Automobile Production in Canada and Implications for Canada's 2025

WORKING PAPER 2018-07

Automobile production in Canada and implications for Canada’s 2025 passenger vehicle greenhouse gas standards

Authors: Dan Luria, Occupy Dan, LLC, Alan Baum, Baum and Associates, LLC, Ben Sharpe, The International Council on Clean Transportation Date: April 10, 2018 Keywords: Canada, passenger vehicle manufacturing

1. Introduction of Transportation (DOT) to issue a the original target for 2025. Thirteen proposed rulemaking later this year other states, plus the District of The current U.S. regulations for passen- with weakened 2025 requirements. Columbia (hereafter, “CA+13”), have ger vehicle greenhouse gas (GHG) and opted to follow California’s lead on fuel efficiency were finalized in 2012 Canada’s regulation incorporates the vehicle emissions standard in lieu of and called for cars and light trucks U.S. EPA rule by reference and thus those at the federal level. These states collectively to achieve a projected fuel would have its standards rollback 1 include: Connecticut, Maine, Maryland, economy level of 54.5 mpg by 2025. automatically as soon as any adjust- Massachusetts, New Jersey, New Mexico, On April 2, 2018 the U.S. Environmental ments are made to the U.S. program. 2 New York, Oregon, Pennsylvania, Protection Agency (EPA) announced With Canada having a long history of Rhode Island, Vermont, Washington, that this regulation was “not appro- harmonizing its vehicle and fuel reg- and Delaware, plus Washington, DC. priate and should be revised.” We ulations with the U.S., the probable expect the EPA and U.S Department rollback of U.S. vehicle GHG standards Altogether, there were roughly 6.2 will immediately trigger a decision million passenger vehicles sold in 1 Using EPA and NHTSA laboratory point for the Canadian government: calculations, the 2025 emissions/fuel California and the other 13 states in economy target is often stated as 54.5 continue the policy of aligning with 2016. Adding an additional 1.9 million mpg. However, the target is sensitive to the U.S. and thus weaken its own 2025 vehicles sold in Canada, this combined the car-truck sales mix and, moreover, is regulation; or, break regulatory ties roughly one-third above the mileage actually bloc of 8.1 million units represents with the U.S. by maintaining the strin- experienced by drivers due to the testing roughly 41% of the total market for cars regime and a variety of credits. Changes in gency of the current 2025 standards. car-truck mix have already caused the 54.5 and light trucks in the U.S.-Canadian mpg target to fall to about 50, corresponding California, which has both a progres- market (19.8 million vehicles). to about 38 mpg in actual driving. Note that sive political culture and serious air in this paper we separate trucks into car-like This paper analyzes the Canadian trucks (“CLTs” or “crossovers” built on car pollution issues in many of its cities, vehicle manufacturing market and platforms) and true (i.e., framed) trucks (TTs) has announced3 that it will stick with built on truck-only platforms. sales patterns to illuminate the possible 2 US. Environmental Protection Agency, impacts if Canada weakens its green- “EPA Administrator Pruitt: GHG Emissions 3 California Air Resource Board, “CARB Chair Standards for Cars and Light Trucks Should Issues Response to EPA press release on house gas emission standards in order Be Revised,” news release, April 2, 2018. weakening vehicle standards,” news release, to align with the U.S. federal govern- https://www.epa.gov/newsreleases/epa- April 2, 2018. https://ww2.arb.ca.gov/news/ administrator-pruitt-ghg-emissions-standards- carb-chair-issues-response-epa-press-release- ment or maintains its existing stan- cars-and-light-trucks-should-be weakening-vehicle-standards dards and aligns with California and,

Acknowledgments: This work is supported by the Bekenstein Foundation. Drew Kodjak and John German of the ICCT provided valuable input to the development of this paper.

