Proceedings of the Standing Senate Committee on
National Finance
Issue 16 - Evidence - April 25, 2012
OTTAWA, Wednesday, April 25, 2012
The Standing Senate Committee on National Finance met this day, at 6:45 p.m., to study the potential reasons for price discrepancies in respect of certain goods between Canada and the United States, given the value of the Canadian dollar and the effect of cross border shopping on the Canada economy
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: This evening, we are continuing our special study of the potential reasons for price discrepancies in respect of certain goods between Canada and the United States.
[English]
Colleagues, this evening we are pleased to welcome Mr. David Adams, President of the Association of International Automobile Manufacturers of Canada.
Mr. Adams, we are very pleased that you have been able to clear your calendar and be with us this evening. I understand you have some introductory remarks, and then we will get into a dialogue with you.
David C. Adams, President, Association of International Automobile Manufacturers of Canada: Mr. Chair and honourable senators, thank you for the opportunity to appear before the committee today to add my contribution to the committee's review of price discrepancies between Canada and the United States with respect to consumer goods.
As noted, my name is David Adams, and I am the President of the AIAMC. It is a long association name, so AIAMC shortens it up a bit. We are the national trade association that represents the Canadian interests of 15 global automobile manufacturers that manufacture, distribute and market vehicles in Canada.
The AIAMC evolved from a subcommittee within the Canadian Importers Association in 1979, now known as the Canadian Association of Importers and Exporters, who I believe has also appeared in front of this committee. We became an independent, not-for-profit corporation in 1999.
The AIAMC advocates for sound public policy to support a competitive and sustainable automotive market in Canada. Our members are committed to meeting the mobility needs of Canadians by providing greater consumer choice, offering leading safety and environmental technologies and eliminating unnecessary regulatory and trade barriers.
I would start my remarks by observing that learned economists and academics specializing in studying price differentials and, indeed, the Governor of the Bank of Canada have appeared before this committee already and enumerated a number of issues that have contributed to the price difference in a number of consumer goods much more than I could ever possibly hope to do, but I would only point out that many of those factors are equally applicable to the automotive industry. I will focus my remarks on the structure of the automobile industry, tariffs and regulations, and then I would be pleased to answer questions.
The automotive industry in Canada can be segregated into vehicle production and vehicle sales. With respect to vehicle production, it is useful to highlight that Canada as a nation produces a limited number of vehicles for the Canadian and the U.S. markets as a result of the Auto Pact, which I will touch on later, the Canada-U.S. Free Trade Agreement and NAFTA.
On the production side, five vehicle manufacturers, three American companies and two Japanese companies, produced 2.1 million vehicles in Canada last year, the bulk of which, approximately 85 per cent on average, were exported to the United States. Honda and Toyota are responsible for about 35 per cent of that production, while Chrysler, Ford and General Motors are responsible for the remainder.
On the vehicle sales side, there is a tendency to only look at new vehicle sales, which have been relatively stable over the course of the past 10 years, with between 1.5 and 1.7 million vehicles being sold annually. Last year, Canadians purchased 1.585 million vehicles, of which the AIAMC member companies were responsible for just over 837,000. Overall, about 54 per cent of the AIAMC member sales in Canada were produced in the NAFTA region.
New vehicle sales are not the entire market, however, and DesRosiers Automotive Consultants has noted that 3.03 million used vehicles were sold in Canada last year, making the total vehicle sales market in Canada about 4.6 million units. This is important to remember as we consider the subject at hand of price discrepancies between Canada and the U.S. with respect to vehicles.
While 4.6 million new and used vehicles were sold in Canada last year, vehicle importations from the U.S. as recorded through the registrar of imported vehicles were 139,762 in 2011, down from 158,600 in 2010, and both were down appreciably from about 240,000 imported from the U.S. in 2008. Therefore, vehicle imports from the U.S. represent about 3 per cent of the total vehicle sales market. The percentage of vehicles imported from the United States does not appear to be appreciably different from that noted by Governor Carney in his testimony with respect to the overall percentage of retail sales in Canada that are imported from the U.S.
For the first quarter of 2012, importations are down about 17 per cent from the same period last year, while new vehicle sales are up over 8 per cent for the first quarter, which suggests that total vehicle imports from the U.S. will be down even further in 2012.
If I continue to reflect on used vehicles for a moment, it is clear that the strength of prices in the used vehicle market also impacts the transaction cost of the new vehicle purchase as well. The stronger the new vehicle prices, the lower the overall transaction cost for the new vehicle for those consumers who are trading in a vehicle. Currently, from my reading, I understand that used vehicle prices are relatively strong, partially resulting from a reduction in the supply of used vehicles as a result of the significant decline in leasing during the course of the recession.
The actual transaction price of the vehicle, or the price that the vehicle actually sold for that I just mentioned, is an important overall consideration as well. To really look at the price disparities between Canada and the U.S., it would be appropriate to look at transaction prices rather than the advertised MSRP or manufacturer's suggested retail price for a vehicle in both countries.
