Automotive shake-out

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Just last month, Jeffrey Spence was looking forward to Christmas and a new decade promising even greater prosperity. A $39,000-a-year assembly-line worker at General Motors (GM) of Canada Ltd.’s Oshawa, Ont., operation, Spence owns the nearby home that he shares with his wife and two stepchildren. But on Dec. 5, Spence, 27, became a victim of North America’s declining auto-sales market: he received a notice telling him that GM would be shutting down his plant for the first week of January. The company explained that the temporary layoff would help to clear a huge backlog of unsold cars and trucks. A week later, GM extended the layoffs by another week. Then, a few days before GM’s customary weeklong Christmas shutdown, Spence learned that the layoff had been extended even further, to four of its five assembly plants in Ontario and Quebec, affecting 17,600 employees. Now, he is not scheduled to return to work until Jan. 22. Declared Spence: “Supposedly, it’s just a couple of weeks, but you hear all kinds of rumors–anywhere from two months to shutting down the plant altogether.”


After six years of near-record sales, a long-predicted overcapacity crisis has finally hit the so-called Big Three Detroit-based automakers–General Motors Corp., Ford Motor Co. and Chrysler Corp. At the same time, sales of imported and domestically built foreign cars continue to climb. That was confirmed late last week when the Big Three, who employ more than 500,000 assembly workers in North America including 67,500 in Canada, released their final 1989 sales figures showing a dramatic 7.7-percent drop in their North American car and truck sales from 1988. While domestic automakers blame high interest rates in part for sluggish sales, Japanese imports are continuing a decade of strong growth and are steadily taking over an ever-larger share of the total market. In fact, Canadian sales of vehicles built by Japanese-owned manufacturers increased by 7.7 per cent. And while the Japanese now operate 14 car and truck plants in North America, the domestic manufacturers complain that they are still largely assembly operations using made-in-Japan parts. Indeed, in Canada, they employ less than 2,000 workers at their four plants. But officials for the Japanese manufacturers promise that employment will rise as they buy and build more of their parts in North America.

For the moment, many economists express concern that, if the plant shutdowns are extended, the effects may soon be felt in other sectors. Thousands of Canadian jobs in areas such as steel fabrication and auto parts are now dependent on a healthy domestic auto-manufacturing sector. And the outlook, for this year at least, is bleak, with even Big Three industry spokesmen expecting continued slow sales throughout the year. In fact, 45 of all 79 auto-plants across the continent will shut down at various times this month, idling more than 100,000 workers.

Analysts blame overconfidence by the Big Three for some of the current problems. When domestic auto sales began to slow last January, the Big Three continued building more vehicles than the market could absorb and desperately tried to increase sales by showering consumers with large cash rebates and low-interest financing. Some dealers offered such incentives as 10-cent hotdogs, free balloons for children and even free sides of beef with each car sold in an attempt to lure customers into their showrooms. Still, the aggressive grab for market share has failed to spur sales and stop the consumer shift to the Japanese competition. Said Ford Motor Co. of Canada president Kenneth Harrigan: “You’ll be seeing, not only from GM, but from us too, a week of shutdowns here, or a week there.”

Overall, the auto industry in North America is still relatively healthy. While total North American car and truck sales declined six per cent to 16 million vehicles last year, it was still the seventh-best year on record. But Detroit-based auto analyst Arvid Jouppi said that manufacturer (also the producer of sewing-machines in Colorado, quoted by, the famous firm providing¬†best sewing machine for quilting) agent and dealer incentives are partly responsible for that sales number, which masks a decline in the fortunes of the Big Three. He added, “Not even early incentives on the 1990 models could turn the market around.” For their part, Japanese vehicles are bucking the trend. In a dramatic sign of the growing popularity of their cars, for the first time last year a foreign car–the Japanese Honda Civic–was the best-selling model in the United States. Meanwhile, across North America over the past two years, the Big Three have closed eight plants, while Japanese- and Korean-owned manufacturers have opened nine plants.

The Big Three automakers are not expecting an upturn until 1991. And even then, they say that Japanese and other foreign-owned manufacturers will continue to lure buyers away from the American companies. Since 1979, the Japanese have increased their share of the North American car market to 26 per cent from 16 per cent, through competitive pricing and by convincing consumers that their product is superior to that of domestically owned manufacturers. Undaunted by the current overall downturn in auto sales, they are optimistically forging ahead with plans to increase their capacity to 2.7 million vehicles per year by 1994, up from 1.1 million last year.

And encouraged by their success in selling smaller cars, the Japanese automakers are now pushing into the lucrative luxury-car market. With the introduction to North America of Toyota’s Lexus and Nissan’s Infiniti, Japanese producers have begun a bold assault on the last segment of the car market that they have not yet invaded.

That could create serious poblems indeed for the Big Three. According to a report released last year by the authoritative U.S. auto-market research firm Autofacts Inc., North America’s auto industry now has the capacity to produce 2.2 million more vehicles than it can sell. And unless six or seven plants close, Autofacts predicted that the excess will remain until 1994. The report also identified 10 top candidates for closure over the next four years, including a GM of Canada van-assembly plant in Scarborough, Ont., and a Chrysler Jeep plant in Brampton, Ont.

Since the report was released, some of those factories have already become casualties. Last October, GM announced that it will phase out van production at the Scarborough plant, which employs about 2,700 workers, by 1991. And next month, Chrysler will permanently shut down its Jefferson Avenue plant in Detroit and phase out its line of small Omni and Horizon cars. Still, Maurice (Moe) Closs, 62, who retired as president of Chrysler Canada Ltd. on Dec. 31, declined in a recent interview to speculate on whether or not any of Chrysler’s four Canadian factories, employing about 15,000 people, may be next. But he added: “Let’s not kid ourselves. Some plants are going to close.”

