The commoditisation of automotive assembly: Canada as a cautionary tale

Abstract

For generations, automotive manufacturing has made an outsized contribution to the Canadian economy. The industry's growth was supported by active industrial policy, including an evolving combination of incentives: low-cost, high-quality labour, access to the largest market in the world, and investment inducements; and deterrents: market access and trade-related levers and threats. In recent years, many of the advantages Canada made for itself have eroded. The rise of new competitors, shifting philosophies surrounding trade, cost pressures, and a new paradigm with respect to investment incentives have challenged policy-makers. Several attributes previously considered the preserve of advanced countries like Canada are now evident in lesser developed jurisdictions, a phenomenon that this paper terms the commoditisation of automotive assembly. It is the result of standardised production processes and the automotive industry's ability to recruit top tier talent, particularly in less developed countries. This phenomenon is evident in the convergence of quality results and capital intensity across geographic boundaries and economic strata, expanding production in lesser developed countries, the emergence of luxury vehicle production in those countries, and stagnation of final assembly production in developed countries.

Neither core nor periphery: The search for competitive advantage in the automotive semi‐periphery

“…This includes a first (Spain and Portugal), second (Central and Eastern Europe), and third (North Africa) periphery (Layan & Lung, ; Lung, ). The expansion of the integrated periphery has unfolded largely as a result of one‐time low‐cost integrated peripheries losing competitiveness to other, even other lower cost integrated peripheries (Adascalitei & Guga, ), driven by a combination of competitive wages (Domanski & Lung, ; Lung, ; Pavlínek, ) and the rapid proliferation of production processes across nations and regions (Mordue & Sweeney, ). Indeed, the dynamic nature of automotive production networks, along with uneven competitive advantages in costs, quality, and government incentives, creates an environment where the competitive advantages of places shift over time, leading to frequent industry reorganization (Lampón, Lago‐Peñas, & Cabanelas, ; Mordue & Sweeney, ; Pavlínek, ).…”

“…The expansion of the integrated periphery has unfolded largely as a result of one‐time low‐cost integrated peripheries losing competitiveness to other, even other lower cost integrated peripheries (Adascalitei & Guga, ), driven by a combination of competitive wages (Domanski & Lung, ; Lung, ; Pavlínek, ) and the rapid proliferation of production processes across nations and regions (Mordue & Sweeney, ). Indeed, the dynamic nature of automotive production networks, along with uneven competitive advantages in costs, quality, and government incentives, creates an environment where the competitive advantages of places shift over time, leading to frequent industry reorganization (Lampón, Lago‐Peñas, & Cabanelas, ; Mordue & Sweeney, ; Pavlínek, ). While some suggest that automotive‐producing nations can obviate the effect of diminished competitiveness by acquiring more design and product development mandates (see Ozataga, ), the process has been uneven across nations (Domanski & Gwosdz, ; Szalavetz, ) and industry segments (Fortwengel, ).…”

“…They note that Spain may be capable of performing knowledge‐intensive activities, but that attracting such investments is unlikely, a result of such activities being well‐established in the more powerful core. Mordue and Sweeney () examine how Canada's competitive advantages as a location for automotive manufacturing diminished alongside the growth of Mexico's automotive industry since the late 1990s. According to them, this was the result of the ubiquity of manufacturing systems, leading to a process they refer to as the “commoditization” of vehicle assembly.…”

“…Additionally, the geographic scope of the North American automotive industry grew in 1994 when Mexico joined Canada and the U.S. in the North American Free Trade Agreement. Meanwhile, automakers became increasingly adept at standardizing and replicating advanced manufacturing processes that were previously the preserve of more economically advanced countries like the U.S. and Canada in less advanced locations like Mexico (see Mordue & Sweeney, ). The effect was that after the mid‐2000s, Canada's status as North America's low‐cost member of that region's automotive “integrated periphery” was eclipsed by the region's newest member, Mexico.…”

“…They did so with incentives to support capital investments in existing assembly plants, including those for vehicle model changeovers that occur every 5–7 years. Subsequently, most capital investments by automakers in Canada since the mid‐2000s have been supported by government incentives of between 10% and 25% of the value of the investment (Mordue & Sweeney, ; Van Biesebroeck, ). Yet despite the expanded use of incentives, and with the exception of the recovery following the recession of 2008–2009, Canada's automotive industry continued to contract.…”