Attractive finance rates, as well as other incentives in the marketplace, along with the trade-in considerations that I just mentioned, make comparing prices on the basis of the MSRP between the two countries a fruitless exercise and, on a transactional basis, I think you would likely find more similarity between Canadian and U.S. prices.
With respect to the issues of tariffs and regulations, I would start by saying that the AIAMC member companies support open, transparent and non-discriminatory trade policy, and we commend the government on its efforts to liberalize and expand trade within a rules-based framework.
It is interesting to note that the automotive sector in North America was the first to embrace managed free trade under the Auto Pact in the mid-1960s to provide vehicle manufacturers with the economies of scale to produce vehicles for the collective Canadian and U.S. market on either side of the border. To be sure, the Auto Pact secured automotive production in Canada, but it also addressed the higher cost of vehicles in Canada at the time that had arisen because of a small market, limited production runs and duties on parts, so Canadian consumers were also beneficiaries of the Auto Pact.
One important point to mention about the Auto Pact, however, was that when Canada relinquished the Auto Pact in order to meet its obligations under the WTO in 2000, the government had a choice to make: to come into compliance by either eliminating the tariff on all imported vehicles or by placing a tariff on all imported vehicles. It chose the latter, thereby increasing the price of about 30,000 vehicles imported into Canada.
I have provided the clerk with this interesting case study for your review and consideration regarding tariffs and this decision. The AIAMC believes that that was the wrong action, and the continued maintenance of the 6.1 per cent on imported vehicles is the wrong action now, especially when one considers that Canada is currently engaged at different stages of trade negotiations with the EU, Japan and Korea, all auto-producing nations. An agreement with any one of those regions will introduce a distortion into the Canadian marketplace, as vehicles from the country with whom Canada has a bilateral trade agreement will enjoy potentially a 6.1 per cent advantage in the marketplace vis-à-vis all others. One has to question whether the 6.1 per cent tariff continues to make any sense. Tariffs are designed to protect a domestic industry, but you will recall that 85 per cent of the Canadian vehicle production goes to the United States.
The tariff for imported passenger vehicles into the U.S. is 2.5 per cent. I know the committee has been looking at the issue of harmonizing tariffs with the U.S., and this is certainly something members of the AIAMC could support, especially in view of the work that has been under way since February 2011 when the Prime Minister and President Obama announced the establishment of the Regulatory Cooperation Council with the goal of better aligning our countries' regulatory approaches to facilitate trade on both sides of the border.
The AIAMC has been supportive of the RCC process and has been directly involved in the discussions with respect to core initiatives to further harmonize vehicle safety standards, a process that has been under way in earnest for more than a decade now outside of the RCC process, as well as efforts to continue to further align emission standards. Indeed, two weeks ago, I was present with Minister Kent at the announcement committing Canada to align its heavy- duty greenhouse gas emissions regulations with those of the United States. These initiatives make sense and should result in Canadian consumers being able to secure the widest array of vehicles equipped with the most advanced technology at the lowest possible cost.
In the context of the Regulatory Cooperation Council, we have encouraged the two governments to consider the harmonization of our external tariffs as part of the broader perimeter security and economic competitive initiative between the two countries. A 2.5 per cent tariff for Canada, similar to that of the U.S., as opposed to a 6.1 per cent tariff would also serve to minimize the market-distorting impacts arising from the implementation of one or more of the bilateral trade agreements previously referred to.
With that, I would like to close. Thank you for having me here this evening, and I will do my best to answer your questions.
The Chair: Just to clarify matters, if an automobile is brought into the United States, it is a 2.5 per cent tariff?
Mr. Adams: Yes. If it is imported into the United States, the tariff rate is 2.5.
The Chair: If it is imported into Canada, it is 6.1.
Mr. Adams: It is 6.1 per cent, yes.
The Chair: Does the 2.5 per cent apply if it is imported from Canada, or is it because of NAFTA that that tariff does not exist?
Mr. Adams: I am sorry?
The Chair: If the automobile were manufactured in Canada and exported from here but imported into the United States, from the U.S. point of view, it is being imported, but it is imported from Canada.
Mr. Adams: If it is imported from Canada, it would be covered under NAFTA.
The Chair: It would not be the 2.5 per cent in that instance?
Mr. Adams: Correct.
Senator Ringuette: Mr. Adams, you told me earlier that you have read a few of our committee's deliberations. You are certainly aware of my raising the issue of the difference in car pricing. More specifically, cars made in Canada and sold to Canadians are much higher priced than they are when sold in the U.S. Sometimes there is $5,000 difference. You indicated that the import of vehicles from your 15 global manufacturers is subject to a tariff of 6.1 per cent in Canada and 2.5 per cent in the U.S.
To make you aware, I have a friend in Canada who bought a brand new foreign-made car in the U.S. about a month ago. The base price difference between Canada and the U.S. was about $5,000. Is this a general price difference between Canada and the U.S. for your 15 global manufacturers?