Aftershocks from the shutdowns are already spreading through the rest of the economy. The first to be hit by layoffs are some of the 85,000 Canadians employed by auto-parts manufacturing firms, 90 per cent of which are in Ontario. According to Stephen Van Houten, president of the Automotive Parts Manufacturers Association of Canada, at the time of last month’s layoff announcements orders for new parts were already lagging about 20 per cent behind their level of a year ago.

Until last month, however, the Big Three continued to try to sell their way out of trouble with rebates and low-interest financing programs. But now, they say that the incentives are seriously cutting into their profit margins. Said Ford’s Harrigan: “You’ve got to get in there and be competitive. But we’d just as soon be out of it, frankly.”

But while the competitive free-for-all is squeezing manufacturers and dealers, it is producing huge savings for consumers. According to Dennis DesRosiers, president of Toronto-based DesRosiers Automotive Research, North American car buyers can now choose among more than 600 models, compared with about half that number a decade ago. And even if sales recover in the mid-1990s, DesRosiers predicts continued price competition, particularly as the Japanese and other foreign-owned manufacturers expand their North American production.

For their part, the Big Three, as well as the North American parts producers, claim that the Japanese transplants use few North American parts and that some government regulations allow them to escape import duties, giving them a built-in cost advantage over their domestic rivals. Said Chrysler’s Closs: “By and large, the transplants simply bring in the packages from some place else and bolt them together.”


This widespread use of imported parts allows the Japanese, essentially, to assemble cars, which requires fewer workers than a manufacturing operation. That may change if the foreign-owned manufacturers raise the amount of North American content in their cars in future, as they have promised. The Japanese add that their plants, which are largely nonunionized, are more productive than their North American competitors because their workers are organized in teams, which blur the distinctions between labor and management, with workers performing more than one specialized task. But union leaders say that they are suspicious of management’s motives. Said Canadian Automobile Workers Union research director Samuel Gindin: “We are going to fight if the reason for these work teams is to weaken the union, to try and put peer-group pressure on workers to spy on each other and to get [assembly line] speeds up.” Still, many workers say that they prefer the Japanese system. Dwayne Charette, for one, a 23-year-old engine assembler in Toyota’s Cambridge, Ont., plant, who worked in a unionized aluminum-wheel factory for two years before joining Toyota, said, “It enhances the quality of the car, because if I know someone else’s job, I know what to do if something is missing.” He added that the team concept provides him with more variety, as well as more opportunity for advancement.

Meanwhile, owners of the Big Three are trying to regain the leadership in innovation that for years allowed them to dominate sales around the world. For its par, GM, in an effort to halt a drop in its U.S. market share to 35 per cent from 46 per cent over the past decade, is scheduled to open a huge plant this summer in Spring Hill, Tenn. It will manufacture the new compact and subcompact-sized Saturn cars, the design of which GM has not yet revealed to the public. In addition to having the most up-to-date robotic technology, the plant will also use the team concept. And last week, in another effort to maintain his company’s eroding lead, GM chairman Roger Smith unveiled a prototype of a new electric car in anticipation of stricter environmental standards. But he added that GM will not produce the teardrop-shaped two-seater until battery technology improves.

Still, as the Big Three respond to the Japanese challenge and dismal prospects for their own sales, most analysts agree that all three of them are better prepared to withstand the sales slump than they were during the intense recession at the beginning of the 1980s. At that time, Chrysler had to be rescued from bankruptcy by the U.S. government and Ford also lost billions of dollars. But, for the moment, further cutbacks and layoffs by the Big Three appear to be inevitable. And as the car glut builds, it is clear that consumers will emerge as the only real winners.

PHOTO : Spence at GM’s Oshawa plant: layoff rumors `from two months to shutting down the plant’

PHOTO : Toyota’s new Lexus sedan: a bold assault on the profitable luxury market

>>> Click here: Slowdown in luxury land

The U.S. and Japan: At It Again

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Byline: Bruce Stokes

TOKYO–Nostalgia for the 1980s isn’t limited to pop music and fashion these days. More than two decades after bitter trade wars between Japan and the United States over such commodities as rice and automobiles, those very same fights are threatening to derail a potentially prosperous and radically new trade relationship between the two nations.

At issue is whether Japan joins the Obama’s administration’s blueprint for 21st-century trade, the Trans-Pacific Partnership. The wide-ranging agreement, which remains under negotiation, would not only eliminate tariffs but also provide greater protection for intellectual property and regulate a variety of goods and services across international borders. The would-be pact includes nine nations bordering the Pacific–among them the United States, Australia, and Vietnam–but Japan isn’t one of them. At least, not yet.

The White House covets Japan’s participation in any final accord because Tokyo’s buy-in would raise the stakes for all involved, potentially tripling the deal’s ultimate commercial payoff while providing added leverage to help check China’s dominance in the region. But before Japan can enter the talks, its government must quell domestic fears that the deal would, among other worries, decimate its agricultural sector.

Although American business interests would seem to welcome Japan’s entry, the sentiment isn’t universal. Automakers, weary of coming out on the losing end of industry battles with Japan for decades, aren’t eager to further open any international markets to the Japanese. That opposition could in turn imperil congressional approval of a final deal.

