96

In June 1996, Mr.Yoshio Nakatani, President of Toyota Canada Inc.
was elected Chairman of the Board of Directors of JAMA Canada, succeeding Mr. Atsuyoshi
Hyogo, formerly President of Honda Canada Inc., who has recently taken up a new assignment
with American Honda in the United States.

Mr. Nakatani joined the Overseas Operations of Toyota Motor Sales Ltd.
in 1964 after graduating from Kyoto University with a BA in French Literature. From 1964
to 1984, he served in over 60 countries, rising to the position of Manager. In 1985, Mr.
Nakatani joined Toyota Canada Inc. as Assistant to the President. He returned to the Tokyo
office of Toyota Motor Corporation in 1991 as General Manager of the Americas Planning
Division. Then in June 1995, Mr. Nakatani returned to Canada as President of Toyota Canada
Inc.

It is a great pleasure to be publishing our 1996 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 sixth
Chairman of JAMA Canada, I would like to pay special tribute to my predecessor, Atsuyoshi
Hyogo, who very ably and conscientiously guided JAMA Canada activities during the past
year.

As I had been in Canada between 1985 and 1991, I have seen dramatic
changes take place in the auto industry in Canada over the past decade, particularly among
the Japanese automakers. Today, as a group, we manufacture more than one vehicle in Canada
for every one we sell, and we export more vehicles than we import. A significant
contribution is being made to the Canadian economy, and I want more Canadians to know what
we are doing.

As you will see from this report, 1995 was another mixed year for
Japanese automakers in Canada. Production at Japanese plants in Canada surged ahead
setting new high levels of production, reaching 391,000 units overall. Of these, about 83%
were exported, or about 325,000 units, mostly to the U.S.

In fact, for the third 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, 1995 was a
rather disappointing year. JAMA Canada members’ sales of passenger cars and light
trucks fell 13% to 204,000 units from 234,000 in 1994. While exchange rates continue to be
a factor, the value of the yen has been falling against the US and Canadian dollar over
the past year.

What’s more, Japanese automakers continue to find ways to cut
costs, and at the same time expand production investment and localization of parts
purchase in both Canada and the US. This means that more vehicles and parts are being
sourced within North America, which helps to mitigate the impact of exchange rate
fluctuations. Currently about 60 percent of Japanese vehicles sold in Canada are made in
North America, more than double the rate in 1993. This trend will continue as additional
production comes on stream over the remainder of this decade. At the same time, motor
vehicle imports from Japan are currently at a 25 year low, having dropped 36 per cent in
1995 alone from the previous year. From the peak in 1989 when 295,000 units were shipped
to Canada, imports from Japan were down 75 percent in 1995 to just over 73,000 units
overall.

New investments announced by Honda and Toyota over the past two years
are important and welcome votes of confidence in Canada as a long-term location for
Japanese motor vehicle production. As a result of these expansions, total manufacturing
jobs will increase to over 7,700 when fully operational, and total Japanese investment in
Canadian vehicle manufacturing at Honda, Toyota and CAMI plants will exceed $2.5 billion
with an annual capacity of 640,000 units.

There were also significant developments in 1995 in the area of trade
policy & tariffs. For non-Auto Pact manufacturers in Canada, duty drawbacks and
production-based remission programs were eliminated at the end of 1995. For Honda and
Toyota, this meant that they would lose duty-free benefits set up under the FTA. By
contrast, duty-free benefits under the Auto Pact for those designated companies would
continue indefinitely. The loss of duty free benefits for non-Auto Pact companies would be
very costly, estimated at more than $45 million annually for the manufacturing operations
alone. However, this cost disadvantage was significantly reduced by the passing of an
Order in Council (OIC) by the Canadian Government that eliminated tariffs on original
equipment parts used in manufacturing of vehicles in Canada.

And yet, in spite of these measures to lower tariffs, there is still a
tariff disadvantage for non-Auto Pact companies in Canada. This affects both automakers
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 vehicles
with an additional ad valorem tariff cost, whether it is at the NAFTA rate of 1.8%
or the MFN (Most Favoured Nation) rate of 8.0%. 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.

