State of the Automotive Parts Manufacturing Market in Canada - Research Proposal Example

of the automotive parts manufacturing market in Canada al Affiliation) The suppliers of automotiveparts based in Ontario, Canada, are greatly affected by high currency, and loss of the market share to low cost countries. The exports of durable manufactured goods are dropping as the imports rise, but the GDP of Canada is stagnant (”Canada Auto Industry”, n.d.). The inverse relationship, which is natural, between the currency and the rate of imports, which is increasing, does not hold because of the presence of an economic condition known as the Dutch disease. According to the economic theory, currency should decrease when there is availability of more of it to others out of the country, which will have to sell it so as to pay the producers of the foreign goods (“Canada”, n.d.). Therefore, the high currency will go on hampering the manufacturers’ ability of exporting products for at least the period that the mineral and energy commodity prices remain high. As a proof to the existence of the Dutch disease, the imports have been steadily increasing while there has been an appreciation on the currency. Therefore, both the long term and short-term perspectives must be addressed for the manufacturers based in Ontario to survive and grow. This paper focuses on the state of the automotive parts manufacturing market in Ontario – Canada. This paper suggests that given the role which manufacturing, in general and automotive parts, in particular hold in the economy of Canada, it cannot be abandoned out of existence because the replacement jobs that are created in the service sector cannot offset the job losses to off shoring, speaking in terms of GDP growth (“Canada”, n.d.). This paper also offers the short term and long-term suggestions. The short term suggestion is shifting of the supply capacity from the big 3 American based OEMs, who have been having their fortune and market share shrinking steadily, to the new domestic OEMs, given that their better understanding of the market places and the their continued success in the market place demands (green vehicles, quality, etc.) The long-term suggestion involves taking advantage of the strengths of Ontario automotive parts manufacturing. The advantages which include the loyal and highly educated labor force, lower costs (than US), generous R&D programs sponsored by the government, among others, to revolutionize the transport industry through the deployment and development of improved or new technology in the field of electrics, hybrids and other technologies which are environmental friendly. Key words: Original Equipment Manufacturer (OEM), Automotive parts, Big three (GM, Ford and Daimler Chrysler), Gross Domestic Products (GDP) Introduction There was a strong competition which grew on the North American manufacturers’ shore in form of automobiles imported from Japan in the 1970s. As these vehicles were niche products, moreover they had a small market place penetration, it symbolized ‘management frog conundrum’ which was typical (Kawamura, 2011). This is the application of a progressively higher temperature at a moderate pace, which results to the frog’s failure to recognize the threat. While Japanese initial foothold in Canada and the US was gained using imports, thereby resulting in a correspondence reduction in production and sales by the local OEMs, Their OEMs quickly moved to North America to establish a local manufacturing footprint. Since there was a wide spread of manufacturing and design facilities in Canada and US, Japanese have turned out to be local OEM like the original big 3. Another significant outsourcing period of Canada and US jobs began in the 1990s when the service providers and the manufacturers discovered the growing potential that China and India had brought to the table. Technology advances enabled the new migration as it opened the potentially gigantic markets. However, the increase in the importation of those manufactured goods and services that have a decreasing local production, suggest the movement of jobs to the markets overseas was not with an intention of capturing the local market but for the re-importation into Canada and US (Kawamura, 2011). The future of manufacturing industries in many industrial countries are greatly influenced by the globalization trends. The manufacturing sector in Ontario for the automotive parts will have to contend with the stiff competition from the countries that are newly industrialized, the runaway currency, and the changing trends in the international trend (Fantasy, Mukerji & Kumar, 2012). Therefore, the effect brought about by reduced manufacturing base is that the fields related, like the R&D and might be offshored. With the decreasing of the Canadian direct manufacturing employment at an alarming rate, and with the halo effect of manufacturing in the economy, then the standards of living are at stake Background Ontario is the most populated province in Canada with more than 12.5 million people who are from 170 different ethnic