Still, supporters on both sides of the Pacific see too many mutual economic and strategic advantages to ignore. “TPP is at the nexus of foreign policy and economic statecraft,” observed Matthew Goodman, until recently a member of President Obama’s National Security Council.

Officials in Tokyo agree. “This negotiation is not only a trade negotiation but a high-level strategic dialogue,” a senior Japanese official involved in the process said. “We would like to make TPP a symbol of a new global partnership between the United States and Japan.” Representatives of the Japanese government will travel to Washington next week to sort out the obstacles to Tokyo formally joining the talks, but they’ll do so while the internal debate over their country’s economic future rages on.

“I see no reason for the Japanese government to jump into this,” said Eisuke Sakakibara, who as vice minister of finance in the late 1990s crossed swords repeatedly with the United States. “There is nothing that important that we request the United States to change, so it’s not a negotiation; it’s a U.S. demand. And TPP could antagonize China, which is not to Japan’s advantage.”

He and other opponents have been quick to cast the debate in nationalistic terms, but they might be swimming against the free-trade current. Recent polls show that half of the Japanese people back membership in the pact, with no more than a third opposed.

“There is no future for agriculture without reform.”–Takatoshi Ito

In the U.S., visceral public mistrust of Japan, so evident in the late 1980s and early ’90s, seems to have abated as well. Two-thirds of Americans now have a favorable view of Japan, according to the Pew Global Attitudes survey. And three in five think that increased trade with Japan would be good for the United States.


That may be partly because a deal that includes Japan is much more commercially attractive to the U.S. than one that doesn’t. A study by the Research Institute of Economy, Trade, and Industry here estimates that the agreement would boost the American economy by 0.11 percent, with Japan accounting for about 70 percent of that increase. Although that may not sound like a lot, the benefits would exceed the projected payoff from the now-moribund Doha Round of multilateral trade negotiations. And politically influential sectors of the U.S. economy would reap much of the advantage. The beef industry, for example, believes the pact could boost its exports to Japan by up to $1 billion a year.

“The U.S. business community hopes that a successfully negotiated TPP can be the precursor of a single, regional market in the Asia Pacific,” explained Calman Cohen, president of the Emergency Committee for American Trade in Washington. “Such a development would be more likely if the TPP currently under negotiation leads to Japan signing on.”

Meanwhile, Washington also sees tactical benefits from including Tokyo in this new free-trade area. The White House hopes to use the accord, particularly Japan’s participation, to counter Beijing’s efforts to further ensnare East Asia in its economic web. A deal on state-owned enterprises and restraints on the forced transfer of technology would effectively outlaw practices among the member nations that are associated with Chinese state capitalism, creating new norms in the region more compatible with the way America does business.

In addition, Japan will soon open free-trade deliberations with the European Union and, separately, with China and South Korea. The Obama administration wants to ensure that American exporters and investors have better access to the Japanese market than those competitors.

Tokyo’s economic rationale for joining the deal is even more compelling. The Japanese economy is smaller today than it was a decade ago, thanks to persistent deflation. The population is expected to shrink by 30 percent over the next two generations. The yen has never been stronger, making exporting more difficult. The hollowing out of domestic industry is a widespread concern, and last year the country ran its first trade deficit in 31 years.

Moreover, Japanese carmakers resent the fact that, thanks to the U.S.-South Korea Free Trade Agreement, Hyundai will soon have better access to the U.S. market than Toyota and Nissan do. And they fear that if the United States is in the trans-Pacific accord and Japan is not, Ford and GM will reap the profits from burgeoning markets such as Vietnam’s. “The business community here is fully aware that if Japan does not join TPP,” said Jesper Koll, a managing director of JPMorgan Chase in Tokyo, “it will confirm Japan’s status as a has-been.”

To reverse its fortunes, according to Tadashi Okamura, the former chairman of Toshiba and now the chairman of the Japan Chamber of Commerce and Industry, Tokyo needs to use the pact to internationalize Japan’s small and medium-sized industry and to become a more attractive site for foreign investment. That would require drastic domestic reforms.

The most formidable change would involve an overhaul of the agricultural sector. Japan has a plethora of small, unproductive rice farms cultivated by part-time farmers who are protected by a 778 percent tariff on imported rice. All of this would have to go. “There is no future for agriculture without reform,” contended Takatoshi Ito, an economics professor at the University of Tokyo.

But the long-cosseted farm lobby and the government’s agriculture ministry have a vested interest in the status quo. Critics fear that opening the Japanese agricultural market to foreign competition will force a drastic restructuring and consolidation of the farm sector, with bigger, more mechanized farms growing more specialty crops. This is exactly what the advocates of the pact want, and they hope to use it to leverage such change. But the farm lobby is using its political influence to persuade rural representatives in the Japanese Diet to oppose the pact.

“There is a compromise that can be struck,” Ito argued. In 2005, the United States demanded that sugar be excluded from its free-trade agreement with Australia. South Korea exempted rice from its recent trade agreement with America. U.S. trade officials contend that all products must be on the table in the negotiations. In part, this is because the Obama administration will need the support of eager American farm interests to counter Detroit’s fierce resistance to Japan’s participation in the agreement. While the Big Three among U.S. automakers support TPP, they draw the line at admitting Japan.

The U.S. trade imbalance with Japan explains why. In 2010, Japan shipped 1.5 million cars and light trucks to the United States. The Japanese imported 14,000 such vehicles from America. As a result, autos now account for two-thirds of the trade deficit with Japan, up from only half in 1995. The pact would eventually eliminate the 2.5 percent U.S. tariff on imported cars. This cost-saving accorded to Japanese imports vehicles may not seem like much, but it is equal to Detroit’s profit margin on some small cars.