Mr. Adams: If I understand you correctly, you are asking if it is a general rule that there would be a $5,000 price difference.
Senator Ringuette: Yes.
Mr. Adams: I would answer that by saying the price differential would vary depending on the vehicle that was purchased. When you look at pricing, you look at the internal market. One thing that the committee should be aware of is that in Canada the compact and the subcompact segments of the market make up about 67 per cent of all passenger car sales. In those segments, you would have a much more competitive dynamic among the players in Canada and, therefore, much more competitive pricing in the marketplace with respect to the cars that fall into that segment.
Senator Ringuette: Mr. Adams, are you saying to the members of this committee that irrelevant of the tariffs, your 15 global manufacturers engage in two-country pricing?
Mr. Adams: I am sorry. Did you say "engage in country pricing"?
Senator Ringuette: Yes.
Mr. Adams: I should be perfectly clear up front. For the discussion we are having tonight, I need to be clear that we are obviously an industry association and we have no discussions about pricing, about how individual companies come to market or about anything competitive. I really cannot answer that question in terms of how individual manufacturers might come to market or approach the two different markets of Canada and the United States. The other issue I would say is that they may have a similar name, but the companies are different in Canada and the U.S. Depending on the company, the reporting structure may well be different as well.
Senator Ringuette: I have two other questions. First, for the purpose of the members of this committee, could you state your 15 members?
Mr. Adams: Absolutely. Our members are BMW, Honda, Hyundai, Jaguar/Land Rover, Kia, Mazda, Mercedes Benz, Mitsubishi, Nissan, Porsche, Subaru, Suzuki, Toyota, Volkswagen and Volvo.
Senator Ringuette: If I understand your first comment on tariffs, you are telling us is that if the tariff in Canada were the same as in the U.S., i.e. going from 6.1 per cent to 2.5 per cent, then all the manufacturers that you have just listed would have the same price structure for the same vehicle in Canada and the U.S.?
Mr. Adams: I cannot speak to the price structure at all. If the tariff came down to 2.5 per cent, then obviously some savings would accrue moving from 6.1 per cent down to 2.5 per cent. Some of that would obviously be passed on to the consumer. How much of that remains to be seen but, certainly, coming down from 6.1 per cent to 2.5 per cent, some of that would certainly accrue to the consumer.
Senator Ringuette: I will go for a second round.
Senator Marshall: My question was on pricing, but you have indicated you cannot answer questions on that. Perhaps you can help me with another issue. You talked about cross-border shopping. Some Canadians go to the United States to buy vehicles and are able to do this for a lengthy period of time. My understanding was that some of the dealerships, if not all of them, no longer honour warranties if a Canadian buys a vehicle in the United States and brings it back into Canada. Can you provide us with any information on that?
Mr. Adams: I expected I might get a question along those lines. We do not discuss those things within our association, but I did go online. There are a number of Internet sites that look at all of the vehicle manufacturers and distributors and whether they honour the warranty from the U.S. or whether they do not and whether it is a situation of after a certain period of time they would honour the warranty. That list is online. I cannot vouch for the accuracy of it, but it would seem to be a mixed bag. It is probably a function of how different manufacturers want to approach their customers at the end of the day.
Senator Marshall: Would you have any insight into the reason for that, given than Canadians do a lot of cross- border shopping and usually do not have problems. In this case, if you want to purchase an automobile and you cannot get the warranties, then you might have second thoughts about whether you will buy the vehicle. What would be the purpose of having that as a factor if you want to go to the United States to buy a vehicle?
Mr. Adams: I can only speculate, but in terms of a company not offering a warranty, you can look at it from the viewpoint of a Canadian company saying that it is not their car. That vehicle was sold into the U.S. market by a company that may share my name or part of my name, but they are two separate companies. I would assume that for such a vehicle coming across the border, a Canadian company would be asked in Canada to absorb the warranty cost for the vehicle.
The other issue when vehicles are brought into Canada is what happens with respect to safety recalls and ensuring that those vehicles are tracked and somehow put in the system. Some of those vehicles probably end up getting lost at the end of the day so if there is a recall, it would be a concern.
Senator Marshall: We have heard other witnesses say that one of the factors contributing to price discrepancies is related to regulatory requirements. Are there significant differences in vehicle regulatory requirements that would have a big impact on cost?
Mr. Adams: There are differences and differences add to costs. You heard from representatives from Transport Canada before the committee, and I would concur with their estimation that probably at this time about 85 per cent to 90 per cent of the regulations are similar, but there are still divisions. Some of those differences are a bit involved. In Canada, we have daytime running lights and bilingual labels. We operate in kilometres as opposed to miles so we need speedometers that reflect kilometres as opposed to miles.