background and speak over 100 different languages. Besides being the manufacturing powerhouse, it is also the financial powerhouse of Canada. It produces more than 42% of the National GDP, being primarily driven by the financial sector, and closely followed by the manufacturing sector (“Statistics and Analysis”, n.d.). The responsibility of most of manufacturing outputs of the durable goods in the province rests on the transportation component. It produces more than a sixth of the market vehicles in North America, with close to 500 component supplier firm and 14 assembly parts (“Ontarios Auto Industry”, n.d.). Although the largest and oldest presences in the province are by the American Big 3, the new domestics, which include Honda, Suzuki, and Toyota are increasing the number of vehicles, which are assigned to the Ontario assembly plants constantly (“Ontarios Auto Industry”, n.d.). With the placement of a renewed emphasis by the government on protecting manufacturing jobs, there is an advantage of a scientific research and experimental development, which is administered by Canada Revenue Agency. This will benefit any private corporation controlled by a Canadian, which, of the first 2 million dollars qualified expenditure for SR&ED done in Canada, they will be entitled to receive up to 35% investment tax credit, and 20% thereafter on any excess amount. Besides this, there is enhanced post-secondary education which will ensure the creation of 135,000 new student spaces at universities and colleges through the investment of 2.6 billion dollars. Moreover, the government has also ensured a re-focused electricity system, for the regaining the advantage of electricity availability which is inexpensive. There is also the provincial apprenticeship program, lower manufacturing cost of the automotive parts and loyalty and work ethic (Riddell, 2013). However, the factors which might have a negative impact include very high exchange rates relative to the US market, high competitive pressure from low wage countries, over dependence on the US big 3 and increased energy costs (Riddell, 2013). Literature Review The economy of Canada demonstrates all the symptoms of the Dutch Disease. The Dutch disease is a theoretical model of the economic phenomenon which was developed in 1982 by J.P. Neary and W. M. Corden. Their model is made up of two components which include the non-traded goods sector, and the traded sector which provides for the underperforming sector which is the manufacturing, and the booming sector which is the gold mine. The symptoms to the Dutch disease include the increases in the real exchange rate, the increases in the natural resources revenue and the lagging tradable sector, which is, manufacturing (“Dutch disease”, n.d.). The definition of the economic version of the Dutch disease is the de-industrialization of a nation because of a sudden wealth increase due to external inflows of capital. The riches which are newfound make the value added goods and services of a country less competitive on the international market which results to reduced exports and surge in the current cheaper imports. The inflows are due to either the world market’s drastic appreciation of some commodity prices, or the discovery of incredible natural resources, or both (“Dutch disease”, n.d.). An original scenario of the Dutch disease development process has the variations in the steps, which include: the newfound wealth. The newfound wealth is caused by the significant increase in certain resources’ market value or the recent significant discoveries of resources, which are new. The relatively abrupt and significant appreciation of the local currency in relation to other free floating currencies and significant movement of resources in the new found booming sector which results to an increased cost across the industrial base; as a result of the above, locally produced goods and services become too expensive to consume locally or to export, which results to a drastic reduction in demand; drastic reduction on the value added export while increasing the imports rapidly; manufacturers close, thereby causing unemployment amongst the human resources that are not in possession or can acquire skills which are necessary for the new found booming sector; when the newfound booming sector is emptied out (“Dutch disease”, n.d.). Looking at the competitive environment, the efforts of globalization, which were organized in the name of free trade, and increase of prosperity, have affected the Canadian manufacturing industries significantly (ElMaraghy, 2012). For example, the trend between imports and exports is negative one. The higher currency favors the imports at the expense of the exports. Although the imports have increased a great deal and they continue to increase, the expected GDP increment does not reflect (“Canada”, n.d.). The GDP of Canada is not increased despite the high employment. While the automotive suppliers based in Canada have a competitive cost advantage over their US counterparts, they cannot be able to compete on pricing alone with the manufacturers