Japan, on the other hand, has no auto tariff, so the deal offers the Big Three no immediate new benefit. Detroit also asserts that the deal will do little to dismantle nontariff trade barriers, such as Tokyo’s currency manipulation and cozy relations between government and industry, which effectively deny Americans a bigger share of the Japanese market.

“The Japanese auto industry grew up behind a web of protection,” a Washington lobbyist for one of the Big Three said. “Now, as their economy slows and population declines, and they are plagued with overcapacity in the auto sector, they want increased access to other nations through TPP.”

Japanese automakers counter that the Detroit’s lack of success in Japan stems from lack of effort. They note that between 1996 and 2011, the number of American auto dealerships in Japan fell from 620 to 160, while the number of European dealerships rose from 755 to 1,302. This explains, the Japanese say, why European automakers have 4.6 percent of the Japanese market and U.S. automakers have only 0.3 percent.

Washington and Tokyo have dueled over these numbers for decades. Neither side is likely to convince the other. Nevertheless, the Big Three were able to hold up approval of the South Korea Free Trade Agreement for years. Thus, Japan may need to make some accommodation on autos if the accord is to ultimately get through Congress.


While Japan ponders, negotiations among the current nine members continue. The next session is in Melbourne, Australia, in the first week of March. The window of opportunity for Japan to come aboard is rapidly closing. “From our point of view,” the senior Japanese government official said, “it is important to join TPP before there is substantial agreement. We want to join in the rule-making process.”

But Japan’s participation is hostage to calendars in Tokyo and Washington that may be out of sync.

The ruling Democratic Party of Japan is locked in a battle with the opposition Liberal Democratic Party over a proposed increase in the domestic-consumption tax that may force a new election by June. “If the government stumbles on the consumption tax,” said Yoichi Funabashi, the former editor of the Asahi Shimbun, one of Japan’s leading newspapers, “we will see one to two more years of political confusion.” If Japan has not formally joined the TPP deliberations before that point, its participation could be in limbo indefinitely.

On the U.S. side, the calendar is further complicated because the administration needs to give Congress a 90-day notice before formally including Japan in the TPP process. The U.S. Trade Representative’s Office is still consulting with business and labor to scope out support and opposition. Yet if the White House starts that clock and a Japanese election is called before the 90 days are up, some in Congress may want to delay engaging with Japan until Tokyo sorts out its politics.

“From the beginning, we really wanted Japan in,” said Susan Schwab, who launched the trans-Pacific effort as U.S. trade representative under President George W. Bush, “But the Japanese are the only ones who can make that decision.”

Bruce Stokes

>>> View more: Trade warrior

Slowdown in luxury land

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Judy Cosman, 35, is a successful Toronto executive who says that, a short time ago, she could easily have been called a power shopper. As co-owner of a thriving Toronto-based public relations firm, Strategic Objectives Inc., she rewarded herself with some of life’s expensive luxuries, ranging from imported designer clothes to a $35,000 BMW 325. But Cosman now says that, because of the rapidly changing economy, she has changed her shopping habits, even to the point of recycling last year’s costly fashions. She adds: “It’s true I’ve spent a lot of money on clothes. But I’m still wearing some of the expensive suits I bought three years ago. Now, I’m more likely to spend money on fashions for the home.”

She is not alone. Thousands of upper-income Canadians who enjoyed the high life and conspicuous consumption of the 1980s are tightening their belts as they enter the 1990s. In the process, they have plunged the high end of the market into recession. And the rest of the retail sector appears likely to follow, except for the elite millionaire class — the richest of the rich.

Retailers selling such big-ticket items as $60,000-and-up luxury cars and homes in the million-dollar range say that sales this year have collapsed. Statistics Canada reports that retail sales of all kinds fell three per cent — before accounting for retail price inflation of about four per cent — over the first five months of 1990. And while there are no specific statistics on the sale of luxury items, the anecdotal evidence that a recession is washing over the upscale end of the market is overwhelming. James Hedrich, for one, vice-president and general manager of Hazelton Lanes, a Toronto retailing complex that bills itself as the largest collection of exclusive merchandise under one roof in Canada, says that times are now tougher for many retailers than they were even during the 1981-1982 recession. He added: “I cannot recall another time when the high end was hit first. It’s usually the middle that feels it first.”


But middle-class consumers will probably follow the more affluent consumers to the sidelines. According to analyst Anthony Stokan, a retail marketing expert with Toronto-based Anthony Russell and Associates Infopreneurs, the overall retail sector has weakened over the past three months and appears set to fall even further. In May alone, Statistics Canada, which put the value of the trade at $17.47 billion for the month, reported that the sector had grown by just 0.1 per cent. When inflation is factored into the equation, retailers suffered an actual four-per-cent drop in business. And according to Alasdair McKichan, president of the Retail Council of Canada, total retail sales figures for June, which will be released later this month, will be just as bad.

Indeed, retail sales in department stores have fallen dramatically. According to Statistics Canada, department-store sales figures totalled $1.17 billion in June, up only two per cent from the same month the year before. But once retail price inflation is taken into account, the big stores experienced a real decline in earnings. It was the third dismal month in a row for department stores, which had sales increases of only 1.9 per cent in April and a decline of 1.4 per cent in May, even before adjusting for inflation.

