95

It is a great pleasure to be publishing our 1995 Annual Report, particularly as I
have recently been elected Chairman of JAMA Canada. JAMA Canada was established formally
in 1984 as a non-profit trade association to promote greater understanding of economic and
trade matters pertaining to the motor vehicle industry, and also to encourage closer
industrial co-operation between Canada and Japan. As the fifth Chairman of JAMA Canada, I
would like to pay special tribute to my predecessor, Toshio Kunii, who very ably and
conscientiously guided JAMA Canada activities during a difficult period of economic
recession, falling sales and a dramatically appreciating Japanese yen.

As you will see from this report which focuses on 1994, this was a very mixed year for
Japanese automakers in Canada. Production at Japanese plants in Canada surged ahead
setting new high levels of production, reaching almost 370,000 units overall. Of these,
about 85% were exported, or about 310,000 units, mostly to the U.S.

In fact, for the second year in a row, there were more motor vehicles exported from
Japanese affiliated plants in Canada than were imported in total from Japan, the U.S., and
Mexico, adding significantly to Canada’s automotive trade surplus. And comparing
production to sales, both Toyota and Honda in Canada manufacture more than they sell, and
export more than is imported from Japan by all automakers combined.

For retail sales of motor vehicles in Canada, however, 1994 was a very tough year. JAMA
Canada members’ sales fell 6.9% from 1993 to 234,400 units, including passenger cars
and light trucks. The high value of the yen is often blamed as a major factor. However,
more and more vehicles and parts are being sourced within North America, which helps to
mitigate the impact of exchange rate fluctuations. Currently over 47 percent of Japanese
vehicles sold in Canada are made in North America, up from 29 percent in 1993. This trend
will continue as additional production comes on stream over the last half of this decade.
At the same time, motor vehicle imports from Japan are currently at a 15 year low, having
dropped 35 per cent in 1994 alone. Since the peak in 1989 when 295,000 units were shipped
to Canada, imports from Japan in 1994 are down 61.1% at 115,000 units.

Moreover, new investments were announced by Honda and Toyota which were important and
welcome votes of confidence in Canada as a long-term location for motor vehicle
production. As a result of these expansions, total manufacturing jobs will increase to
over 6,500 when fully operational, and total Japanese investment in Canadian vehicle
manufacturing will exceed $2.2 billion with an annual capacity of 520,000 units.

There were also significant developments in 1994 in the area of trade policy &
tariffs. First, the NAFTA was implemented which provided improvements in the rule of
origin content formula; however other changes such as a hike in the percentage from 50% to
62.5%, were clearly protectionist measures aimed at Japanese automakers. Secondly, the
Government of Canada unilaterally reduced some auto parts tariffs to either 2.5% or zero,
which will help the manufacturing operations of both Toyota and Honda in Canada. Finally,
the successful conclusion to the GATT Uruguay Round, while created the World Trade
Organization to replace the GATT, automotive tariffs will generally be reduced by
one-third when fully implemented in 1999.

And yet, in spite of these measures to lower tariffs, as studies sponsored by both JAMA
Canada and the Canadian Association of Japanese Automobile Dealers (CAJAD) confirm, there
is still a tariff disadvantage for non-Auto Pact companies in Canada. This directly
impacts both producers and consumers in Canada. More than 80% of all vehicles produced in
Canada are exported, which means that most vehicles sold to Canadian consumers are
imported. Auto Pact companies can import all vehicles duty-free, while non-Auto Pact
companies import CBU (completely built up) vehicles with an additional ad valorem
tariff cost, whether it is at the NAFTA rate of 2.8%, the GPT(General Preferential Tariff)
rate of 6.0% or the MFN (Most Favoured Nation) rate of 8.6%. And according to an OECD
study entitled ‘The Costs of Protection’, the effect of tariffs are likely to
make all vehicles more costly for consumers, not just the vehicles subject to the tariff.

For non-Auto Pact manufacturers in Canada, duty drawbacks and production-based
remission programs will be eliminated in 1996, which in the absence of other measures will
raise the costs of production in Canada as full MFN duties will be applied on imports of
original equipment parts. In addition, duties will not be able to be refunded when goods
produced in Canada are exported to the U.S. under the NAFTA. This situation creates a cost
disadvantage for non-Auto Pact vis-á-vis Auto Pact companies on the one hand, and in
comparison with competitors in the U.S. on the other.

This concerns us not just because of the fact that the FTA/NAFTA created a distinct
two-track industry in Canada, in which one group of foreign investors receive more
flexible conditions and higher benefits on a permanent basis, but more precisely because
there are no longer any conditions under which non-Auto Pact companies can obtain the same
or equivalent treatment and benefits as Auto Pact companies. This seems to be
fundamentally inconsistent with the GATT/WTO principle of national treatment.

Secondly a trade policy that discriminates between foreign investors creates
disadvantages not only for non-Auto Pact automakers but for Canada as well. The issue is
more than just tariffs and resulting cost disadvantages for non-Auto Pact producers,
although these are the most critical. To be sure, this disadvantage has been partially
addressed by the Canadian Government’s initiative to reduce selected parts tariffs in
the December 1993 Order-in-Council (OIC), as well as tariff cuts contained in the recent
GATT agreement. However, due to the inequities and competitive disadvantages still facing
all non-Auto Pact companies in Canada, this policy continues to be a major hurdle for both
new and current investors. Moreover, maintaining this two-tiered policy fundamentally
weakens Canada’s ability to compete for further non-Auto Pact foreign investment.

