Caterpillar closure signals change for Canadian manufacturing: expert

Bradley Bouzane
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Electro-Motive workers picket a Caterpillar equipment dealership in London, Ont. Progress Rail, a U.S.-based subsidiary of giant Caterpillar Inc., closed the Electro-Motive plant’s doors Friday. — Photo by The Canadian Press

The closure Friday of Electro-Motive plant in London, Ont., paints a bleak picture for the future of the Canadian manufacturing industry, one expert says, adding the “writing was on the wall” for the southwestern Ontario plant long before the closure became official.

Progress Rail, a U.S.-based subsidiary of giant Caterpillar Inc., closed the Electro-Motive plant’s doors Friday after prolonged unsuccessful contract negotiations and a month after more than 450 workers were locked out. The closure added to a worrisome trend, says Western University economist Mike Moffatt.

“Unfortunately, I don’t see any silver lining here for the workers,” said Moffatt of the London, Ont., university’s Richard Ivey School of Business. “No company has suggested that they’re going to buy this plant from Caterpillar and have it manufacture something else. It’s just a combination of the high Canadian dollar, a poor U.S. labour market and these weakening labour laws in the United States makes Canada — and southwestern Ontario — a particularly more expensive place to do manufacturing.

“Not only is this closure a problem, but I fully expect this trend to continue. Sadly, it’s not the end.”

In a statement Friday, the company said the situation was “regrettable” and cited the ability to remain competitive among its reasons for the decision.

“The cost structure of the operation was not sustainable and efforts to negotiate a new, competitive collective agreement were not successful,” the company said, adding that its delivery schedules to its customers would not be affected by the closure of the London facility.

The Canadian Autoworkers Union called the closure “callous” and insisted that closing the plant was the company’s intention from the beginning of the labour dispute.

Benjamin Tal, deputy chief economist with CIBC World Markets, said the entire manufacturing industry is in the process of change in Canada. He said, however, that while the industry is primed to look very different, it isn’t doomed.

Tal said Canada is likely undergoing a transformation into a “leaner” and “more dynamic” manufacturing industry that will remain very efficient, but less reliant on human resources and more on mechanical and technological alternatives.

“What I do see in the manufacturing sector is not a diminishing sector, but I see a smaller, but more flexible and dynamic sector in the future,” Tal said.

“We’re in the process of restructuring the manufacturing sector due to the strong Canadian dollar and globalization. This process is not over, although we are getting closer to the manufacturing sector of tomorrow. What I’m seeing is a manufacturing sector that is very flexible, but will not be a huge employer. Most of the improvement will be in capital-intensive, high-tech stuff and that will not require a lot of labour.”

Moffatt said the decision is a further blow to an already vulnerable region of the country that has been dealt repeated blows in terms of lost manufacturing opportunities.

“It certainly hurts London and southwestern Ontario. We were already a region with the highest unemployment rate in Canada, due to a number of plant closings,” he said.

“We’ve seen a lot of manufacturing job loss over the last 18 to 24 months. Now there are 450 more workers who are unemployed, who won’t be spending nearly as much money in the community, so this tends to have a cascading effect.  …  It’s something that London has experienced before, but it’s sort of piling on an already difficult situation.”

When it comes to tax breaks for companies to operate in Canada — such as the well publicized $5-million federal tax break given to Electro-Motive for its London-based operations — Tal said changes aren’t necessary.

“I think the business sector as a whole is going to be the new driver of economic growth and anything that will help (such as government tax breaks for companies) is a good thing.”

Tal also said the “very slow process” of change is shifting manufacturing focus away from the U.S. and into emerging markets, such as China, India, Brazil and Mexico.

Workers at Electro-Motive had been off the job since New Year’s Day after rejecting a new collective agreement that would have lowered the salaries of some workers currently paid $35 an hour to $18 an hour. Despite the closure announcement, picket lines remained active at the site on Friday.

The company apparently intends to relocate its operation to a facility in Muncie, Indiana, where Moffat says it will have an easier time moving ahead with less resistance from workers.

He said new workers there were being trained, with a plant being expanded despite running at only one-third of its capacity.

On Wednesday, Indiana became just the second U.S. state in 20 years to enact right-to-work laws, which allow a unionized workplace to have voluntary enrolment.

He said that practice often leads to a lot of “freeloading,” which results in underfunded unions with less clout in the negotiating room.