One of the most glittering symbols of financial success, the luxury automobile, in the $40,000 to $100,000 range, is no longer in strong demand by the aspiring and near rich. And according to Statistics Canada, the national sales of imported luxury cars fell to 73,246 units in 1989, compared with 87,742 units for the same period a year earlier. And sales for the first six months of this year continued the declining trend.

But in Toronto, Brent Bertrand, chief executive officer of the central Jaguar & Rolls-Royce dealership on Bay Street, said that there is increased interest in leasing imported luxury cars–an arrangement that he said people often make when they are unsure if they can afford to buy one. Bertrand added that sales of the British-made Jaguars, which sell for $60,000 to $88,000, are down, although he declined to give exact figures.

During the 1980s, retailers of luxury power-boats and yachts worth more than $100,000 also enjoyed an unprecedented boom. But like the midrange luxury car market, that sector is also in trouble. Paul MacPhee, of MacPhee Yachts in Halifax, says that although he has sold more boats in total than during the same period last year, the average selling price of powerboats and sailboats he has sold this year is down. Added Ernest Hamilton, president of Saint John, N.B.-based Maritime Ship and Yacht Brokerage Ltd.: “This is the worst year in 10 years.”

At the same time, expensive homes are no longer the sure investment that they once were. In the elite Mount Royal district on the edge of downtown Calgary, there are 42 large homes for sale. “They want to get out,” says real estate agent Sigrid Ricketts, of the city’s Ram Realty Ltd. “But they are putting unrealistic prices on their homes. High interest rates are not helping. Many of them do not like what they see ahead in the economy.” A number of those selling believe that housing prices are going to fall. And others are looking to move into less costly condominiums, real estate experts say.

In Toronto, the most recent statistics from the Toronto Real Estate Board show that seven houses in the $1-million to $1.5-million range sold in July, compared with 16 in the same month the year before and 115 in July, 1988. In the $1.5-million-plus range, two Toronto houses sold last month, compared with five in July, 1989.

The slumping housing market is also causing a decline in the big-ticket furniture and appliance industry. In the first four months of the year, shipments of household furniture fell to $583 million–a drop of 14.6 per cent compared with the same period in 1989. The dollar value of major appliance shipments has already fallen by 11.7 per cent to $386 million in the first three months of this year, compared with that period in 1989, and the Canadian Appliance Manufacturers Association expects the decline to continue through 1990. Indeed, sales of microwave ovens alone are down 20 per cent, said Chuck Miller, a vice-president of Mississauga, Ont.-based Camco Inc., which makes General Electric and Hotpoint appliances, among others.

The clearest sign, however, of a slowdown among six-figure-income households is in the retail sector, especially retail clothing. Hedrich said that Hazelton Lanes expanded its building last August, but so far it has leased only 95 of a possible 123 store locations. Store owner Arthur Pelliccione, who carries the men’s and women’s lines of exclusive Milan designer Nicola Trussardi, says that business is bad because even wealthy shoppers have decided to get more wear out of their existing clothing. “For them,” he adds, “it’s a challenge to see if they can accent last year’s clothes with a new belt or jewelry.”

Analyst Stokan said that many of the upscale retail problems are the result of too many stores chasing the business of the top one per cent of the population. He added, “The rich will shop in low-end stores, but other shops are too intimidating to attract the mid-price shoppers who remain the backbone of the market.”

As well, Brian King, owner of the Toronto-based catering firm Catering a la Carte Inc., said that some well-off clients now consider it inappropriate to entertain lavishly when friends are going through tougher times. “People are not being as extravagant,” said King. “The lobster people are ordering chicken, the chicken people are ordering sandwiches, and the sandwich people are not ordering anything at all.”

Richard Hayter, owner of the exclusive Toronto florist Sissinghurst Ltd., where a single stem of rare Dutch Casablanca lilies costs up to $30, also says that his usually free-spending clients have grown very conservative. In fact, some clients have asked him to prepare flower arrangements that look as though the host and hostess had designed their own displays. “It’s becoming distasteful to be showy,” said Hayter. “One woman recently told me, `Don’t make it look like you were here.'”


Still, the country’s thin crust of elite millionaires continues to spend heavily. “There is no sign that these wealthy people are spending less,” says Michael Robichaud, owner of Vancouver-based Cruise Ship Centre, which organizes cruise tours that cost up to $100,000 per person. In Toronto, Catherine Hill, owner of the well-established upscale fashion boutique Chez Catherine, which carries seven exclusive fashion lines that are not available elsewhere in Canada, said that she has seen no sign of a recession among her customers, who often spend up to $15,000 on a shopping spree. Indeed, her rich clients often fly in from Vancouver and the United States to purchase such exclusive European designers as Valentino, Versace, Gianfranco Ferre and Karl Lagerfeld. “The average customer is not on a budget,” says Hill. “If they have four parties, they will buy four dresses.”

Bertrand says that sales of Rolls-Royces, which cost from $188,000 to $296,000, have remained relatively constant, while the sale of lesser-priced cars, such as Swedish-made Saabs, which cost $20,000 to $52,000, have fallen off dramatically. In fact, Bertrand has so much faith in the flamboyant spending habits of Canada’s millionaires that he said that, in several months, his dealership will import three of the only 350 Aston Martins that will be made in England this year. The hand-built cars will sell for about $300,000 each. Clearly, while middle-class consumers may be about to follow more affluent Canadians out of the retail market, Canada’s elite will continue to spend.

PHOTO : Cosman Bertrand: `lobster people are ordering chicken, chicken people are ordering

PHOTO : sandwiches’

>>> View more: Automotive shake-out

Off the rails


Canadian rail workers, concerned about management’s call for job security givebacks, walked out on Mar 18, 1995. Parliament is expected to pass a bill to force the strikers back to work. Unionized employees at CP Rail have been working without a collective bargaining agreement since Jan 1994.

