productivity.  Smaller companies lacked the margin to take 
advantage of the stronger Canadian dollar. 
 
--------------------------------------- 
Ford Condemns Proposed Canada-Korea FTA 
--------------------------------------- 
 
¶6. (SBU) On November 22 at the Economic Club of Toronto, Ford Canada 
President Bill Osborne joined other Canadian auto manufacturers and 
the Canadian Auto Workers union in criticizing a pending free trade 
agreement between Canada and South Korea.  Osborne said a 
Canada-South Korea free trade agreement that does not include more 
open access to the Korean auto market would make it difficult for 
Ford to justify making more investments in Canada.  He warned that, 
 
TORONTO 00000457  002 OF 002 
 
 
if Canadian negotiators emulate the proposed U.S.-South Korea deal, 
which would reportedly end the U.S. tariff on small Korean cars, it 
could result in "serious economic harm" to Canadian auto 
manufacturers.  Because Canada's market is more heavily skewed to 
compact cars than the U.S. market, he argued, Canadian auto 
manufacturers would be harder hit by a trade agreement that does not 
effectively open Korean markets to North American autos. 
 
¶7. (SBU) Comment:  On November 27 Ontario Premier Dalton McGuinty 
reportedly said the federal government should sit down with 
provincial officials and auto industry leaders to decide how to help 
the struggling sector.  Citing federal funding of infrastructure 
projects, work to harmonize fuel efficiency standards with the U.S., 
elimination of the federal capital tax, accelerated capital cost 
allowances for manufacturers, and a federal corporate tax rate cut, 
federal officials reacted coolly to the suggested talks.  Ontario 
claims its C$500 million five-year Automotive Investment strategy, 
announced in April 2004, has so far resulted in C$7 billion of net 
new investment and creation of 7,000 new jobs.  Because the auto 
sector employs more than 130,000 people in Ontario, and represents a 
large portion of the manufacturing sector (20% of provincial GDP), 
we believe the provincial government will actively intervene to help 
the auto sector in the coming months as small to medium-sized 
companies continue their efforts to stay afloat with small or 
non-existent profit margins.  Provincial officials are also likely 
to continue seeking assistance from the federal government, though 
the Conservative federal government is ideologically inclined toward 
broadly-based tax relief, rather than subsidies, and is likely to 
delay any such measures until the announcement of its FY08-09 budget 
(February 2008 at the earliest).  End Comment. 
 
NAY