The Chair: Senators, rather than speculating as to what our witness may or may not be able to answer, it might be better to put questions on the record so that Mr. Adams can let us know if he is able to answer them. Not only is he here to talk about the information he has as a representative of his association, but he obviously, like the rest of us, has some personal knowledge, which might be of interest to us as well.
Senator Marshall: Could I ask another question then?
The Chair: Certainly.
Senator Marshall: Could you indicate what factors you think account for the price discrepancy in Canadian and American dollars?
Mr. Adams: As I said in my remarks, I think it is a number of the items that you heard from other presenters, whether it be transportation cost, higher occupancy cost, or the fact that we are a much smaller marketplace than the U.S. is. I think all of those things add to the price discrepancy. Whether we like it or not as Canadians, almost regardless of where the exchange rate goes, we are kind of stuck with a situation where our cost structure in Canada is higher than it is in the United States. Often, the point is made that the Canadian automobile market is 10 per cent of the U.S. market. Generally, that is the case, just in terms of our sales volume and that sort of thing. However, when you start getting into individual models, for instance, you could have a vehicle for which that ratio is not 10 per cent. It might be less than 1 per cent of the volume of the U.S. for that same model in Canada. That vehicle still requires advertising, marketing, and even the training of technicians in the dealerships on that particular vehicle. That is a lot of cost that is spread over a much narrower volume of vehicles into the marketplace.
Senator Marshall: Does it account for the difference? I guess that is the question.
Mr. Adams: Yes.
Senator Buth: You made comments about used versus new vehicles. Then there are leased vehicles. My sense is that the number of leased vehicles has declined. You might have mentioned that it is much lower than it was before the recession. Can you talk about the relationship between leased, new, and used vehicles and whether or not that could impact prices?
Mr. Adams: I think it is actually a very good question because I think it has the potential to impact prices quite dramatically.
To give you an example, two years or even a year ago someone enters into a lease for a vehicle at a set price. All of their lease payments are based on that particular price of that vehicle, and then that price of that vehicle suddenly goes down. That consumer, I guess, could be in a situation, at the end of their lease, where the value of that vehicle at the end of the lease is substantially different than what was anticipated at the beginning of the lease because of the drop in price of the vehicle subsequent to the lease being signed.
Leasing and the value of used vehicles, as I mentioned in my remarks, do impact, and are interrelated with, the new vehicle price.
Senator Buth: I do not have a follow up to that, sorry.
The Chair: I can put you down on round two if you want to digest that answer.
Senator Peterson: You mentioned that when the Auto Pact was eliminated because of the WTO in 2000, you disagreed with the 6.1 per cent tariff. Did you push back fairly strongly, and were you given reasons why it did not blend with the 2.5 per cent?
Mr. Adams: To be honest, I was not in the position that I am in now, so I was not in a position to push back one way or the other.
It is a globalized industry, and I think members will recall that, at one point, companies like General Motors owned SAAB. Ford owned Volvo and Jaguar. At the time, there was a partnership between Daimler and Chrysler, and Mercedes Benz came under that gamut. Under the provisions of the Auto Pact, those vehicles that some would classify as imported were allowed to be brought into Canada duty free. When the Auto Pact went away, there was a choice to either eliminate the 6.1 per cent for all of the vehicles, including those that already had the tariff eliminated by virtue of the relationship with the Auto Pact players, or to add the tariff on to all imported vehicles. The decision was to add the tariff on to all imported vehicles.
Senator Peterson: Since 2000, has the industry made any representation to the government to say that this should not be this way?
Mr. Adams: I think, in pretty much every pre-budget submission that the AIAMC has made since I have been around — and with my predecessors as well — the tariff rate has always been an issue. I think, likewise, that the Japanese automobile manufacturers association has made similar representations with respect to the tariff.
Senator Peterson: The impact is really only on the consumer, not on the automobile manufacturer. It just adds it on. It is the consumer, who is not at the table, who pays the price.
Mr. Adams: In terms of what happened as a result of 2000? The price of those vehicles went up.
The Chair: For the consumer.
Senator Peterson: That is correct.
Senator Neufeld: Let us suppose the tariff was removed. Can you tell me whether the price of vehicles would come down that equivalent amount, 6.1 per cent? Would your members say, "We are going to pass that on?" When I think about it, they just include that 6.1 per cent tariff, as Senator Peterson said, in the price of the car. Their markup, advertising, and training are already in place. To me, it would be a pretty simple yes or no. Yes, I would reduce it by 6.1 per cent, but I want to hear what you have to say, representing those car makers.
Mr. Adams: I cannot speak to what any individual member would do. What I can say — as I think others who have appeared before this committee have suggested when the subject of reducing tariffs has come up — is that, to my mind, it would be a situation where part of that decrease would be passed on to the consumer. Part of that probably would not be passed on.