most likely, 13 other U.S. states and the Table 1. Vehicles assembled in Canada, 2017 District of Columbia. Vehicle model Location of assembly Assembled only assembled in Canada plant in Canada in Canada? Vehicle type 2. Research questions and Chrysler 300 Brampton Yes Luxury car methodology Dodge Challenger Brampton Yes Muscle car Dodge Charger Brampton Yes Muscle car Canada’s pending regulatory align- Windsor Yes Minivan ment decision could potentially have Chrysler Pacifica impacts on its domestic auto manufac- Ford Edge Oakville Yes Crossover turing sector. This market assessment Lincoln MKX Oakville Yes Crossover is centered around addressing the Chevrolet Equinox Ingersoll No Crossover following research questions in order Toyota Corolla Cambridge No Midsize car to better inform policymakers and Honda Civic Alliston No Small car other stakeholders about the potential Honda CR-V Alliston No Crossover impacts to Canada’s manufacturing Toyota RAV 4 Woodstock No Crossover base if the country elects to maintain the stringency requirements in its Lexus RX350 Cambridge Yes Crossover current 2025 GHG vehicle standards. in Canada. For this analysis, we 2018, assembling the twelve4 vehicle 1. What is a current snapshot of procured data from IHS Markit, models summarized in Table 1. While Canada’s automobile manu- which is North America’s leading in recent years most automakers have facturing sector? Where are aggregator of sales, registration, been reducing their Canada footprint the assembly plants located in and production data. in favor of producing in lower-cost Canada? What are the brands and 2. Given project resource con- Mexico, auto manufacturing remains models being produced, and what straints, we were unable to pre- an important industry in Canada, are their market prospects over cisely track the ultimate sales accounting for a substantial share the next few years? location of the actual vehicle of the nation’s exports to its North 2. For the models produced in Canada, models that are produced in American Free Trade Agreement where are these vehicles sold in Canada. As a simplification, we (NAFTA) partners and beyond. All of the U.S. if we break the country make the following assumption: the twelve models are cars or car-like into two distinct sales geographies: Vehicles produced in Canada trucks (CLTs or “crossovers”); Canada California and the thirteen Section are sold in both Canada and the assembles no true trucks.5 Note that 177 states (CA+13 states) versus U.S. For those that are sold in the remaining 36 states? five of the vehicles assembled in the U.S., we assume that the dis- Canada are also assembled in the U.S. 3. For the models produced in tribution of sales of the actual and/or Mexico. Canada, what brands and models Canadian-made vehicles is are popular in the CA+13 states? exactly the same as the overall Table 2 displays how many of each of 4. For the models produced in Canada, distribution of sales for those the 12 models that are partly or wholly is there any difference in the fuel vehicle models, in terms of sales economy of the top-selling vehicles in the CA+13 states versus the 4 We have not included the Dodge Grand in the CA+13 states as compared to rest of the U.S. Caravan, as FCA’s product plans call for this model to be terminated by 2019. We have the rest of the country? 3. For the fuel economy analysis, also excluded the Ford Flex and Lincoln MKT, we used values from www. as they are low-volume and, based on Ford’s To explore these questions, we used product plans, likely to terminate by 2020. fueleconomy.gov. the following methodology for our In addition, a modest number of Cadillac XTS and Chevy Impala models are built in analysis. Oshawa, but GM’s product plan suggests that 3. Auto production in production there will likely terminate in 2020 1. We acquired vehicle production and 2019, respectively. data by manufacturer, brand, Canada 5 As we will see, this could briefly change at Oshawa under a temporary arrangement with and assembly plant location for Ontario has seven operating car and/ Unifor as part of the changeover for the T1xx every model that is produced or light truck assembly plants in update of the Silverado and Sierra.

2 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION WORKING PAPER 2018-07 AUTOMOBILE PRODUCTION IN CANADA AND IMPLICATIONS FOR CANADA’S 2025 PASSENGER VEHICLE GHG STANDARDS

