CARS: THE COMING CHINA WAVE

Last Thursday, during Chinese Premier Li Keqiang's visit to Canada, Prime Minister Justin Trudeau announced that the two countries had agreed "to launch exploratory talks towards a potential free trade agreement between Canada and China."  And speaking at a GBD event this past Wednesday, Flavio Volpe, the president of Canada's Automotive Parts Manufacturers' Association, talked about what such a negotiation could mean for his industry.  Today's quote is taken from that talk. 

China's Agreement Goals. Referencing earlier remarks in Canada by China's Vice Minister for Financial and Economic Affairs, Han Jun, Mr. Volpe talked about what China would want from an FTA negotiation with Canada before turning to what he hopes Canada will achieve.  Paraphrasing Minister Jun, Mr. Volpe said China wants "better and forecastable access to Canada's abundant energy and natural resources."  And, he added, "they also would like us [Canada] to revisit Canada's rejection of [certain] Chinese ... acquisition overtures ... over the past five to ten years."

The Automotive Background.  The heart of Mr. Volpe's presentation dealt with the interaction between two different phenomena.  One is the anticipated wave, first of Chinese built cars and then of Chinese automotive investments.  The other is the expected role that a Canada-China FTA might play in those developments.  Before tying the bow around the package of that relationship, Mr. Volpe gave the audience a quick course in car markets and automobile production in China and North America.  Here we will quote Mr. Volpe at some length:

"In 2015, at over 21 million unit sales, China's automotive market exceded all of North America's combined market.  And it continues to grow at a materially faster rate.  Canada, U.S., Mexico together is 20 million unit sales.  Customers [buying Chinese cars] are, in most cases, buying well-constructed and well-engineered cars made by state-owned Chinese companies like Shanghai Auto, Zhejiang Geely, which owns Volvo, Dong Feng, FAW,  and BAIC.  North American customers, specifically U.S. northeast and U.S. southwest customers, will be seeing these Chinese branded and built cars enter as a natural next step. [This will be the] next product wave [after we] saw Europe, Japan, and Korea enter and establish themselves here. 

"Those Chinese automakers are as big as Ford, Honda, and Renault.  And their investments here, north of the border, or south of the border would have as meaningful an effect as any of those.  With China's leadership in next generation power trains and materials, their products promise to be just as good and perhaps lead on the EPA's targets for fuel economy standards.  ... "

By the Numbers.  "In Canada we make 2 ½ million cars a year.  We make [them] in a 250-mile strip of highway between Detroit and Toronto.  ... The Great Lakes region makes 7 ½ to 8 million vehicles a year.  The U.S. Southeast - and I'll tuck in Texas into that ..., [makes] 5.7 [million], and Mexico is at 3 ½ , going perhaps to 4 ½ -5 [million] in the next five years. 

"So, for context, already, before we see Chinese product [in North America], the Chinese domestic market already outstrips us.  ...

"We know from our European, Japanese, and Korean experience that foreign direct investment by China's largest automakers must follow their inevitable product introduction into North America.  The way our business works is, you really need to build where you sell.  So if you sell 200,000 in a region that shares a platform, the most cost effective way to make a profit on those is to put a plant in.  It is a global model.  There isn't anybody who operates in a different way.  Chinese state-owned companies aren't going to decide to sell to consumers in the U.S. northeast and ship them all from Shanghai.  They're going to have to find a place to build. 

"Canada must make sure to acquire its fair share of this."
 
It can do that, Mr. Volpe suggested, by making the issue of Chinese North American automotive investments part of the FTA negotiations between Canada and China.  It is not that there are no other reasons for China to put automotive investments in China.  Among these, Mr. Volpe cited the high reputation for quality enjoyed by Canadian auto parts facilities and the competitive tax policies of both Canada's provincial and Federal governments.  Plants in Ontario, he said, have a 10 percent tax advantage over their U.S. counterparts in the Great Lakes and Southeast regions.

Against that background, Mr. Volpe's message was clear:

"Brokering more efficient access to Canada's resource economy needed for Chinese growth is competitive leverage that Canada enjoys over most of its North American competition in a similar type negotiation. 

"Canada, the smallest of the three NAFTA partners, should absolutely use that leverage to clearly target large, new, advanced manufacturing commitments [from China]."

You might ask, why bother talking about a negotiation which is hasn't yet begun and won't finish for some time?  The answer is simple.  It is a window into both today's realities and tomorrow's.
 
Mr. Flavio was one of four presenters at the GBD event this past Wednesday.  Called China Mirrors it focused on how the three NAFTA countries - Canada, Mexico, and the U.S. - see their relationships with China.  Of the four presenters, two focused on Canada's trade with China, Mr. Volpe was one.  Gilles Gauthier, the Minister for Economic Affairs at the Canadian Embassy in Washington, was another.  Next week we'll highlight elements of Mr. Gauthier's presentation.  You don't need to wait, however. An audio recording of the full event is available at the link below.

Also next week we will devote time and space to the presentations given by Kenneth Smith Ramos, the head of the NAFTA office at the Mexican Embassy in Washington, and John Magnus of TradeWins, who focused on U.S. issues with China.

As for Mr. Volpe's remarks, three things in particular struck us.
 
First, how much we learned from it.  He made vividly clear the dynamics of the automotive industry and the reality of China's prowess, which is not well understood on this side of the Pacific. 

Second, how very refreshing it was.  Listening to him one doesn't get the impression that he is picking sides in the debate over whether China is or is not a market economy.  He is just describing things as he sees them.

Third, of course, is that, while his negotiating goals relate to Canada and China, they depend upon the maintenance of a relatively free and open North American market.  Is that a realistic assumption?  We think it is.  Given the involvement of U.S. automakers in the Chinese market, it is hard to imagine any serious challenge to China's export plans from that quarter.  And yet it is difficult to be completely confident of any projection about China and North America.  One reason we say that is this.  The relationship with China is a blend of cooperation and rivalry for all three North American countries.  For the United States, however, the rivalry component is and will continue to be a larger element of the relationship than it is likely to be for the other two.  And that could affect everything.

China Mirrors, the recording, is a link to the MP3 file on the GBD website, www.gibdinc.org, with the audio portion of the event that was the source for today's quote.

China Car Companies takes you to a Wikipedia page that lists China's car companies.

Exploratory Talks Launched is the TTALK Quote from September 22, which focused on this first step toward a Canada-China FTA.