Organizations: Electro-Motive, Caterpillar Inc., Western University Richard Ivey School of Business London facility.The Canadian Autoworkers Union CIBC World Markets

Geographic location: United States, Canada, Southwestern Ontario London, Ont. London Muncie, Indiana China India Brazil

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  • You obviously skilled math class and economic class JACK
    February 07, 2012 - 07:44

    Jack said " Since Electro-Motive is a Caterpillar division, and Caterpillar or CAT has made over $5 billion last quarter, their closure of the London, Ontario railcar facility is definitely a symbol of greed. "....................So you are telling be because CAT is profitable, the should keep their unprofitable sister company open? That is pretty stupid and an example of the union entitlement that leads companies to hate unions. Each any every division of a company needs to be independently profitable. If one division is not profitable, it should be shut down period. I am a CAT shareholder, and I actively make submisisons to the company that as a shareholder, I expect them to only operate profitable divisions. As such, I applaud the company's decision to shut down the unprofitable divisions. I just mailed a thank you letter in response to the London closure. Look at GM, Chrysler and other bankrupt companies...one of the first things they did was to close down the unprofitable divisions. THink of CAT and its subsidiaries as the human body.....if all is working and making profit, then great.....but if you have one arm that is failing, and even though you are profitable, your profits will increase if you cut of that arm. EMD in London was not a profitable operation...rather it was a liability. THey have cut of that arm, and are now a stonger company. SUre, they put people out of work, but technically, they had a duty to their shareholders to do so. Again, I applaud their decision.

  • Fred from Brigus
    February 07, 2012 - 05:33

    Greed forced the closure of the pant not the high cost of labor. I believe labor only accounts for some 3% of the cost.

    • Labour costs must be competitive
      February 07, 2012 - 07:37

      Even if labour is 3% of the most, I would argue that that is still too much if cheaper labour exists elsewhere.

  • sealcove
    February 06, 2012 - 11:42

    Cat made 5 billion last quarter, O the greed runs deep

    • JUST BECAUSE CAT MADE FIVE BILLION DOES NOT MEAN THAT EMD, THE COMPANY THAT CLOSED ACUTALLY WAS PROFITABLE
      February 06, 2012 - 13:42

      The earnings of CAT is irrevelant because CAT is not the company that moved, it was EMD. CAT is just an investor who owns EMD. EMD was not making money becuase the workers were paid too much, so EMD closed down London and moved the work to an more efficient operation. And as a shareholder, I applaud the company for this decision.

    • Jack
      February 07, 2012 - 06:31

      "JUST BECAUSE CAT MADE FIVE BILLION DOES NOT MEAN THAT EMD, THE COMPANY THAT CLOSED ACUTALLY WAS PROFITABLE", that's beside the point. Since Electro-Motive is a Caterpillar division, and Caterpillar or CAT has made over $5 billion last quarter, their closure of the London, Ontario railcar facility is definitely a symbol of greed. At the end of the day, Caterpillar should be forced to pay back the $5 million in tax breaks as punishment for not fulfilling their job commitments and face a ten year suspension from setting up shop in any Canadian province, particularly Ontario. This ban would apply to its subdivisions as well. In the meantime, every single Canadian, including the corporate community, should boycott selling CAT related products like their famous hats and boots like London, Ontario is doing now.

  • EXCELLENT.....ANOTHER RIGHT TO WORK STATE....TIME TO CALL THE GOVERNOR
    February 06, 2012 - 08:04

    I will be putting in a call to this governor to see if he wants to buy some jobs from my companies. If he is willing to pay enough, I can have some jobs within 45 days. I do feel bad for the workers that are displaced, but I am happy about this development for various reasons. First and foremost, I am a CAT shareholder, and like other shareholders, we have been pushing the board to makes changes like this to increase our profits. Secondly, I am openly anti-union, so I am happy to see union jobs go south. Thirdly, I am a business owner, and this type of event will make workers consider concessions in profitable times...maybe I can extract some more concesssions from my unskilled workforce. Forthly, there is a fresh, ripe right to work state with money to trade for jobs. I have dealt with right to work states before, but a fresh state with money to spend to get jobs is ripe for the picking.

  • Townie
    February 06, 2012 - 07:58

    I just wonder what your criteria for an expert is? Just because he teaches at a university doesn't make him an expert even at what he teaches.