Moldy Peaches

First, the details. Today, Toyota formally announced that it will build its second Canadian auto assembly plant in Woodstock, Ont., creating thousands of direct and spinoff jobs. The announcement ends months of speculation that the Japanese giant had selected the southwestern Ontario town as its preferred site for the new facility, which will pump out 100,000 vehicles a year when it's up and running by 2008.

The plant is expected to create 1,300 direct jobs and several thousand additional jobs at parts manufacturers and related industries.

The Ontario and federal governments are providing $125 million in financial aid. Ontario's share, $70 million, will go towards training and infrastructure. The $55 million from Ottawa is in the form of "repayable support.

Now, you are probably wandering what in the world does a Toyota announcment have to do with health care. There is a connection and it is one that Ontario Premier Dalton McGuinty cited in the announcemnt. McGuinty indicated that medicare is one reason why Ontario won out over a U.S. location. "We've always said medicare is one of our competitive advantages – and Toyota has chosen the stability that medicare provides investors in Ontario," he said.

U.S. automakers are facing rising health-care costs and this is causing the industry problems. In fact, General Motors, the world's largest auto maker, actually spends more money on health care than on steel. The auto giant expects to spend $5.6-billion (U.S.) this year on health benefits for its 1.1 million employees, retirees and their families in the United States. That's up about $800-million from 2004 and it makes GM the largest private health care provider in the United States.

Recently, Chrysler introduced a "baby-step rollback" of no-cost employee health coverage. This rollback could indicate a future change in employer-sponsored health coverage, which "has long made assembly work at a Big Three automaker one of the most attractive blue-collar jobs in America." UAW employees "still have coverage that is the envy of many white collar workers"; however, the change to coverage is "a sign of the union's acknowledgment of the competitive pressures from Toyota and other foreign-based competitors" and "such arrangements are expected to follow for GM and Ford. According to the New York Times, Chrysler is expected to experience "modest savings" in the "low tens of millions of dollars" from the change.

There are a few lessons to be examined here. One, even though the United States has lower individual tax rates the competitive advantage is wasted if more and more workers have to spend extra resources on previously covered employee-employer benefits. Who cares that the tax rate in Michigan is 5 points lower than Ontario if the same worker requires a higher share of their disposable income to cover basic necessities? People who fixate on tax rates alone miss the big picture.

Second, government subsidies, although not a prefered measure for business by this author, are an absolute necessity when you are competing against protectionist and subsidy happy jurisdictions like the US and Europe.

Finally, this problem is only going to get worse for US automakers. As more and more employees retire, live longer and require different medical attention, the bills will come do.