Artificial stimulation: The pros and cons for Canada’s manufacturing industry

In recent years, our governments have invested billions of dollars into stimulation projects and bailout packages designed to keep our economies buoyant and our workforces employed. A strong argument is made by some that this spending spree kept us from going into a deeper recession, while others argue that it has gotten in the way of a full economic recovery.

I hear the latter argument regularly, particularly in the London region, where one large factory has recently been shut down, leaving 450 people out of work. The news shows angry people demanding that the government get involved.

But what role, if any, should the government play?

In Ontario, where the government was quite involved with bailout packages and stimulus funding, one side will argue that it helped save many jobs by providing funding and loans to keep the big companies here and their assembly factories operating. But the other side will argue that the government’s deal only had a short-term benefit, and that it further eroded the industry’s competitiveness, hurting it significantly in the long term.

In 2007, the “all in” cost of a unionized employee in an automotive assembly plant was about $77 per hour – roughly the same in Canada as in the U.S. (according to Wikipedia). Although Canadian workers have made some concessions, the “all in” costs of employment in Canada has not fallen since then, while in the same period they have fallen significantly in the U.S. In 2009, according to a report published in the Globe and Mail, the “all in” rate for assembly workers at Ford facilities in the U.S. was $52 an hour, approximately $16 an hour less than the “all in” cost in Canadian factories. When Ford chose to close its St. Thomas facilities, they did so ignoring financial incentives that were offered at the last minute by the provincial government and concessions offered by the union. They appeared to be firm in their resolve to make solid business decisions for the long term, based only on what they believed were solid business realities. Stimulation packages and last minute concessions are not solid business realities for the long term.

Governments have short shelf lives. Their expiry date is the next election date, which can be four years away, or just around the corner. Their objective, in any such intervention, is short term. They want to be seen as making a positive impact before the next election – something that will help them win. In the last few provincial elections, organized labour has been very supportive of the reigning Ontario Liberal party, who in turn have been very generous in their efforts to encourage the automotive companies to keep their factories in Ontario from closing. There’s absolutely nothing wrong with either of their intentions. Everybody wants these factories to continue to operate and employ people at decent wages; not just the governments and the workers, but everybody interested in the social and economic well being of a community wants that, too. The difference between these stakeholders is not their ultimate objective; it’s their reason for the objective, and the route they have to take to achieve it.

The government’s objective is to keep the plant open and operating for another four years. A big plant closure will have a significant negative impact, and they don’t want that happening on their watch. The workers’ objective is to keep the plant there and operating, period, because they want to protect everything they have personally worked hard for over many years. And even the company’s objective is to keep the plant operating profitably, because as long as it’s operating profitably, it’s generating what it was put there for. Aligning the singular objective of keeping a plant open is not difficult; it’s the “how” and the “why” that cause the problems and the differences.

It’s easy to criticize companies when they close plants, but I find it ironic that one argument often brought up against them is that they are short-sighted, or that they are making decisions just for the bottom line. The opposite is actually true. When they decide to build a new facility, they invest years in planning and hundreds of millions of dollars on the belief and hope that they will be profitable and get a return on their investment. They make these decisions with far more than a four-year view. And in downturns, when they decide which ones will stay open and which ones will close, they do that with more than a short-term perspective as well.

The sustainability of our entire automotive manufacturing industry depends on the two primary stakeholders (the companies and their workforce) aligning their objectives on the right set of goals, and then sitting on the same side of the table to achieve them. When the government rushes to the table with a chequebook in its back pocket (that usually comes with a laundry list of conditions created by people that have never built or run a company), it’s not actually helping; it’s just getting in the way.

Ontario has seen its fair share of manufacturing job losses lately, but demanding that our governments get involved is not the answer. They can help create an economic environment conducive to investment, or add their support to a plan that has been developed by the two primary stakeholders, but the bottom line is that it has to make sense for a company to want to operate a plant in Ontario. Short-term incentives are always tempting, but it’s not the cure for what ails our industry.

This column originally appeared in the March/April 2012 issue of Manufacturing AUTOMATION.