Senator Neufeld: Can you tell me why part of it would not be? I say that because yesterday there was a gentleman here representing hockey and sports equipment. He said unequivocally that yes, they would drop it. I am wondering why the dealers would want to keep part of that reduction that the government would make? That is what makes it, I think, partly difficult for government to make those decisions. It is just like dropping the gas price. The industry says, "We just dropped the gas price." Guest what? The government puts up the tax, or vice versa. Tell me why a dealership that is selling today and making money would want to say to their customers, "By the way, I am going to give you — I do not know, let us say hypothetically — half of it. The other half I will keep because you are going to a have to pay it." I do not think that is fair, but I want to ask you why you think they would only give part of that to the consumer.
Mr. Adams: In terms of the discussion you may have had yesterday, you were speaking to an individual company representative, and I think that would be a good question to ask individual companies. If you look at the situation, I think it is a possibility, at least, that a company will say, "Look, this tariff reduction has been passed along; I have choices. I can pass this along to the consumer, or I can keep some of it." To the extent that they want to be highly competitive in the marketplace, a company may choose to pass it all on. To the extent that there are other things driving their motivation, that may not be the case. That is all I can answer to that question.
Senator Neufeld: As the head of AIAMC, would you recommend to the companies you represent that they should actually drop it by the full tariff rate, if in fact that happened?
Mr. Adams: I recommend lots of things to my members; that does not mean they listen to me. I understand why you are asking the question. To be honest, I am not sure I am in a position to be able to answer that.
Senator Neufeld: That is fair enough. I appreciate you are in a difficult position. I wanted to get that on the record. That is part of what we are doing. Why are people in Canada paying more for something than they are in the U.S.? Some of it I understand, and some of it, when someone determines they might want to keep part of it because we want to drive our profit up, that is what I do not agree with.
Mr. Adams: I think that is a fair comment. To your point, Canadians are frustrated by the price discrepancies, not only on vehicle but on a lot of different issues. Fortunately, there are more information tools out there than ever before in terms of people being able to check prices on both sides of the border. Certainly if a consumer wants to purchase a vehicle across the border, they have the ability to do so.
I am not sure that companies necessarily, when they are pricing their vehicles, look at what this vehicle is being sold for in the U.S. They are probably more concerned with what their competitors are doing in the Canadian market than anything else, but I hear you.
The Chair: Senator Neufeld, I was treating your questions not as a supplementary but just as an intervener and question.
Senator Neufeld: I am fine.
The Chair: I can put you on round two, if you like. You have used up your round-one slot.
Yesterday we talked about a market structure for other products. I wonder if you could confirm for me or explain the market structure for imported automobiles. The importer or the manufacturer here would be treated like a wholesaler. Is there a wholesale level before it gets to the ultimate dealer from whom we buy an automobile? What are the levels between that ultimate dealer and where the car started as a manufactured entity?
Mr. Adams: To be honest, I do not have a lot of knowledge on that. I think probably companies are structured somewhat differently, but generally you would have a wholesaler that would be set up in Canada, which some of my members would be. They would subsequently sell those vehicles to the dealer body. There may in some instances be other levels in between, but that is my basic understanding of the structure.
The Chair: Let us talk about the situation that you are familiar with, that you have just described. Is the wholesaler an importer, or would they be a manufacturer?
Mr. Adams: It could be both. For instance, if a company is manufacturing in Canada, that company could also be the importer of record for vehicles coming into Canada. The vast majority of my members are importers, so they would be the individual companies that would be importing the vehicle and then subsequently selling those vehicles to the dealer community.
The Chair: In the figures we heard yesterday, the importer wholesaler would add 40 per cent to cover his or her costs and then sell his costs plus 40 per cent to the retailer. The retailer would then have a cost plus 30 per cent for the ultimate purchase price. Do those mark-ups sound similar to your industry or are they quite different?
Mr. Adams: I have no knowledge of that, so I could not comment.
The Chair: The reason I am asking is because the 40 per cent to cost applied as well to the tariff items. They added the tariff in and then took 40 per cent of costs which included tariff. If you take the 6 per cent tariff away, it is actually more than 6 per cent because you are not taking 40 per cent of the 6 per cent. That figure of 40 per cent of cost plus 6 per cent is moving on up, and then it is extended again when you take 30 per cent of the overall cost, which includes an increase for tariff. Rather than Senator Neufeld looking for 6 per cent savings, it should be more than that if the tariff was removed.
Mr. Adams: I think whatever the percentages are, your logic makes sense to me.
The Chair: I wanted to ensure my logic was making sense at this time of the night. Thank you very much for that.
Senator Runciman: With the companies that your association represents, looking at this presentation, you have three that manufacture in Canada with manufacturing and production facilities: Honda, Toyota and Suzuki. That is a joint venture with General Motors. Are they the only three that manufacture?
Mr. Adams: Suzuki actually does not manufacture in Canada any longer. That operation has been completely taken over.
Senator Runciman: So this is old information.
Mr. Adams: No. You are correct that Honda and Toyota produce in Canada.