This concerns us not just because of the fact that the FTA and the
NAFTA established a distinct two-track industry in Canada, 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 non-discrimination and national
treatment.

Secondly, a trade policy that discriminates between foreign investors
creates disadvantages for Canada as well. The issue is more than just tariffs and the
resulting costs for non-Auto Pact producers, although these are the most obvious. To be
sure, this disadvantage has been partially addressed by the Canadian Government’s
initiative to eliminate parts tariffs in the December 1995 Order in Council, as well as
ongoing tariff cuts for finished vehicles contained in the implementation of the 1994
Uruguay Round GATT agreement. However, due to the inequities and competitive disadvantages
still facing 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 undermines Canada’s ability to compete for further foreign investment.

There are two options that would address this problem. Restoring the
Auto Pact to its pre-FTA condition would allow non-Auto Pact producers like Honda and
Toyota to voluntarily ‘join’ the auto Pact. The difficulty here is that this
would require changes to FTA, the NAFTA, or both.

By contrast the alternative option of lowering or eliminating tariffs
on finished vehicles would present little, if any administrative burden, nor would it
affect Auto Pact companies as they already enjoy duty-free benefits for both parts and
finished vehicles. 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 finished vehicles are an important matter because only a
limited range of vehicles are produced in Canada. This requires that other models be
imported to meet the wider needs of Canadian consumers. As more than 80 percent of all
vehicles built in Canada are exported, most vehicles sold in Canada are imported. As a
recent study (commissioned by the Canadian Association of Japanese Automobile Dealers) on
the impact of tariffs on Canadian consumers has shown, eliminating tariffs on vehicles
could have a stimulating effect on the Canadian market, which, along with current
expansions in production capacity, would help with the unemployment problem in Canada. We
are not asking for special treatment. We are asking for a policy that is fair and that
applies equally to all automakers who chose to do business in Canada.

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.

Yoshio Nakatani

Chairman

As a whole, 1995 was an up and down year for the Canadian auto
industry. Unit production, shipments, employment and new capital expenditures were up;
however, sales continued to slide.

Motor vehicle production totaled almost 2.42 million units, up 4.3%
from 2.32 million units in 1994. Passenger car output rose 10.2% to 1.34 million units,
while truck production dipped 2.5% to just under 1.08 million units.

Shipments

Shipments of all automotive products gained 14.6% in 1995 reaching a
new high of $72.8 billion from $63.5 billion in the previous year. According to Statistics
Canada, motor vehicle shipments rose 15.5% to $50.4 billion, auto parts and accessories
shipments improved 12.4% to $20.7 billion and truck body and trailers increased 15.8% to
$1.76 billion in 1995.

As a result of record levels of vehicle and parts production, according
to Statistics Canada survey of manufacturers, total vehicle and parts manufacturing jobs
gained 3.3%, rising from 146,800 in 1994 to 151,700 in 1995. On the retail side,
employment at dealers/distributors jumped 8.3% to 127,600, while the aftermarket stayed
flat at 223,900.

The prominent weak spot in the Canadian auto industry continues to be
domestic demand and new motor vehicle sales. Since the peak in 1988 at 1.56 million units
sales have been on a steady decline, with the exception of a slight uptick in 1994. Total
light vehicle sales fell 7.7% to 1.13 million units, including 670,141 passenger cars
(down 10.5%) and 460,070 light trucks (off 3.4%).

Sales of imported brands peaked in 1991 at almost 394,000 units, and
have fallen in 1995 to just under 267,000 units, representing an annual drop of about 8%
over the past four years. Finally, sales of heavy duty trucks (class 5, 6, 7 and 8) gained
7.9% over 1994 to a total of 32,301 units. With the exception of Class 7, all segments
increased in 1995 over the previous year.

Turning to automotive trade, in 1995 Canada recorded a global trade
surplus of $12.8 billion, a dramatic 19.9% increase over the previous year. This surplus
is comprised of a $28.4 billion surplus in finished motor vehicles and a $15.6 billion
deficit in automotive parts.

