What the EV transition means for the heart of Canada’s auto industry

Robots and other machinery are already in place along some of the assembly lines at the gleaming new battery-enclosure factory that a team of Magna International Inc. employees is racing to finish constructing in Brampton, Ont.

It will be the first new Canadian plant opened by the country’s largest auto parts company in two decades, to be staffed by more than 500 people at full capacity, and soon it will be supplying battery enclosures for the F-150 Lightning electric pickup trucks that Ford Motor Co. will assemble in nearby Oakville.

Down at the other end of the Southwestern Ontario manufacturing belt, in the Windsor area that’s home to hundreds of smaller shops making parts or equipment for production lines, the president of Laval Tool and Mould Ltd. rushes through an interview about the surge in demand for his company’s services in lightweight plastics, as automakers try to find ways to reduce the weight of battery-heavy electric vehicles.

“I’ve got Tesla in my building right now trying to figure out how to develop the Cybertruck,” Jonathan Azzopardi says, by way of explanation for his hurry.

In between, in the Niagara-area city of Welland, Linamar Corp., the second-biggest domestic parts maker after Magna, recently secured a big chunk of land for a new 300,000 square-foot facility.

It’s to be home to Canada’s first giga press machines, capable of producing large chunks of vehicle frames in one piece, which some EV makers prefer to the smaller components typically used to piece together frames for cars and trucks with internal combustion engines.

Across the region, there are scenes and stories like these. Within the domestic parts sector that supplies global automakers – the heart of the Canadian auto industry, despite their multinational clients with branch plants here often getting more attention – companies big and small are finding early traction in a transition to electrified transportation that could easily have left them behind.

But there are also warnings, in what are still early days for the biggest shift in automaking since vehicles started rolling off assembly lines more than a century ago, that all concerned still face huge tests ahead.

And to emerge surviving, let alone thriving, many companies still need to up their games in ways they never have before, as they contend with chaos being passed down to them by clients dashing to meet unprecedentedly ambitious targets and timelines.

The Globe and Mail recently interviewed leaders from a dozen domestic auto parts companies – which number hundreds in total, directly employ about 100,000 people and ship about $35-billion in vehicle components annually – during site visits from the Greater Toronto Area down to the Windsor-Detroit border.

The idea was to gauge what the EV transition means for them, which will be a significant barometer for Canada’s low-carbon industrial ambitions. That’s not least because part of the justification for massive subsidies which the federal and Ontario governments have been committing to foreign car companies, including up to about $30-billion total for Stellantis NV and Volkswagen Group to each have a battery plant here, is that the benefits will flow down.

The perspectives were far from uniform. They ranged from Linamar chief executive officer Linda Hasenfratz describing it as “the most exciting time in history to be an auto parts supplier,” because “every new platform means a new opportunity to win a new piece of business,” to the heads of some smaller companies complaining that the automakers are making unreasonable demands and pursuing unrealistic production goals.

The extent to which companies will be affected by the change also varies greatly. For manufacturers involved in making engine or powertrain components, which comprise roughly 30 per cent of the domestic parts industry’s output, it will be much more profound than for those focused on vehicles’ frames and interiors. But even the latter will be significantly affected by automakers’ push for everything to be lighter, costs to be pushed down as much as possible to compensate for the expensiveness of battery materials, and aesthetic changes to befit consumers’ expectations of vehicles of the future.

There are some obvious potential winners, such as lightweight materials producers, as well as companies that make or administer automated and artificial-intelligence systems on which new production lines increasingly rely. There are also at least a few companies that will have it tougher than most – including those that specialize in products, such as exhaust systems, that will no longer be needed.

But taken as a whole, the interviews and visits added up to some telling takeaways.

They mostly reflected greater optimism than a few years ago, when traditional manufacturing’s decline in North America threatened the sector’s very existence. Many company leaders acknowledged that the costly battery-factory commitments have helped with that – even if they’re unlikely to get business directly from those new plants – because they helped ensure the automakers will keep (and possibly add) vehicle assembly plants nearby, and sent an international message that vehicles and components will still be made in Ontario.