Senator Runciman: What impact do corporate tax rates have on the pricing of an automobile? Have you assessed that? It would have more impact, obviously, on the folks who are producing cars. Is that much of a factor in terms of the end cost to the consumer?
Mr. Adams: I have not assessed that, but I think it makes sense to me that the more competitive the corporate tax rates are, the better off it would be.
Senator Runciman: Looking at the combined corporate tax rate in Canada, it is 25 per cent versus 39.2 per cent in the United States. It strikes me that that should be giving us a bit of a leg up in terms of offsetting some of the other disadvantages you have cited.
I represent the province of Ontario. In this submission, and it is dated, but one of the items that you raise in this is a lower hydro cost. This is in the United States. It has lower hydro costs than other manufacturing jurisdictions.
I am wondering, how big an item is that? Is it a growing concern, especially if you look at some of the projections of hydro rate increases through 2018 and beyond in the province of Ontario and the impact it will have on businesses? Is that something that has been assessed and looked at by your association, what the long-term impacts could be?
Mr. Adams: It has not been assessed by our association. I think it is probably a question that should be asked of the manufacturers themselves.
Senator Runciman: If only we could get them here.
I would like your personal impression with respect to this price gap. We had an individual talking to the clerk who is in the business and said that from their perspective, about 70 per cent of the automobiles now sold in Canada are at a lower price than what is available in the United States, and a lot of that has to do with incentives, cash rebates and those kinds of things. Is that your sense of what the marketplace is like today?
Mr. Adams: I could not say what the percentage would be, but I would say that there are probably a number of vehicles anyway that could be sold in Canada at a lower price than in the U.S. Again, part of that would be with respect to the competitive dynamic that I referenced earlier in that in the subcompact and compact segments, which are highly competitive in Canada, you could probably find vehicles in those segments sold for a price equal to or in some cases perhaps less than a similar vehicle in the United States.
Senator Runciman: Looking at one of the manufacturers you are representing, Honda, the Honda Civic EX, automatic transmission, is $21,445 in the United States and $22,435 in Canada but with a cash price in Canada of under $21,000, so it actually beats the U.S. retail price. That is including freight and PDI.
Looking at Ford Fusion, another one you looked at, it is roughly $1,000 more expensive in Canada. By the time the incentives are applied, there is $6,500 in incentives in Canada compared to $1,500 in the United States. The final pre- tax price is under $22,000 and close to $25,000 in the U.S.
It may not be as significant an issue perhaps with the imported cars that you primarily represent. If we can accept the 70 per cent, it is perhaps a diminishing concern for consumers in this country.
The Chair: Were those figures of U.S. dollars and Canadian dollars assumed to be roughly exchange rate equivalent? Thank you.
Senator Callbeck: Mr. Adams, carrying on with that line of questioning then, I think you said that in Canada the subcompacts are 60 per cent of the market. The per cent difference there between the United States and Canada will be a lot smaller than the larger cars?
Mr. Adams: That would be my assumption, yes.
Senator Callbeck: That is because of the competition?
Mr. Adams: Yes.
Senator Callbeck: You spoke of the car leases, how they have gone down. Do you have any figures on that as to what per cent of cars were leased before the recession and now what the figure is?
Mr. Adams: I can get a reference for you, but I was reading something the other day that suggested that leasing has fallen off by about 60 per cent since 2008-09, and is only starting to return to the marketplace now. In terms of its impact, that effectively constrains the supply within the used vehicle market as well. You end up having higher used vehicle prices in the marketplace as well.
Senator Callbeck: You talked about the regulatory differences between the two countries, but I take from what you say that that really is pretty minimal in terms of dollars?
Mr. Adams: There are things I mentioned off the top of my head before. There is the issue of immobilizers as well. Vehicles that are sold in Canada have to be equipped with immobilizers. Some of the vehicles going into the U.S. market have immobilizers as well but it is not a requirement in the U.S. market so that would be an additional difference. All of these things add up in terms of just being different. There is a cost associated with just being different.
Senator Callbeck: What cost are you talking about there, how much roughly?
Mr. Adams: I can strive to get some figures for you. I do not have figures with me today.
The Chair: Any figures that you have that would help us following the question of Senator Callbeck would certainly be appreciated. You can send them to the clerk and they will be distributed to all of our members.
Senator Ringuette: Mr. Adams, notwithstanding the fact that I am very happy that you are appearing in front of us, would your individual members appear in front of us to answer the questions that you were not able to answer?
Mr. Adams: I think you would have to approach the individual members directly. I cannot speak for them.
Senator Ringuette: Okay, then I guess we will.
As a follow-up to Senator Day's question in regard to the wholesaler-importer concept, for instance, you would have Volvo Canada and Volvo U.S. Is that the kind of structure that we are looking at?
Mr. Adams: Yes.
Senator Ringuette: Would Volvo Canada buy directly from Germany?
The Chair: Sweden.
Mr. Adams: Yes, Sweden. Again, individual companies are structured somewhat differently. Some of the Canadian companies may be subs of the U.S. or have their reporting through the U.S. company. Some may have a direct relationship to the home jurisdiction.