assembled in Canada6 were sold in Table 2. Registration and sales totals for the 12 vehicle models produced in Canada 2016 or registered in the U.S. during 7 Units assembled the 12 months ending August 2017. Vehicle model Units registered in Canada and Units sold in Adding the not-quite-comparable8 assembled in the U.S. sold in the U.S. Canada second and fourth columns results in Canada (Sept 2016 – Aug. 2017) (2016) (2016) in a total of roughly 2.6 million units Chrysler 300 49,827 53,241 3,662 of the 12 models sold in the U.S. or Dodge Challenger 66,021 64,433 3,158 Canada. Of those, about 800,000 (or Dodge Charger 90,824 95,437 3,738 31%) were sold by the “Detroit Three” Chrysler Pacifica 110,282 62,366 2,650 (i.e., General Motors, Ford, and Fiat Ford Edge 135,802 134,588 20,517 Chrysler Automobiles) and the rest 30,941 30,967 3,551 (69%) by Toyota9 or Honda. Lincoln MKX Chevrolet Equinox 268,806 188,164 19,197 Note the difference in vehicle types Toyota Corolla 355,176 191,050 45,626 and market appeal of the vehicles Honda Civic 360,514 162,231 64,551 offered by the Detroit Three versus Honda CR-V 377,248 181,079 44,789 those offered by Honda and Toyota Toyota RAV 4 390,864 277,513 49,103 (including Lexus). The latter are Lexus RX350 100,764 104,446 8,147 leaders in their segments; the RX350 (and its associated hybrid version) is TOTAL, 12 models 2,317,069 1,545,516 268,689 Lexus’s best-selling North American model. While small cars are lately Honda and Toyota’s Canadian facili- for the Alfa Romeo Giulia now being losing some market share, the Toyota ties, as Equinox is now being assem- sold. A move to Giorgio would allow Corolla and Honda Civic remain the bled at two plants in Mexico. FCA to spread development costs two best-selling cars in their segment. over up to five vehicles that could The Charger and Challenger models Their sales prospects are bright, so share this design architecture. The offered by Fiat Chrysler Automobiles five include a rumored return of the they and other vehicles on the same (FCA) from its Brampton plant remain Barracuda and/or the Hornet, and platforms offer the best opportunity popular with consumers favoring the 300 could also move to this plat- for new investment in Canada. Finally, muscle cars, with combined sales form.11 These plans will be updated these models in particular, and their similar to those for Ford’s Mustang in 2018 when FCA rolls out its latest brands in general, enjoy their highest 10 and GM’s Chevrolet Camaro. But long-term product plan. However, market share in the CA+13 states. like most Detroit Three vehicles, with in the past FCA has cancelled new the exception of pickup trucks, they The new Chevrolet Equinox is a very vehicle programs when a shortage of are not popular in the CA+13 states popular model and, while it is not the capital looms, as it would do again if (see Table 4, below). Moreover, FCA’s best-selling crossover in its class, it is the market slows significantly and/or Brampton vehicles are on a mature likely to continue to do well. However, if it seeks to tidy up its balance sheet platform, the LY, that itself is only increased production at the Ingersoll for a spinoff or sale. a modest reworking of the old LX. plant is less likely than it is to occur at FCA intends eventually to move The Pacifica is new and has sold rel- some or all of these vehicles to its atively well, although its high sticker 6 “Wholly assembled in Canada” is with respect to sales in the North American market. Some Giorgio Platform, which is the basis price may have caused limited sales of the 12 are also built elsewhere in and for volume. The cheaper Dodge Grand non-NAFTA markets. 10 See Patrick Rall, “Ford Mustang Beats Caravan continues to be built in 7 We are using the terms “sales” and Chevrolet Camaro, Dodge Challenger to Windsor (and indeed has just been “registrations” interchangeably. Our data, Claim 2016 Title,” TorqueNews, January 4, acquired from IHS Markit, cover new vehicles 2017. https://www.torquenews.com/106/ updated to meet U.S. safety require- registered for the first time in the 12-month ford-mustang-beats-chevrolet-camaro- ments), but the planned end of Grand period September 2016 through August 2017. dodge-challenger-claim-2016-title. Sports Caravan production in 2019 could 8 The 4th column shows Canadian sales for car aficionados tend to compare only 2016, while the 2nd column shows U.S. 2-door models, but in fact a high proportion registrations for a period that it eight months of (four-door) Chargers are also muscle 11 Alternatively, the 300 could be terminated more recent. This is why there is some cars. Fully one-third of those sold in 2016 or moved to front wheel drive and share the discrepancy in the numbers. had a V8 engine, the same proportion of platform used by the Chrysler Pacifica and 9 Lexus is the luxury vehicle division of Toyota. V8s as Mustang. potentially be built alongside it in Windsor.