These tariff costs for both parts and vehicles are an added burden for non-Auto Pact
manufacturers that Auto Pact producers are able to avoid by virtue of their exclusive Auto
Pact benefits. There are two options that would address this problem. Restoring the Auto
Pact to its pre-FTA condition, which would allow non-Auto Pact producers like Honda and
Toyota to voluntarily ‘join’ the auto Pact, would require changes to FTA, the
NAFTA, or both. Any substantive changes to these trade agreements would be very difficult
indeed, due to the necessity of reopening the agreements.

By contrast, however, the alternative option of lowering or eliminating tariffs on
automotive products would present little or no administrative burden, nor would it
generate any additional costs or disadvantages for Auto Pact companies. Moreover, removing
the remaining tariffs would create a competitive edge for investment in Canada, as well as
assure an equitable policy environment for all foreign-owned automakers producing in
Canada for markets in North America and beyond.

Tariffs, on CBU vehicles as well as inputs for production, are serious concerns for
Japanese automakers because only a limited range of vehicles can be produced in Canada,
which requires imports of other models to meet the needs of Canadian consumers, and
because the Canadian parts industry is not yet able to offer a full and complete range of
Tier 1 capabilities.

In closing, we hope this report will contribute to a better understanding of the
Japanese auto industry in Canada and the activities of JAMA Canada. We welcome any
comments or inquiries concerning the material herein.

Atsuyoshi Hyogo

Chairman

2. The Japanese Auto Industry in Canada – 1994

I. Overview of the Canadian Auto Industry:

While total passenger car production by all automakers slid 10 percent in 1994 from the
previous year, light and heavy duty truck producers recorded an increase of 23 percent
each. Overall, motor vehicle production increased 3 percent to 2.3 million units in 1994.

Shipments of automotive products, including heavy trucks and buses reached a record
total of $62 billion in 1994, up 12 percent over 1993. Motor vehicle shipments grew by 16
percent at $43.6 billion while shipments of parts and accessories reached a record high of
$8.4 billion, up 13 percent.

Due to the strong growth in automotive production, total employment in the industry
rose by 6 percent to over 493,000 overall, according to Statistics Canada. Motor vehicle
manufacturing employment was up 11 percent to 57,700 in total, parts employment gained 8
percent to 81,700 and retail was up by 4 percent to over 341,000 compared to the previous
year.

Sales of passenger cars in Canada during 1994 were up only marginally by 1.0 percent,
while light and heavy duty trucks made gains of 12 percent and 23.4 percent respectively.
Imports were down almost 26 percent on the year, while models built in North America
increased 8.8 percent.

A total of 1.24 million light duty vehicles were sold, a 5 percent increase over 1993,
including 758,200 passenger cars, and 483,500 light trucks. In addition, over 31,100 heavy
duty trucks were sold in 1994.

In 1994, according to data published by Industry Canada based on Statistics Canada
data, the auto industry recorded a $5.8 billion surplus in trade with all countries, a 21
percent increase over 1993. Motor vehicle trade produced a surplus of $24.8 billion, while
there was an $18.6 billion deficit in parts. Total automotive exports gained 20 per cent
over 1993 to $60 billion, with vehicle exports up 23 per cent and parts up 13 per cent. An
overwhelming majority of exports (over 96 per cent) went to the U.S. Exports to Japan rose
by 30 per cent in 1994 to $144 million with passenger cars up 73 per cent and auto parts
up 13 per cent compared to the previous year.

In 1994, overall imports rose 20 percent to $54.4 billion, according to Industry
Canada. Motor vehicle imports jumped 21.5 per cent to $18.7 billion, while imports of
parts gained almost 20 per cent to $33.4 billion.

Total imports from Japan declined by 20 per cent in 1994 to $3.4 billion, continuing a
trend began in 1992. Vehicle imports fell 30 percent, while parts dropped 8 per cent.

II. The Japanese Auto Industry in Canada

Production: In 1994, production of motor vehicles at Japanese affiliated plants in
Canada (Honda, Toyota and CAMI) attained a new high level of over 364,000 units, an
increase of 6.1% from 343,000 units the previous year. The combined total represents 15.7%
of total Canadian vehicle production.

Passenger cars produced by Honda (HCM) in Alliston and Toyota (TMMC) in Cambridge rose
8.0% in 1994 to 194,179 units from 179,840 units in 1993.

Exports: While the Canadian market alone is too small to sustain the levels of
production in Canada, Canada has benefited by trade agreements that allow the integration
of the industry on a North American basis. Japanese automakers, like other U.S. owned
automakers in Canada, export a high level of their annual production, primarily to the
U.S. market. In 1994 Japanese affiliated plants exported about 309,000 units up 1.8% from
303,500 units in 1993. The lower gain in exports during 1994 reflected slower growth in
the U.S. market.

Imports: Motor vehicles imported from Japan continued to fall in 1994 due to the
increasing reliance on North American-built models to serve local markets. Imports dropped
34.4% overall from 174,754 units in 1993 to 114,639 units in 1994. Passenger car shipments
were 32.4% down to 105,268 units, while trucks plunged 50.1% to 9,371 units.

Since the peak in 1987 when 295,694 units were exported to Canada from Japan, exports
have fallen 61.2% in unit volume overall. Passenger car exports have been reduced by 56.4%
while trucks have plummeted 82.7% over the past seven years.

Sales: Sales of Japanese badged vehicles in Canada, including both imported and North
American-built models, slipped 6.9% lower in 1994 to 234,424 units for all JAMA Canada
members. However, sales of vehicles that were built in North America jumped 52.8% over
1993 to 111,015 units. Imports from Japan (excluding captive imports sold by the Big 3)
declined 31.1% for a final tally of 123,409 units. Over 47% of 1994 sales were vehicles
built in North American plants, an increase from 29% in 1993.

Aggregate market share of JAMA Canada members in 1994 stood at 19.0%, including a
passenger car share of 25.9% and a light truck share of 8.4%.