Secretariat

Draft Outline
December 9, 2002

Competitiveness Analysis - Terms of Reference

Executive Summary

1. Introduction

This section will include the purpose and objective of conducting the analysis as well as the methodology of doing it.

1.a Background and Objective

The automotive manufacturing industry is a major contributor to the Canadian economy, employing about 145,000 Canadians, generating about 14% of manufacturing GDP and about 25 percent of all Canada=s merchandise exports. The industry provides highly paid jobs in vehicle and parts manufacturing as well as being a major purchaser of the output of many other sectors, including steel, aluminium, rubber, wire goods and glass. The automotive sector also drives innovation in advanced materials, electronics, fuel cells and alternative fuel technologies, advanced manufacturing processes and technologies as well as E-commerce and E-business.

The Canadian Automotive Partnership Council (CAPC) was created with a mandate to identify issues needed to strengthen the Canadian automotive industry. Recognizing that Canada competes with the US and Mexico for automotive investment and production in North America, and seeking to better understand Canada's competitiveness for automotive investment relative to other North American jurisdictions, CAPC has requested that Industry Canada examine recent automotive investment decisions.

1.b Scope and Methodology

Companies deciding on a site for a new assembly plant carefully consider numerous factors relating to both cost and business environment, including government policies and programs. As the impact of these individual factors may differ significantly across jurisdictions, the only means of comparing the overall relative attractiveness of different jurisdictions is to focus on the return on investment (ROI) that a company would realize in each jurisdiction.

For the purpose of this study, a selective number of jurisdictions have been chosen: Alabama, Georgia, Michigan, Mississippi, Ohio and South Carolina in the US and Quebec and Ontario in Canada.

The assessment should be conducted through an investment model representing a typical automotive assembly investment of US$500 Million for a plant with 2.2M square feet and a production capacity of 200,000 units per year and an employment of 3000 people. Other assumptions would be made as necessary, and would be based the experience of recent automotive assembly investment in Canada and the US. The model should be similar to the recent KPMG CCM-2002 model using standard financial assumptions to generate 10-year pro forma reports as the basis of comparison across different jurisdictions.

2. Overview and assessment of Key Factors Driving Automotive Investment Decisions in North America

This section will focus on a broad range of factors considered during company's decision-making process. These factors have impacts on the company's return to investment (ROI). Both quantitative and qualitative factors are going to be compared among competing jurisdictions.

The main factors considered by a company in arriving at a decision on where to invest in a new assembly plant include:

2.1 Production Costs

• Facility construction
• Machinery & equipment and tooling costs
• Energy costs/surety of supply
• Utility costs
• Infrastructure B roads, water, sewage
• Emissions standards B cost, complexity, unique requirements
• Waste disposal B cost, local availability

2.2 Transportation/Logistics

• Inbound/outbound transportation costs distance to suppliers/markets
• Road/rail/air infrastructure
• Transportation risks B bottlenecks, risk of job actions
• Access/Cost for 24 hour emergency freight facilities
• Border access
• Ease/speed of customs clearance
• Simplicity/clarity of customs procedures

2.3 Labour

• Availability/Quality of workforce B production, skilled, technical/engineering, managerial
• Relative labour cost
• Productivity/Quality/Flexibility Performance Record of existing facilities
• Labour laws B right to strike during course of agreement, hours of work, health & safety standards/costs, enforcement of laws, etc.
• Whether workforce is organized/What union/Whether positive working relationship exists
• Ability to negotiate arrangements specific to that investment
• JOBS bank status/work ownership issues
• Relative cost of closure of one facility versus another

2.4 Fiscal/Government-Related Factors Applicable to all Industries

• Taxes, including but not limited to capital taxes, corporate tax rates, withholding taxes, property taxes, payroll taxes
• Government programs: corporate tax reductions, property tax abatement, training, etc.
• Cost/Responsibility for health care coverage

2.5 Other

• Exchange rates
• Inflation
• Other

2.6 Project Specific Measures

• Infrastructure: land, roads, highway access, sewer, water, etc.
• Taxes: State corporate tax, property tax, withholding taxes, payroll taxes, capital taxes
• Training and recruiting

2.7 After-tax return on investment

3. Summary and Conclusions

This chapter will wrap up the study by developing some general competitiveness indicators for these competing jurisdictions based on the assessment results of the first five chapters.