WORKING PAPER 2018-07 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION 3 AUTOMOBILE PRODUCTION IN CANADA AND IMPLICATIONS FOR CANADA’S 2025 PASSENGER VEHICLE GHG STANDARDS

increase sales of the Pacifica. Still, 4. Where in the United states differs markedly from those the Windsor plant will not be full, States the vehicles made sold in the other 36 U.S. states. and two larger crossovers could be built at the plant on FCA’s Compact in Canada are sold As shown in the red column, 44% of total U.S. sales of the Toyota Corolla, Honda Wide Platform (which is also the To shed light on Canada’s decision Civic, Honda CR-V, Toyota RAV 4, and basis for the Pacifica). These cross- about whether to align with the U.S. Lexus RX 350 are in the CA+13 states. overs have been tentatively named federal standard or, instead, with the In contrast, the combined market share the Chrysler 400 and 700 and could likely CA+13 standard, the study team represent additional volume for the of Honda, Toyota, and Lexus in the U.S. commissioned sales data by geography Windsor plant. is 24%. For the Detroit Three, these two for the 12 models from IHS Markit. The percentages are roughly reversed. GM, IHS data are summarized in Figure 1. The Brampton facility is in some danger Ford, and FCA have a combined market after the current Unifor contract expires At the highest level, the results seem share of 44% in the U.S., while only (in 2020), for several reasons: 25% of the seven models that these clear: the seven Detroit Three-made three automakers produce in Canada 1. Sales of its current product line models sell less than average in the are sold in the CA+13 states. are stagnant or declining and are CA+13 states, while the Toyota and focused on brands (Chrysler and Honda models sell better. All told, the Figure 3 compares the fuel economy Dodge) and market segments twelve vehicle models produced in and total U.S. sales of the seven (large cars) that are falling out Canada do better in CA+13, but not by models produced by the Detroit of favor. a great deal—37.8% of their sales are Three compared to the five models 2. FCA is in a more precarious finan- in those markets. This figure is only made by Toyota and Honda. As cial position than many of its com- slightly higher than total sales in the shown, the fuel economy values petitors, and cost-cutting and/or CA+13 states, which represent 34.8% for the seven Detroit Three models a merger with another automaker of vehicle sales in the U.S. However, range from about 19 to 23 miles are possible, either of which could as Figure 2 illustrates, the popularity per gallon (mpg) and have a sales- shake up its vehicle line-up plans. of vehicles brands sold in the CA+13 weighted average of 21 mpg. The

While the Brampton plant has received 60% 300,000 Number of units assembled in some investment (most recently in its Canada and sold in the U.S.* paint shop), it is a relatively mature 50% 250,000 facility. Moreover, its location in an Percentage of U.S. upscale part of suburban Toronto may 40% registrations in 37.8% CA+13 states 200,000 mean that FCA could be tempted to close it and sell the land for quick 30% 150,000 earnings and a positive entry on their 12 balance-sheet. 20% 100,000

12 If FCA has the money to go forward with 10% 50,000 the full Giorgio platform in North America, it will need two full assembly plants for it, one for the up-to-five car models and one for 0% 0 the next-generation Jeep Grand Cherokee 0 a a and Grand Wagoneer. Ironically, its Jefferson North plant, which build’s today’s Grand Ford Edge Cherokee, could be a victim of its own Lincoln MKX Honda CivicHonda CR-V Chrysler 30 Toyota RAV4Lexus RX350 Dodge Charger Toyota Coroll success. FCA cannot afford to lose Grand Chrysler Paciﬁc Cherokee sales, and might therefore opt to Dodge Challenger Chevrolet Equinox run the current model right up to when a Overall, for 12 models retooled plant—Brampton, Toledo, Warren, * Note: the CA+13 states account for 34.8% of total U.S. registrations or a new plant—is ready. This possibility is very much on the radar of Michigan’s auto Figure 1. The 12 models produced in Canada and their share of vehicle registrations in the retention/attraction professionals. CA+13 states

4 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION WORKING PAPER 2018-07 AUTOMOBILE PRODUCTION IN CANADA AND IMPLICATIONS FOR CANADA’S 2025 PASSENGER VEHICLE GHG STANDARDS

Percent of 12 vehicle models produced in Canada and sold in CA+13 states 5. Summary and policy 50% implications

