Bye-Bye Blue Collar

OpenCanada: Will globalization kill Canadian car manufacturing?

Stephen Blank: There will be a great deal of automobile manufacturing in North America over the coming years, partially because of our inability to remove ourselves from the automobile fix due to our suburban way of life, and partially because of our rapidly growing population.

This market is too big to be supplied by imported vehicles. The main questions are: Where will automobiles be made in North America? By whom? Who will own the critical technologies? Companies like Honda and Toyota brought their manufacturing to North America and tried very hard – in many cases successfully – to control the critical technologies. Honda, for example, controlled the motors and drive trains, which it considered its core assets. Conceivably, some of the most critical technology might be owned by the Chinese. In “green” automobiles, North Americans could be making the lower-value-added materials and assembling the cars, but one could imagine the damage done to air-freighted critical technology parts coming directly from China.

Will the Big Three – Ford, General Motors, and Chrysler – make the new generation of cars, or will General Electric and unknown companies take the lead? One can easily see a struggle between the traditional companies, including Honda and Toyota, making increasingly better hydrocarbon-driven automobiles and new companies making non-hydrocarbon cars. When looking at the supply chain, the high-tier supplier companies that make metal parts, plastics, and interiors, might adjust easily – as opposed to the original equipment manufacturers (OEMs) – to technological changes because their products are generic, not dependent on new technologies.

Over the past few years, there have been many changes to the supply chain. Mexico has succeeded Canada in auto parts production, as Canada specializes in assembly, rather than parts production. When looking at the geography of auto production, in the last 30 years there has been a movement out of southern Ontario, southern Quebec, the Michigan “rust bowl,” and Louisiana’s “auto alley,” into Monterrey, Mexico. In spite of the continued southern shift, the Canadian dollar is driven higher by commodity exports. As long as the price of oil is high, and Canadians want to sell oil, the Canadian dollar will be very high, harming Canadian manufacturing. On the other hand, as new manufacturers begin looking for locations, no place is better than southern Ontario and Michigan because of inexpensive land and the abundance of former employees. For these reasons, Detroit may be the best place to put new auto activities.

OC: Globalization leads to reduced transportation and communication costs. As global production moves to lower-cost regions, what is to say that manufacturing will continue to be profitable in Canada?

SB: We have to look at manufacturing parts, not manufacturing employment. China is creating pressure to strengthen product value. The Chinese get nowhere by continually making cheap T-shirts, of which most production is now going to Vietnam and Sri Lanka anyway. The Chinese will move as rapidly as they can to more capital-intensive and less labour-intensive activities. A lot of manufacturing will come back to North America, but it will be more automated. The cost of transportation is rising through fuel and regulatory costs. It will make less sense to move bulk commodities across the ocean, particularly if one of the answers to higher fuel costs is slow steaming, as no one will want their inventory on a ship from Asia for 12 weeks. Manufacturing will expand in North America, but it’s going to become more capital-intensive. The kind of blue-collar manufacturing job that characterized the 1950s and ’60s will not characterize the future. The automobile industry will reflect that change.

OC: If Canadian manufacturing becomes more capital-intensive, will it also become more innovative?

SB: People will have to use the newest and best manufacturing technologies. As global competition increases, and as input-costs increase and prices decrease, the challenge will be to use new technologies as much as possible. Even in commodity items, not just the “green” technologies the Chinese might excel in, but basic automobile parts, the companies that use less labour and more technology will survive. North Americans will find a resurgence of manufacturing output in our GDPs without producing the commodity blue-collar jobs. Jobs will be in technology-based, they’ll be more upmarket, but there won’t be many of them. These jobs will have high barriers for entry in terms of education and skills.

OC: Is there a role the Canadian government can play to spur innovation that generates jobs?

SB: That’s the question everyone’s asking. It’s easy to imagine innovation in capital-intensive activities; it’s harder to imagine job-producing innovation. The fast-growing sectors host minimum wage jobs – aging services, health services, and retail – jobs with little room for promotion. The younger generation will not face problems with increasing production, as older generations did, but rather problems with distributing products that are made without employing many people. We see that problem in the field of medicine: We have all the medical resources we could possibly use; the questions remain in how to distribute them in a reasonable manner and how to pay for them.

There are two steps here: The first is that, in the United States in particular, we have a huge gap between available jobs and those skilled enough to take those jobs. For example, in Michigan citizens are told there are 100,000 jobs available, though the unemployment rate was at 11 per cent in September 2011. It seems conceivable that in the next decade, the government could take on the role of helping people acquire the necessary skills – not just verbal and mathematical, but also social. Nonetheless, the vast majority of jobs that are becoming available now are low-quality, low-value, and low-skill. The next question is, what happens when all those jobs are automated too?

OC: Richard Florida, University of Toronto professor and head of the Martin Prosperity Institute at the Rotman School of Management, has suggested that if Canada approaches it properly, innovation can be structured to create more jobs. Is that a fallacy?

SB: No, it’s a midpoint. Innovation will create more high-skill jobs, but it won’t create enough to resemble the number of jobs that were previously available in the unionized blue-collar labour force. Now the barriers to entry are much higher and the number of jobs is relatively small. Future jobs will be in retail and tending to an aging population – and those will be minimum-wage jobs.

OC: Does this problem affect manufacturing worldwide? In other developed economies, Germany for example, the workers’ wages in manufacturing are increasing.

SB: Germany is indeed the prime example. But not every country can live by exporting. The Germans have put a huge amount of energy into manufacturing goods to niche markets, but not everyone can do that. The Germans have been very good at matching technical education with jobs, however, Germans have avoided turnover because employees are skilful, so their manufacturing workforce is much older than in North America, and many younger Germans are out of work, leading to higher levels of youth unemployment. There are also racial barriers in Germany, which affect immigrant employment. The German population is declining, so its employment rate appears to be better than it is. Yes, one can try to be more like Germany, but the number of jobs is still limited, and not everyone can adopt Germany’s model. At various times Canadians have owned significant pieces of niche markets – Research in Motion was one of these companies and before that was the Canada Deuterium Uranium Reactor. But, the Canadian economy is far more integrated structurally with the North American economy than Germany’s economy is with Europe’s. So much of Canadian manufacturing is completely integrated into a North American system.

This interview is part of OpenCanada’s ongoing series, Will Globalization Kill Canadian Manufacturing?

Photo Courtesy the Art Gallery of Ontario’s Exhibit, “Songs of the Future: Canadian Industrial Photographs, 1958 to Today“