Total automotive exports rose 8.0% from $58.4 billion to $63.1 billion,
with vehicles gaining 9.7% and parts exports up 2.7%. An overwhelming majority of exports,
over 95%, go to the U.S. Exports to Japan surged 28% in 1995 over the previous year rising
from $143 million to $183 million according to Industry Canada and Statistics Canada data.
The increase is a result of a large jump in the value of passenger cars, approximately
128% year over year, from $57 million to $130 million. On the other hand, exports of parts
dropped from $63 million to $34 million, a decline of 46%.

In 1995, overall automotive imports to Canada from all countries grew
4.5% to $55.9 million. Motor vehicle imports reached $19.7 billion from $19.1 billion,
3.1% while auto parts imports increased 4.8% to $35.0 billion from $33.4 billion in 1994.
Total auto imports from Japan were 12.8% lower in 1995 at $2.8 billion compared to $3.2
billion a year earlier. Vehicle imports were down 23.4%, while parts edged up 2.2% to $1.3
billion.

There are six Japanese automakers and one
medium duty Japanese truck maker who are doing business in Canada importing, distributing
and servicing motor vehicles under the following brand names: Hino Diesel Trucks, Honda,
Acura, Mazda, Nissan, Infiniti, Subaru, Suzuki, Toyota and Lexus. Some Isuzu brand
vehicles are imported and sold through General Motors affiliated dealers, and a few
Mitsubishi made vehicles are being imported and sold with Chrysler name plates. There is
some speculation that Mitsubishi motor vehicles will eventually establish their own
distribution and dealer network in Canada.

Production

In 1995, production of motor vehicles at Japanese affiliated plants in
Canada (Honda, Toyota, and CAMI) attained a new high of over 391,000 units, an increase of
7.4% over the previous year when 364,000 units were made. The combined total represents
16.5% of total Canadian light vehicle production for 1995.

Passenger cars built by Honda (HCM builds 3 and 4 door Civic models) in
Alliston, Ontario and Toyota (TMMC makes 4 door Corolla models and 4 cylinder engines) in
Cambridge, totalled 196,269 units for 1995, a gain of 1.1% over the previous year. In late
1995, TMMC officially opened their $30 million engine production facility. TMMC makes 1.6
litre and 1.8 litre 4 cylinder engines for the Corolla.

Exports

As the Canadian market alone is too small to sustain rising levels of
production in Canada since the Auto Pact was signed in 1965, integration of the industry
on a North American basis has allowed foreign automakers in Canada to benefit from trade
agreements that permit access to the larger US market. Like the US Big 3, Japanese
automakers export a high level of their Canadian production, and likewise, rely on
imported models to serve the needs of the Canadian consumer.

In 1995, Japanese affiliated plants exported about 325,000 units mostly
to the U.S. representing an increase of 5.1% over 1994. The ratio of units exported to
units produced was 83.1% in 1995, compared to 84.9% in 1994.

Based on production and exports of Toyota, Honda and Suzuki model
vehicles, Canada was a net exporter of Japanese brand vehicles in 1995. While over 170,000
units were exported, less than 150,000 units were imported from Japan, the U.S. and Mexico
combined.

Imports

Imports of motor vehicles from Japan continued to slide in 1995. There
were 36.2% fewer units shipped to Canada compared to 1994, dropping from 114,639 units to
73,122 units in 1995. Since the peak in 1987 when 295,694 units were exported to Canada,
overall exports have fallen more than 75% to the lowest level in 25 years. The decline in
passenger cars from the peak stands at 71.1%, while trucks have plunged 93.7%.

At the same time, however, imports from the US and Mexico have been
taking up some of the slack over the past few years. With growing Manufacturing
investments and reliance on production within North America, some models are now or soon
will be sourced entirely within North America to meet local demand. In 1995, imports of
motor vehicles from NAFTA countries totalled 76,338 units, a 6.2% gain over 1994. Since
1990, imports from the U.S. and Mexico have grown five fold from 15,000 units to over
76,000 units. And for the first time, the number of imported vehicles from the U.S. and
Mexico exceeded vehicle imports from Japan.