from the low cost countries. The big three on the other hand have increased their demand constantly for cost reductions and they have shown the interest to shop the world so that they can get parts and components at the lowest costs. Therefore, the automotive parts manufacturers in Ontario cannot compete on pricing alone. The long term viability of this sector of the economy is based on the focus to shift the customer mix from the predominantly American OEMs to the Japanese OEMs and their market share which increases continuously, effective immediately, and concurrently developing the necessary technologies for the evolving market segments and to hold the higher promise of the future (Mclarney, 2003). Given the current trends in energy prices for example, the hybrid and electrical vehicles technology might be at the fore from of the future market (Gera, Gu & Lin, 2001). For the success of making the switch to supplying the Japanese OEMs primarily, the manufacturers of automotive parts in Ontario shall be required to prove their efficiency in management strategies and processes which have given the manufacturers in Japan a tremendous edge in the market place (Rutherford & Holmes, 2007). Conclusion The automotive sector, which represents 62% to 71% of the production of durable goods in Ontario, is a large and very important economic driver, which significantly employs a segment of the middleclass either through direct or indirect employment (“Statistics and Analysis”, n.d.). Significantly, there is an increasing availability of lower cost products from the new industrialized countries. Moreover, most automotive suppliers based in Ontario are supplying to the big three, whose market share is decreasing steadily. Because of the share problems that the big three have faced, they sought relief in their safe heaven, of supplier price reductions and givebacks. They have now turned to triple their purchases of parts from low cost countries as a survival method. This paper focuses on two alternatives which will help to stabilize manufacturers of transportation equipment in Ontario. The short term proposal which focuses on shifting of the available capacity from the big tree to new domestics, although a potential threat exists, which is the growing and significance of the Japanese OEMs partners. The system favors commitment to their business partners at the expense of local suppliers. This is also an opportunity for research awaiting solution. The long term proposal involves the development of new technologies and products which will resonate with a market place, thereby turning towards products which are more energy efficient. This research will help revolutionize the market of the automotive industry in Canada, by improving the market share, and also impacting the general economy. Reference Canada. (n.d.). Economy: Population, GDP, Inflation, Business, Trade, FDI, Corruption. Retrieved October 5, 2014, from http://www.heritage.org/index/country/canada Canada Auto Industry. (n.d.). Canada Auto Industry. Retrieved October 6, 2014, from http://www.huffingtonpost.ca/news/canada-auto-industry/ Dutch disease. (n.d.). - Economics. Retrieved October 6, 2014, from http://moneyterms.co.uk/dutch-disease/ ElMaraghy, H. A. (2012). Enabling manufacturing competitiveness and economic sustainability proceedings of the 4th International Conference on Changeable, Agile, Reconfigurable and Virtual production (CARV2011), Montreal, Canada, 2-5 October 2011. Heidelberg: Springer-Verlag Berlin Heidelberg. Fantazy, K. A., Mukerji, B., & Kumar, R. (2012). Relationship between supply chain strategies, logistics flexibility and supply chain performance: evidence from Canadian manufacturing industry.International Journal of Logistics Systems and Management, 12(4), 433. Gera, S., Gu, W., & Lin, Z. (2001). Technology and the demand for skills in Canada: an industry-level analysis. Canadian Journal of Economics/Revue Canadienne d`Economique, 34(1), 132-148. Kawamura, T. (2011). Hybrid factories in the United States: the Japanese-style management and production system under the global economy. New York: Oxford University Press. Mclarney, C. (2003). A driving force: an analysis of strategic planning in the Canadian automotive industry. Business Process Management Journal, 9(4), 421-439. Ontarios Auto Industry. (n.d.). Ontarios Auto Industry. Retrieved October 6, 2014, from http://www.investinontario.com/en/Pages/OS_automotive.aspx Riddell, C. (2013). Labor Law and Reaching a First Collective Agreement: Evidence from a Quasi-Experimental Set of Reforms in Ontario. Industrial Relations: A Journal of Economy and Society, 52(3), 702-736. Rutherford, T. D., & Holmes, J. (2007). "We Simply Have to Do that Stuff for our Survival": Labour, Firm Innovation and Cluster Governance in the Canadian Automotive Parts Industry. Antipode,39(1), 194-221. Statistics and Analysis. (n.d.). Government of Canada, Industry Canada, Office of the Deputy Minister, Industry Sector. Retrieved October 6, 2014, from https://www.ic.gc.ca/eic/site/auto-auto.nsf/eng/h_am01302.html Read More