Senator Ringuette: Would it be possible for you to indicate to us who are those Canadian importing companies that do business directly and the ones that do it via the U.S. homeland?
Mr. Adams: I do not have that information, but I can ask my members.
The Chair: As a supplementary on that, you mentioned BMW as one of your members. BMW is actually manufactured in the U.S. Would the Canadian BMWs that are sold come from the U.S. or would they come from Germany?
Mr. Adams: Again, I would highlight, I do have that information that I would be happy to supply the committee with, which is a listing of all of the vehicles that are produced at the different facilities in the NAFTA region, so you would know which vehicles are produced where.
The reality is, in answer to your question, yes, some of the BMWs do come from the U.S., but not all of them. There are certain models that are produced in the Spartanburg facility in the U.S., but others would come from Germany.
Senator Ringuette: We have always been told — at least I have been told — that parts for foreign cars are a lot more expensive than for North American-made cars. Is that based on the 6.1 import tariff? Is the 6.1 tariff applied on parts also?
Mr. Adams: My understanding is that it is not applied on parts for manufacturing, but I would have to go back and check the HS code to determine the tariff. You are basically talking about after-sale parts. I do not know what the tariff is on after-sale parts or whether there is a tariff even.
Senator Peterson: The lease market was off 60 per cent from 2008-09. Does that include airport rental cars or just leased cars?
Mr. Adams: I will get the article and make sure the committee gets it. My understanding is that that was a combination of fleet vehicles and the leasing vehicles. As you are aware, the auto companies put a number of fleet vehicles into the marketplace, whether those are with car rental companies or various other fleets, so I think it was a combination of both of them.
The Chair: I guess that would include taxis?
Mr. Adams: Yes, I believe so.
The Chair: I can remember some companies trying to get those fleet sales in at the last part of the year just so that their overall sales figures would be above another company's sales figures. It is an interesting business.
Mr. Adams: It is.
The Chair: It is quite competitive, I think, in general as well.
I do not have any other questions. Everyone is satisfied. Thank you.
Mr. Adams, on behalf of the Standing Senate Committee on National Finance, I would like to thank you very much for being here and helping us understand at least the imported part of the automobile industry. There are a number of undertakings and questions you said you would be able to get some information for us. If you would get those to our clerk, that would be very much appreciated. Thank you for being here.
Mr. Adams: Thank you very much.
Senator Ringuette: One of the issues I want to ask is, as a follow-up to Mr. Adams' appearance and the different questions we have asked, if it would be possible to invite some of the 15 foreign car manufacturers to appear before us, which brings me to the North American car manufacturers, GM, Ford and Chrysler. I have asked many times to invite them, and I would like to know how many times they were contacted to appear before our committee.
The Chair: I am not sure we would have that figure, but we do have correspondence back from at least one of those three companies saying that they decline to attend because of litigation that could be compromised if they did attend. We have done some investigation with respect to what litigation that might be. We understand, and I do not have the full particulars, that it may be a class action by certain purchasers or potential purchasers of automobiles against the manufacturers because of price discrepancies between Canada and the U.S., which is our mandate for study, which is very interesting.
Senator Ringuette: Mr. Chair, one of two things: You said that you have researched into this issue of class actions?
The Chair: No, I did not say I researched into the issue of class actions. That is a very complicated area.
Senator Ringuette: But who has indicated? Is it those manufacturers that have indicated that and we have made verification to acknowledge that that was the situation?
The Chair: We have not done our due diligence on that. We have received information to that effect. We have not done our due diligence to see what the class action is all about. Mr. Adams, do you know anything about this class action against some manufacturers of automobiles?
Mr. Adams: I am aware there are class actions out there. What the particulars are, I am not aware of those.
The Chair: That is part of our due diligence.
Mr. Adams: I am sorry. I do not know the particulars.
Senator Ringuette: If there are class actions related to pricing, I will accept that they do not want to appear. If a class action is in regard to the technicality of an automobile, then I will not accept that they will not appear after two years ago, in regard to the North American auto manufacturers, the Canadian taxpayers were extremely generous, for one to the tune of billions and billions of dollars. If these same North American auto manufacturers would be requested to appear before a U.S. Senate committee, would they also refuse to appear? I have serious doubt about that.
Therefore, Mr. Chair, if your research into the class action issue shows that it is not related to pricing, which is the issue that we are studying, I move the following motion:
That General Motors Canada, Ford Canada and Chrysler Canada be summoned to appear before the Standing Senate Committee on National Finance before we conclude the witnesses pertaining to the study at hand in regard to price differences between Canada and the U.S.
The Chair: We have had a motion. In committee, it is not necessary to second the motion. We should have some debate on it. As I understand your motion, a precondition was following our due diligence. Have you any suggestions on how we might do our due diligence? When would you be satisfied that we have done our due diligence on this?