They also invoked a convergence of factors that will make for a very bumpy road for at least the next few years. Relationships with automakers are being redrawn, as new players enter the market and more established ones reassess supply arrangements. Uncertainties around rollouts of new vehicles, consumer demand and fast-evolving technologies are complicating decisions about capital investments. An accelerated shift toward automation is changing the nature of the workplace. A skilled-labour crunch jeopardizes a work force advantage that is Canada’s industrial calling card.

Perhaps most instructively, they revealed a few crucial ways that Canadian companies may be able to confront those challenges, build competitive advantage and emerge stronger once the dust has settled.

Staying agnostic

“Our strategy has been built largely around a concept of flexibility,” says Ms. Hasenfratz, during a conversation at Linamar’s headquarters in Guelph.

An aspect of that strategy is evident at one of her company’s sites in the same town.

On one side of a divide, workers are building rear axles for sports cars with internal combustion engines. On the other, a space has been cleared to soon start making rear axles for electric short-haul delivery trucks.

It’s a scene that neatly captures the industrial shift. Although the so-called e-axles will be considerably different and much heavier – integrating propulsion systems (gearbox, motor, inverter) that in these vehicles will be in the rear rather than the front – Linamar says that the machinery and expertise used to make the old product will be largely transferable to the new one.

“We generally don’t invest in special-purpose equipment,” Ms. Hasenfratz says. While capital investments geared to one product can improve efficiency, they also mean trouble if “your realized volumes on that program are less than what your customer indicated they would be.” Better, she says, to use gear that can be reallocated to another client if things go awry.

Ms. Hasenfratz repeatedly returns to the flexibility theme more broadly, in the sense of not becoming too wedded to any one client, product or technology.

Linamar, she says, is pursuing an extremely wide suite of products. That partly reflects growing variation in automakers’ preferences, including whether they want to assemble components such as motors and gearboxes themselves or have them preassembled by suppliers.

It also reflects uncertainty about which type of non-emitting vehicles will eventually dominate the market – whether batteries could prove a bridge to hydrogen fuel cells, for instance, which Ms. Hasenfratz believes is a strong possibility – and thus trying to develop things that are geared or adaptable to every outcome.

That approach may not be replicable for many smaller Canadian parts makers with nowhere near the range of Linamar (which boasts 65 manufacturing sites worldwide and nearly $8-billion in sales last year) let alone Magna (341 sites and $49-billion).

Although some of the same options around technology-agnostic equipment may apply, businesses with one or two facilities and a handful of products and clients can only be so flexible.

But a second form of risk mitigation is increasingly an imperative for the more specialized companies alongside the behemoths. It involves figuring out which of the new EV makers challenging the established auto giants to seek business from, during what might prove akin to a tech bubble.

Avoiding what’s too good to be true

As president of Circle 5, one of the many companies clustered in Windsor that make equipment for production lines, Saylo Lam is embracing a new dimension of his job as more players enter the automaking field.

“A business owner has to become a business analyst,” he says, describing late nights spent reading market research, “and assess the risks associated with the opportunity presented.”

He’s referring to avoiding the potentially devastating outcome for businesses like his, only partly mitigated by insurance programs provided through Economic Development Canada, of getting partway through orders (or capital investments to ready for them) that go for naught when those orders fall through.

Placing faith in upstarts can certainly pay off.

There are small companies in Ontario that got in early with Tesla Inc., back when others doubted its reliability, and established relationships to supply it despite the vast distance to its assembly plants in the Southwestern United States. (One such company visited by The Globe asked not to be publicly identified as a Tesla supplier because of commercial sensitivities, often an impediment to reporting on arrangements with automakers.)

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Suppliers have been given pause by the failures of seemingly promising early-stage companies, such as Ohio-based Lordstown Motors, which filed for bankruptcy protection in June 2023.MEGAN JELINGER/AFP/Getty Images

But Tesla is currently an exception that has established its ability to make and sell its product. Suppliers have been given pause by the failures of other, seemingly promising early-stage companies – the recent bankruptcy of the Ohio-based electric truck maker Lordstown Motors Corp. being one oft-cited example.

