OTTAWA — Ottawa is providing nearly $1 billion in guarantees calculated to reassure consumers and parts suppliers that do business with shaky auto companies, most notably General Motors and Chrysler.
Industry Minister Tony Clement said Tuesday that Canada will follow a U.S. program and guarantee warranties on new vehicles sold by GM Canada (NYSE:GM) and Chrysler LLC.
He said that initiative could cost the federal government up to $185.3 million in a worst-case scenario, if the automakers can’t fulfil their warranty obligations.
As well, Export Development Canada will be authorized to provide an additional $700 million to insure parts manufacturers against non-payment from troubled automakers.
An EDC official says the Crown corporation will raise the funds on capital markets and provide the insurance to auto parts suppliers at commercial rates.
The federal government wouldn’t necessarily provide any of the $700 million, but will be the EDC’s guarantor. The new initiative more than doubles the EDC’s exposure to the auto parts sector to $1.25 billion, which Clement said is proportionate to a similar U.S. program.
GM and Chrysler have been teetering for months and their condition has become more precarious as sales dropped and they failed to meet conditions laid out by the government for tapping into billions of taxpayer aid.
“There used to be a phrase in the auto-sector, ‘too big to fail.’ I don’t think that phrase exists anymore,” Clement said Tuesday.
“Consumers (can) have confidence when they buy a vehicle from GM and Chrysler during this uncertainty period that their warranty will be there for them.”
The warranty program came into effect Tuesday and lasts as long as the automakers’ viability remains in doubt.
“This is good news. It is welcome because it provides stability to both parts suppliers and consumers at a time of volatility for the auto industry,” said a spokesman for Ontario Economic Development Minister Michael Bryant.
The warranty guarantee was seen as necessary to calm consumer fears that service plans on GM or Chrysler vehicles would lapse in the event of failure — one reason sales have dropped so much.
The Canadian Automobile Dealers Association, which represents car retailers, said there was a misconception among many customers that if the two companies sought bankruptcy protection, they would necessarily cease operations and no longer honour warranties.
Under bankruptcy protection, the two companies can continue to produce autos and service them, said spokesman Huw Williams.