Sales

Sales of Japanese brand vehicles in Canada, including imported and
North American-built models, continued the slide begun in 1991. In 1995, retail sales sunk
12.9% to 204,037 units from 234,376 units in 1994. Both passenger cars and light truck
sales fell compared to the previous year, dropping 10.4% to 173,503 units and 14.3% to
30,534 units in 1995 respectively.

However, sales of all Japanese badged vehicles built in North America
moved up 5.0% to 119,351 units from 114,064 units in 1994. Both passenger car and light
truck segments improved 5.4% and 1.7% respectively. Import models from Japan lost 29.8%
overall to 84,686 units.

In 1995, approximately 58.5% of total JAMA Canada members sales were
vehicles built in North America, up from 48.5% in the previous year. About 62% of
passenger cars and 38.7% of light trucks, including minivans and sport utility vehicles
sold by JAMA Canada members were manufactured in North America in 1995.

Source: AIAMC

Japanese automakers have become an
integral and significant part of the Canadian auto industry. Since first setting up
business in Canada thirty years ago, Japanese automakers’ contribution to the
Canadian economy has grown and developed in several ways:

All of these activities support the employment of thousands of
Canadians and purchasing of a wide range of supplies and services.

1. Consumer Benefits

In pursuit of satisfying the ever demanding consumer, Japanese
automakers have stimulated competition and raised the quality of vehicles not only made in
Japan, but increasingly vehicles designed and developed in North America for the Canadian
and U.S. markets. While quality is seen to be a necessary ingredient for any automaker
just to be able to stay in the market, for Japanese automakers, quality is a constantly
moving target. And as nearly half of all Japanese brand vehicles currently sold in Canada
are now made in North America, the benefits to local communities and local suppliers in
Canada will continue to grow. In addition, according to opinion polls and industry surveys
over the years, Japanese vehicles still maintain the edge in terms of reliability, low
cost maintenance and high resale value retention.

2. Employment

The Japanese auto industry is multi-faceted and in the aggregate,
employs over 43,000 Canadians in manufacturing, importation, distribution, sales and
service.

In the manufacturing sector, more than 5,400 Canadians work in three
motor vehicle manufacturing plants, and an estimated 6,000 jobs have been created through
various parts and materials operations supplying the North American auto industry.Recent
announcements of further manufacturing investments at Honda of Canada Manufacturing and
Toyota Motor Manufacturing Canada will add over twelve hundred additional jobs directly,
plus significant indirect employment as a result of increasing local sourcing of supplies
and services. There are in excess of 30,000 Canadians employed in over 1050 dealerships
according to the Canadian Association of Japanese Automobile Dealers (CAJAD). Finally,
there are about 1,700 people employed in the national distribution and head offices of
JAMA Canada members.

3. Investments in Manufacturing

There are three motor vehicle manufacturing plants and over twenty auto
parts and related materials and machine tool operations currently in Canada. The total
current and planned investment by Japanese automakers stands at about $2.5 billion.
Further details about Japanese assembly plants in Canada can be found in this section,
while information regarding auto parts and other related investments can be found in
Section IV, PAC Report, p. .

Honda Canada announced in 1995 an investment of $300 million to build a
new minivan plant in Alliston, Ontario beginning in 1998 with a capacity of 120,000 units
and an additional 1,200 associates. In late 1994, Toyota announced a $600 million new
plant in Cambridge, Ontario that will increase capacity by 120,000 units with an
additional workforce of 1,200 team members. TMMC will continue to make Corollas at the new
plant and add another model not yet named, in addition to their engine plant which
officially began production in October, 1995 which makes 1.6L and 1.8L four cylinder
engines.

Earlier in 1994, Honda announced that a new Acura passenger car would
be built in Alliston, adding 20,000 units of capacity to the existing 100,000 units of
Civic production, starting in 1997. When all of these expansions are complete, Japanese
automakers will have invested over $2.5 billion in Canadian vehicle manufacturing, with a
production capacity of 640,000 units, and a workforce of about 7,700 Canadians at Honda,
Toyota and CAMI.