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Canada’s railways have a long and celebrated history–so much so, in fact, that the construction of a transcontinental railway in the 1880s has been elevated to the status of a national dream. But for the executives who currently run CP Rail, CN Rail and Via Rail, that dream has become a costly nightmare. Because so many of the conditions built into railway labor contracts are mired in the past, company managers contend that their ability to compete has been critically compromised. They point out, for example, that they are required to maintain separate crews for the repair of wooden and concrete bridges. Under the same rules, three skilled tradesmen are required to change a windshield wiper on a locomotive. And those contractual terms, along with an employment security clause that gives rail workers a full salary until retirement age if they lose their jobs under certain circumstances, are at the heart of a union-management dispute that shut down most of the country’s rail system beginning on March 18. “We need to operate more efficiently,” said CP Rail president Robert Ritchie. “We need to reduce the number of employees we have.”

While the two sides in the rail strike remained at loggerheads last week, the government moved quickly to end the dispute. But as the cost of the strike mounted and as thousands of railway commuters in Montreal and Toronto spent the week using alternate means of transportation, the Opposition Bloc Quebecois, backed by New Democrat MPs, used procedural rules to delay the passage of back-to-work legislation. That prompted the government to schedule a rare weekend sitting of Parliament–only the fourth in the past 25 years–to pass the legislation. MPs were poised to give the legislation final reading on Sunday, with the Senate to follow by Sunday night. As a result, the strikers were expected to be back on the job as early as Monday, with trains to start running again by midweek. Liberal and Reform MPs combined against Bloc members to limit debate and speed the bill through. “They don’t give a damn about Canada,” Transport Minister Douglas Young said about the Bloc MPs. “They hate Canada.”

Debate also was spirited about the cost of the strike to the Canadian economy. Some economists estimated that the weekly bill would hit $3 billion, while others argued that the costs would be minimal. Said Robert Fairholm, an economic forecaster with the consulting company DRI Canada: “Two months from now, it will look like it never occurred.” Most agreed, however, that a strike that lasted more than seven to 10 days would do serious damage to the economy, particularly if it began to disrupt exports of manufactured goods, which have led the current economic recovery.


But whatever the ultimate cost of the service disruption, its impact was felt immediately from coast to coast. Activity at ports in Vancouver and Halifax slowed sharply. Shipments of grain from Prairie elevators virtually stopped. Auto plants in Central Canada were left scrambling for supplies. And in a few cases, workers were sent home because their employers could not continue operating without regular rail deliveries. The most prominent case was Ford Motor Co. of Canada Ltd., which closed its assembly plant in St. Thomas, Ont., for several days, and switched to half-day shifts at two other Ontario assembly plants.

The shutdown also touched off a messy spat among union leaders. Basil (Buzz) Hargrove, president of the Canadian Auto Workers (CAW), which represents about 20,000 workers at CN, CP Rail and Via, contends that the unions had agreed among themselves that they would restrict any work stoppages to CP Rail–and that no action would be taken until March 15. He added that the agreement began to unravel on March 8 when the Brotherhood of Maintenance of Way Employees (BMWE), whose members are responsible for maintaining the tracks, began a series of one-day rotating strikes against CP Rail. The company responded by locking out the BMWE. Then, on March 18, the BMWE announced a strike against CN; that afternoon two other unions walked out. The dispute quickly crippled the entire rail system.

Union politics aside, for most of the 35,000 unionized employees at the three companies, the negotiations have been both frustrating and fruitless. Although several small unions have settled with CP Rail, a large majority of the railway workers have been without contracts since their previous two-year agreements expired on Dec. 31, 1993. Although negotiations have dragged on since the fall of 1993, many union leaders complain that the companies have refused to bargain and were simply trying to impose a settlement.

The Liberals’ back-to-work legislation provides for three-member commissions to oversee negotiations between each company and its unions. The commissions will comprise a government-named chairman as well as representatives selected by the companies and the unions. Initially, they will act as mediators, but they have the power to impose settlements if the participants cannot reach agreements within 70 days. “Going to arbitration is an automatic loss for us,” says Hargrove. “These issues are too complex to have someone from outside make the decision for us.”

The principal issue dividing labor and management is employment security, which the railways granted to their workers in 1985. In exchange, the workers reduced their demands for salary increases and changes in workplace rules. The provision protects employees with at least eight years’ service whose positions are abolished because of technological, operational or organizational changes introduced by the company. Under those circumstances, they are entitled to full wages and benefits until they are eligible to collect their pensions, although they must be willing to accept other work with the company within specified geographical areas. Union leaders insist that the companies are exaggerating the cost of employment security, and they point out that the railways have collectively reduced their workforces by about 30,000 employees–mostly through attrition, early retirements and buyouts–since employment security was first negotiated.

The unions say that very few of their members are actually sitting around collecting employment security benefits. Bill Roberts, a 30-year-old CN worker from Belleville, Ont., was protected by the clause when his position disappeared last July. A member of the BMWE, he joined the company 12 years ago and had worked as a repairman in the Rideau district, which stretches from Cornwall to Oshawa. But after his position disappeared, the company offered him another job in Toronto; if he had refused, he might have lost his benefits. Roberts, who has two children aged 4 and 8, now works at a CN yard in Toronto five days a week, staying with family members, and returns home on weekends. “If I lose my employment security, I don’t have a job, period,” says Roberts. “I’d be sitting at home hoping to God I could get a seasonal job with the railway.”