45% 44% 44% The following are the key takeaways from this market assessment: 40% 1. The combined vehicle sales in 35% Canada, California and the 13 30% states that have adopted California 25% 25% 24% vehicle emissions standards make Overall up 41% of total vehicles sold in the 20% market share in U.S. and Canada. the US Overall 15% market 2. Canada has seven production share in 10% the US plants that produce 12 vehicle models. When looking at total 5% sales of these 12 vehicle models in 0% the U.S., the CA+13 states account General Motors, Ford, and Honda, Toyota, for about 38% of these vehicle Fiat Chrysler Automobiles and Lexus sales. This is only slightly higher Figure 2. GM, Ford, and FCA versus Honda, Toyota, and Lexus: their combined market than the overall market share of shares in the CA+13 states compared to the U.S. overall the CA+13 states, which is about GM, Ford, FCA: 629,000 Toyota, Honda, Lexus: 916,000 34% of total U.S. sales. vehicles produced in Canada vehicles produced in Canada and sold in the U.S. and sold in the U.S. 3. The five Toyota and Honda vehicle 40 300,000 models that are produced in Canada Units sold in the U.S. 35 Estimated miles are much more popular than the 250,000 per gallon* 30 29 seven “Detroit Three” (i.e., GM, Ford, 200,000 and FCA) models in the CA+13 25 21 states. Canada-made Toyota and 20 150,000 Honda vehicles are almost twice 15 as likely to be in sold in the CA+13 100,000 states than the vehicles made in 10 50,000 Canada by the Detroit Three. 5 4. The Toyota and Honda vehicles 0 0 r manufactured in Canada have a sales-weighted average fuel

Ford Edge economy (29 mpg) that is nearly Lincoln MKX Honda CiviHondac CR-V Chrysler 300 Toyota RAV4Lexus RX350 Dodge Charge Toyota Corolla 35% higher than their Detroit Chrysler Paciﬁca Dodge Challenger Chevrolet Equinox Three counterparts (21 mpg).

We can make several policy-relevant

Japan 3’ sales-weighted average Detroit 3’ sales-weighted average conclusions from this study. This analysis strongly suggests that from *STICKER fuel economy values taken from www.fueleconomy.gov both an economic and environmental Figure 3. GM, Ford, and FCA versus Honda, Toyota, and Lexus: fuel economy ratings and perspective it would be most benefi- total U.S. sales of the 12 vehicle models produced in Canada cial for Canada to maintain its current five models from the two Japanese of 29 mpg. The Toyota and Honda 2025 GHG standards for passenger manufacturers have fuel economy models have sales-weighted average vehicles rather than remaining aligned vales ranging from roughly 23 to 34 fuel economy that is 34% higher than with a weakened U.S. federal govern- mpg, with a sales-weighted average the Detroit Three vehicles. ment regulation. The advantages of

WORKING PAPER 2018-07 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION 5 AUTOMOBILE PRODUCTION IN CANADA AND IMPLICATIONS FOR CANADA’S 2025 PASSENGER VEHICLE GHG STANDARDS

Canada maintaining the current 2025 to sell the same vehicle models prevalent in the Canadian auto stringency levels include: across Canada and the U.S., this industry. Canada-CA+13 regulatory alliance 3. Putting Canada in a stronger 1. Maintaining regulatory solidarity could motivate automakers to position to meet its 2030 climate with California and the Section 177 simply sell the higher efficiency commitments, as vehicle GHG states. With the imminent roll back models required in Canada and standards are a cornerstone of the of the U.S. federal GHG and fuel the CA+13 states in the remaining strategy to reduce GHG emissions efficiency standards, there could 36 U.S. states. Thus, the current from the transport sector. be a bifurcated regulatory situation 2025 regulation would be the de 4. Keeping Canada competitive in in which there are two separate facto standards for the entire U.S.- global markets, since other major Canadian market. regulations facing manufacturers: markets such as China and Europe the weakened EPA/DOT federal 2. Retaining support for the domestic are implementing aggressive GHG regulation versus California’s regu- manufacturing base by uphold- regulations and zero emission lation, which is likely to remain at ing vehicle GHG standards that vehicle policies, which are accel- current stringency levels. Given the promote the types of higher effi- erating the prevalence of high effi- auto industry’s strong preference ciency vehicles that are more ciency and electric drive vehicles.

6 INTERNATIONAL COUNCIL ON CLEAN TRANSPORTATION WORKING PAPER 2018-07