To some extent, that means continuing to maintain and court more established clients as a base.

“We’re all excited about new entrants,” says Flavio Volpe, who heads the Automotive Parts Manufacturers’ Association. “But you have to land General Motors. You have to land Stellantis.”

It also means that leaders of auto parts makers, who until recently didn’t have to ask many questions about the household-name corporations at the top of the auto sector’s food chain, now need to do more homework.

That applies even when not directly supplying those new companies themselves.

Circle 5, for instance, largely makes equipment for bigger suppliers such as Magna and Linamar (known as Tier 1s, because they directly serve automakers rather than other parts makers). So Mr. Lam worries about the consequences of cancelled orders from those companies being passed down to him.

Not that the bigger parts companies aren’t having to ask questions themselves, including of the oldest and most established automakers, which keep announcing highly ambitious EV targets.

“They’re making assumptions about what their volumes will be, what their market share will be, and what that’s going to require,” Ms. Hasenfratz says. “It’s our job, for our own risk mitigation, to challenge them where appropriate and invest accordingly.”

A greater need to minimize exposure, however, is not the only way that the risk calculus has changed. Another recurring message is that the more successful parts makers will be those that also prove adept at helping customers manage their risks.

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A Magna employee prepares EV battery tray components. Canadian parts maker Magna boast 341 manufacturing sites worldwide and $49-billion in sales last year.Christopher Katsarov/The Globe and Mail

Embracing the chaos

Diba Ilunga, the president of Magna’s powertrain division, is explaining why the car companies themselves are now “our biggest competitors.”

“They have their transmission plants, they have their engine plants,” he says, “and they’re really questioning what they should bring in-house.”

For the largest parts makers, this is one of the biggest challenges: that as automakers overhaul operations during the EV transition, they’ll opt for less outsourcing than before, in part because EVs typically have fewer total parts than traditional vehicles.

The case for companies like his keeping that business, Mr. Ilunga says, involves putting their technical expertise to use in trying to solve challenges such as EV range, and being able to do things cheaper than the automakers themselves (partly by virtue of engineers and other staff working for multiple clients).

It also involves shouldering some of the risk of cost overruns, production delays or lower-than-expected demand as new vehicle lines are rolled out.

As Ms. Hasenfratz puts it, if production plans go awry for some reason, an automaker going it alone is “left holding the bag for all that investment,” whereas a company such as hers can “reallocate capacity to another customer.”

Suppliers that aren’t as big as Magna and Linamar might not be able to help off-load as much risk. But they can absorb some of the automakers’ turbulence by embracing a more fluid relationship with their customers than was long the case.

Before EVs, automakers usually sent orders with clear specifications for the components they needed, then didn’t connect with suppliers again until those orders had been filled months later.

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Ed Winter is the Director of Corporate Sales and Program Management at Windsor-based Integrity Tool and Mold Inc., one of the top North American companies in making machinery for manufacturing.Kati Panasiuk/The Globe and Mail

Ed Winter, who heads program management and sales for Integrity Tool & Mold Inc. – which is based in the Windsor area, and is one of the top North American companies in making machinery for manufacturing – first noticed the workflow changing with the arrival of new automakers developing more untested products.

With those companies’ own understanding of their needs rapidly evolving, the demands are revised once orders are already under way, and suppliers have to be more involved in helping the clients overcome hiccups. Now, Mr. Winter is seeing the same thing even with more established automakers, as they move into unfamiliar territory.

Although it means more hours and stress, Mr. Winter frames it as a change to be embraced. “We need to critique our way of thinking and how we process tools with moving changes,” he says. “It’s unconventional, but we’re certainly up for the challenges ahead of us.”

Mr. Azzopardi of Laval Tool and Mould describes a similar experience. Rather than research and development being completed in advance of orders being placed, the hurried EV rollout mean lines between design and production have been blurred, and successful suppliers take on more of the burden.