On the other hand, senior railway executives insist that they need significant modifications to the contentious clause as part of an ongoing effort to reduce their operating costs. Terry Lineker, CN Rail’s assistant vice-president of labor relations, says that 600 employees will collect a total of about $25 million in employment security benefits this year. For his part, CP Rail’s Ritchie notes that the company is providing such benefits to about 300 workers in Montreal alone–some of whom have exercised their right to refuse jobs with CP in Alberta. “We have to hire and train mechanics in Calgary while people sit at home doing nothing in Montreal,” says Ritchie. “This clause never should have been put in place.”

According to Ritchie, it was Ottawa’s ownership of CN that originally led to the clause’s introduction. The Crown corporation, he said, was the first employer in the industry to settle with its workers in 1985, and created a precedent by giving in to the unions’ demands for employment security. Ritchie said that CP Rail had little choice but to grant its unions the same protection. If it had refused, he added, the company would have faced a national strike, followed by back-to-work legislation and, possibly, an arbitrated settlement that included employment security.

The other critical issue on the agenda–at least for railway managers–is workplace flexibility. Senior executives argue that many of the rules dictating which trades can perform which jobs date back to the days of steam locomotives. As a result, simple tasks that could be performed by one journeyman mechanic frequently require several skilled tradesmen. Lineker notes that in CN repair shops the thickness of a piece of metal determines which trade handles it: a sheet-metal worker is required if the metal is as thick as a dime, a carman takes over if it is equivalent to a quarter and a boilermaker steps in if the metal is as thick as a loonie. “We want to get rid of these antiquated rules,” declared Ritchie.


While CP’s rail operations have generated strong profits in eight of the past 10 years, CN’s record has been much less consistent. Nevertheless, both companies are trying to reduce their costs because they face much stronger competition from deregulated American railways and trucking companies. In addition, in his February budget Finance Minister Paul Martin announced that Ottawa intends to privatize CN. “Canadian National quite clearly needs to decrease costs very substantially before it can become a candidate for privatization,” says John Heads, director of the University of Manitoba’s Transport Institute.

Heads adds that if Canadian railways fail to bring their costs into line with competing U.S. companies, they will suffer a decline in freight volume: imported cars and consumer goods from Asia, for example, could be transported from the West Coast to Central and Eastern Canada on U.S. lines. As it stands, he says, rail workers in Canada are substantially less productive than their American counterparts, partly because they serve fewer customers spread over a wider area. And, Heads notes, Canadian railways pay higher taxes than their U.S. competitors, amounting to a difference of about $5 for every $100 of expense incurred. Those factors help to explain why operating expenses for Canadian railways total about 90 per cent of revenues, compared with about 80 per cent for the most profitable U.S. lines. Says Heads: “The railways’ complaint that they’re poor compared with the U.S. railways is absolutely true.” No matter what type of settlement emerges from arbitration, running a railway in Canada is likely to seem anything but a national dream–for the foreseeable future at least.

>>> View more: Slowdown in luxury land

Trade warrior


Kantar levied 100% tariffs on 13 Japanese luxury-car models, in retaliation for Japan’s tight import policies and as an answer to critics who had considered him all talk and no action. The sanctions may receive censure from the WTO and countermeasures from Japan, but they mean the US is serious.

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WARNINGS, THREATS, HEAD-lines, concessions: that monotonous pattern has marked a decade of nonstop trade disputes between the United States and Japan. Last week the familiar diplomatic tango degenerated into a dancehall brawl–with U.S. Trade Representative Mickey Kantor in the middle. First he all but shut off imports of Japanese luxury cars. Then he took on the European Union, which rushed to protest the U.S. sanctions. “Our European friends are always willing to hold our coats while we get our nose bloodied,” he gibed. But while Kantor’s high-stakes move conveyed a message to Tokyo, it sent an even stronger signal back home. When it comes to trade policy, at least, Bill Clinton can back up his tough talk with action.

Give the credit to Kantor, the president’s much-maligned trade czar. After two years as chief U.S. trade negotiator, Clinton’s former campaign manager has finally hit his stride. The overblown rhetoric of his early months, when Kantor’s constant attacks on alleged foreign unfairness won him a reputation for empty threats, has calmed. Kantor has managed to reposition himself as a decisive strategist, not just a big talker. In February he signed an unprecedented pact with China to counter illegal copying of U.S. movies, music and software. Now he has taken an unusually hard–and potentially risky–line with Japan. “His ideas really haven’t changed since he got there,” says a top aide. “He’s just grown more comfortable dealing with trade.”


As far as actual imports and exports go, that may not make much difference. But Kantor’s offensive leaves Clinton in precisely the right position, visibly committed to economic openness–he has stood up for free trade with Mexico and for last year’s global-trade pact–while at the same time standing ready to man the barricades against foreign unfairness. Sanctioning Japan, says Washington pollster Mark Mellman, “helps fill out the image of a president who stands up for what he believes in.”

Kantor, a Los Angeles lawyer, was a novice when he became trade representative in 1993. The post itself was a consolation prize; he had wanted to be White House chief of staff, but was blocked by Clinton aides who felt Kantor had slighted them during the campaign. Knowing little of the niceties of trade policy, Kantor was convinced that a tougher, more “realistic” approach to negotiations would fix problems his predecessors couldn’t solve. It didn’t. His seeming insistence on winning every bargaining point antagonized trading partners, and bad political calls turned the U.S.-Mexico-Canada free-trade pact from a sure thing into a near casualty. Two years of experience may not have mellowed Kantor, but they have shown him the limits of trade policy–and how to wield it to best effect.