Senator Ringuette: I indicated in the motion that I wish for these three entities to appear before us before we conclude our study, so I think in the next month, because there is a border crossing visit that is proposed and so forth as part of this study. I would think that, by then, we should have done due diligence and see. If it is the case that the class action is pertaining to the issue that we are studying, then I accept that they do not want to appear. However, if that is not the case, then I am sorry, but let us call a spade a spade.
We are looking into a very serious issue in regard to price discrepancy. Many times in front of this committee I have brought forth the issue of North American car manufacturing and the fact that some vehicles are being made in Canada and sold to Canadians at much higher prices, anything between 4, 5 and $6,000 more, notwithstanding the HST, in comparison to their American counterpart. It is a big part of the mandate of this study. We are asking why these prices are different.
Senator Marshall: I have a question. Did I understand we had only invited one company and one company had declined? Have we invited one company?
Jodi Turner, Clerk of the Committee: The chair sent letters to the presidents of Ford, GM and Chrysler, and they all declined.
Senator Marshall: For the same reason?
Ms. Turner: GM declined because of the class action suit. Ford and Chrysler declined because people were not available, although Ford did reference that they had interest in a class action suit as well. I also spoke with Toyota at the beginning of our study, who suggested Mr. Adams would be a good person to speak with, which is how we came into contact with him.
Senator Neufeld: Chair, I think Senator Ringuette brings up a good point. We had better do a bit more due diligence as a steering committee. Maybe it will take a little bit more pressure from the chair, and maybe the deputy chair has to get involved a little bit, to see what we can do about some research on it and look at it further down the road. I do not disagree with Senator Ringuette. We need to have some kind of a reasonable answer that actually is an answer that we can accept. To be honest, we cannot accept, "No, I do not want to show up." We need to do some homework as a steering committee. I have not had a chance to talk to Senator Runciman. Do you agree with me, Senator Runciman? If that meets with your approval, Senator Ringuette, I would like to do that, if that is okay.
Senator Peterson: Talking to Senator Runciman, I would think this lawsuit is public record, and it is probably in Ontario, so just phone the court in Toronto, I suppose. I am sure we can get a copy of it and find out what it says and who is involved.
The Chair: We have not had an opportunity to do that. We had a discussion on that earlier today.
Senator Neufeld: I think the law is sometimes a little bit funny. I think we have to be careful how we do it. That is all.
Senator Ringuette: I understand and I really appreciate what you want to do. That being said, I put forth this motion. Do you want me to temporarily withdraw the motion until due diligence is done?
The Chair: That is how you worded it.
Senator Neufeld: I would appreciate that. I think we all would. I am not saying that we are not going to do something, but we will do some due diligence.
Senator Ringuette: We all agree this is an unacceptable situation. I withdraw for the moment until due diligence is done.
The Chair: The record will show that you have tabled that motion, and we will not proceed with a vote at this stage, pending the precondition you put in the motion, actually, that due diligence is conducted to determine whether the reason for refusal to appear relates to a class action that in itself relates to pricing. That is what we need to do.
Senator Nancy Ruth: First, if there is litigation going on, I would love to hear from the litigants. They have something to say. The car manufacturers may not but the people who are suing them sure do; so that is the other way to kiss the ass. Second, this is the minister's study; and the minister saved the bacon of the car manufacturers, so the minister should get us Chrysler, Ford or something else.
The Chair: Trailers on our broadcast are saying "strong language and sexual innuendo."
Senator Runciman: How about a 30-second delay?
The Chair: Thank you for those comments.
Senator Neufeld: They are good comments, and if we decide that we need to get a little bit more aggressive with our invitation, I think we can use some of the rationale that Senator Ruth just talked about.
The Chair: Maybe not in the same words.
Senator Neufeld: Not in the same words. Some of those are excellent ideas. They did get a fair chunk of money from the public.
The Chair: Senator Ringuette makes a good point and it has been one of the issues from the beginning of this study. I know the clerk has tried diligently to have representatives of the manufacturers come, so your deputy chair and I will pursue it along the direction you have indicated. We will report back to you.
Since we are on a general discussion, we talked about a visit. What was the date? I will not ask you to make any commitment but if you can consider, because we do not have approval yet from the whips as to whether and how this would happen. If no one is able to go, then there is no sense in going to the whips. We should hear if there is some interest in going to a border crossing and talking to the Canada Border Services Agency people and some businesses at the border. We talked about leaving on the evening of Wednesday, May 9; do our work on Thursday, May 10; and be back to the airport in Toronto so you could fly back to your regions Thursday evening. We would be away one sitting day from the Senate.
Would you consider that and let us know if there is any interest in such a trip? The likelihood is that we would have even numbers from both major political parties.
Senator Nancy Ruth: Would we stay in Toronto for the night?
The Chair: No. There is a Days Inn in Fort Erie.
We should wind this up. Thank you, Mr. Adams.
(The committee adjourned.)