“You’ve got to actively participate in the R&D,” he says. “We’re putting a lot more skin in the game than we ever have, and that’s really risky.”

To be able to deliver that value, while meeting other heightened expectations, means suppliers have to meet yet another challenge. It’s the one that many of their leaders say keeps them up most at night: finding enough skilled labour.

The hunt for talent

Chris Hergott goes into high schools in the Kitchener area, where he owns and runs XL Tool Inc., to tout the virtues of the skilled trades and seek out potential employees who he’ll then train for years after they graduate.

XL is a bit of an extreme case, because it makes highly customized products for automakers and Tier 1s, so it’s not been able to lean much on the robotics increasingly evident on other factory floors.

But never mind that there may be fewer total workers required across the sector than before – partly a response to EV-specific factors, such as some components being too heavy for humans to handle, and in large measure an automation shift already happening, regardless of vehicle type, whenever the sector makes new capital investments.

Certain types of workers, able to operate new technologies and innovate around their uses, are now more needed than ever.

That’s still a relative advantage for Canada.

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Ed Winter (right) and Mark Muscat, Integrity’s Capital Project Manager, look out over the company’s new HD2 Plant in Windsor where the Correa Machine is being installed.Kati Panasiuk/The Globe and Mail

Asked how this country stacks up in general when it comes to attracting investment, Mr. Ilunga – who is based in Troy, Mich., where Magna has corporate offices in addition to its Aurora, Ont., headquarters – immediately mentions that a relatively ample supply of engineers and other skilled employees helps keep work on product development here. (He also acknowledges that comparatively high wages make automation more of a priority here than in places such as Mexico, China and Eastern Europe.)

But further down the supply chain, competition for people adept at navigating all the newly automated systems and machinery is fierce.

It’s made all the more so by landmark investments, such as the Stellantis battery plant being built in Windsor.

That sort of project is “a blessing and a curse,” says Mr. Lam of Circle 5. While providing economic opportunity and helping produce an ecosystem that could ultimately produce more talent, for now it “strains the limited talent pool that exists” by hiring away workers.

He offers that assessment in the context of needing to double down on his own efforts to attract and retain the people he needs – a sentiment that’s widely shared.

Mr. Hergott’s talk of becoming more aggressive in recruitment is frequently echoed, for postsecondary if not high-school students, plus economic migrants. The same goes for upping apprenticeship programs to get raw but talented young employees trained up.

And there is more talk than there might have been a decade or two ago about workplace culture, reflecting awareness that employees adept at working in this sector will not have a hard time finding new jobs.

There is also a sense of hope, about the EV transition causing younger generations of Southwestern Ontarians to see the auto sector in a new, somewhat sexier light – as a tech-oriented industry of the future, not the old world of assembly lines that offered their parents and grandparents diminishing opportunities.

Some of that energy that comes from being part of something ground-shifting that can be felt now, on factory floors and among the people running them, albeit with a heavy infusion of anxiety even among those who will presumably benefit in the long run.

All shook up

In the downtown Windsor offices of a company that does systems integration for manufacturers, several members of the industry group Automate Canada converge to offer The Globe what should be among the rosiest perspectives.

As people running businesses that provide automakers and their suppliers with services such as robotics, artificial intelligence and data collection, they face some of the most obvious growth opportunities.

At points in the conversation, they acknowledge that potential, and sound optimistic about how their world will look five or 10 years from now.

They also tell stories of frustration. One involves an unnamed major North American automaker announcing a new EV line that was supposed to start production last year and still hasn’t as of this summer, leaving one of their companies that struck a deal for related business in a hurry-up-and-wait situation.

All told, they sound equal parts excited and nervous like most everyone else, about all the unknowns – the production delays, the market hiccups, the work force evolution, the competing brands and technologies, the questions about who will be left standing.

Near the end, one of them summarizes the feeling of being inside all the upheaval right now, in a way to which many others across the sector could relate.

“Everything’s been shaken up,” says Steven Del Duca, who heads the automation-oriented company Ro-Matt International Inc.

“It’s a snow globe right now.”