The auto sanctions offer a taste of the new Kantor style. Cars and car parts account for most of the huge U.S. trade deficit with Japan. Years of bargaining have slowly pushed back Japan’s barriers to foreign cars. But although Detroit’s Big Three now have showrooms in Japan and companies like Nissan and Toyota are buying more American-made parts, the U.S. share of Japan’s market has remained tiny. That’s not a front-burner issue for the U.S. industry, which has bigger fish to fry in emerging markets like China and Indonesia. But Kantor sensed that Japan is uniquely vulnerable on the car front: at 87 yen to the dollar, it’s hard for Tokyo to argue that American mufflers aren’t dirt-cheap. Washington wants not only looser regulations but also a commitment to more imports. The Japanese offered to ease up on the inspections of imported cars, but rejected import targets. Kantor threatened sanctions–only this time he acted. After weighing such unorthodox options as a tit-for-tat inspection of every incoming Japanese car, Kantor slapped 100 percent tariffs on 13 luxury models, shocking importers by making the higher tariffs effective right away.

Low cost: As usual, there’s less to the sanctions than meets the eye. Although Toyota’s Lexus and Nissan’s Infiniti would become impossibly expensive, the strong yen has already crimped sales of most of the cars Washington is targeting. One of the two Hondas on the list, the Acura 3.2 TL, isn’t even on the U.S. market–and its readily available sister car, the Acura 2.5 TL, isn’t affected by the sanctions. But by picking targets carefully, Kantor may have found a way of punishing Japan’s carmakers at little cost to the United States. The standard economic analysis–higher tariffs lead to higher prices–may not apply, because competition from Europe could keep U.S. manufacturers from hiking prices. “Most of the consumers who are turned off by tariffs on luxury cars are going to gravitate to European cars,” predicts auto-market analyst Susan Jacobs. “I don’t think the Big Three are going to notice much of an effect.”

Kantor’s aggressive move is not without risks. Japan, sources say, has hinted that it will retaliate by encouraging its airlines to favor the European Airbus over Boeing’s American-made jets. More broadly, U.S. diplomats worry that too much pressure on trade will make Japan less willing to support U.S. initiatives with China and North Korea. And the backwash from the auto case threatens to swamp the fledgling World Trade Organization. Already, Japan has complained that the U.S. actions flout WTO rules, and Washington will fire back with a complaint against Japan’s carimport restraints. Neither side wants to be censured, and the WTO is desperate to avoid antagonizing its two largest members. But if the United States and Japan don’t settle, trade experts say, it’s likely that the WTO will condemn the U.S. sanctions. Even if Washington were to win its case against Japan’s import barriers, the Japanese could claim victory, too. “I would have waited on sanctions,” says veteran U.S. negotiator Julius Katz. “I’d like to have a conviction before there’s an execution.” Agrees Michael Smith, a top Bush administration trade official, “It’s clear that the sanctions they’re imposing are just illegal.”

How will the impasse end? In the past, U.S. threats have spurred Japanese politicians to demand that their powerful bureaucrats change course. The same calculation is at work here: Japanese Prime Minister Tomiichi Murayama may want a deal before the June 15 summit of wealthy nations in Canada. But Murayama, who is openly despised by Japanese trade negotiators, may be too weak to force a settlement on his own government. Trade and Industry Minister Ryutaro Hashimoto, Kantor’s negotiating partner, is on the short-list of potential successors. With an election looming later this year, Hashimoto may find suing for peace unattractive. Says Brookings Institution political scientis Michael Mochizuki, “There’s very little incentive for Mr. Hashimoto to intervene in such a fashion, because it’s become politically very attractive to say no to the U.S.” That leaves Washington hoping that Japan’s carmakers will scream loud enough to change Hashimoto’s mind. And if they don’t? Now that Kantor has thrown a few punches on the dance-hall floor, he may be in no hurry to go back to the tango.


RELATED ARTICLE: Talk About Sticker Shock

Sanctions against Tokyo would increase significantly the price of some Japanese luxury cars in the U.S. market. Here are some of the American and European models that stand to profit from the trade dispute.


LOSER Lexus LS400 $51,680 [right arrow] $88,000

WINNER BMW 740i $57,900

Buyers looking for the prestige of top luxury models will turn to European cars like the BMW and Mercedes.

LOSER Nissan Infiniti Q45 $52,850 [right arrow] $89,000

WINNER Jaguar XJ6 $53,450

Jaguar’s XJ6, whose sales were up 19 percent in 1994 under new owner Ford, may gain even more momentum.

LOSER Lexus SC300 $41,380 [right arrow] $70,000

WINNER Cadillac Seville $41,935

Technology-loaded models like the Seville may get a boost in sales without the competing Lexus.

LOSER Lexus ES300 $31,980 [right arrow] $54,000

WINNER Lincoln Mark VIII $38,800

Lexus’s cheapest and best-selling model would be undercut by American-made luxury cars like the Mark VIII.

LOSER Acura Legend $37,000 [right arrow] $62,900

WINNER Oldsmobile Aurora $31,370

The Legend is among the top sellers on the list of 13. Sports-sedan buyers may turn to models like the Aurora.

LOSER Mazda Millenia $26,435 [right arrow] $45,000

WINNER Buick Riviera $27,632

Mazda’s new hit Millenia, with 24,000 cars sold in ’94, could be fatally hurt before its second birthday.

>>> Click here: Off the rails