Dennis DesRosiers founded DesRosiers Automotive Consultants in 1985, after working as an auto analyst with the Ontario Treasury from 1973 to 1979, and as director of research for the Automotive Parts Manufacturers' Association from 1979 to 1985.

Vaughan: Having read many of your reports in the past year (your 20th in business, congratulations!) I'd like to follow up on some of the year's big trends. First, the continued loss of market share from what we used to call the Big Three. Although GM and DaimlerChrysler actually picked up a little market share this year, together with Ford, they lost share for the eighth year in a row. What does 2005 look like for them?

DesRosiers: First of all, I believe there is no more Big Three. There are a dozen OEMs (original equipment manufacturers) all fighting it out in a very competitive market.

GM did pick up some market share this year with fleet sales and with their imported product from Korea. And DCX had one of the most successful vehicles in the market with their Chrysler 300 made in Brampton but they lost market share in the entry-level market, which is Canada's largest segment. I'm also very concerned about Ford, which lost a lot of market in just about every segment except pickup trucks.

I'm still of the belief that these three traditional players will see more market share losses over the near term. Not because they are doing anything wrong, but because the competition is so strong. This year, we will see a record 58 new vehicles introduced into the market (the previous record was 42) and more than half will carry an import nameplate. "Product" carries a lot of weight and this will drive more share to the imports; some of which, by the way, are owned and controlled by GM, Ford and DCX.

Vaughan: You've written about the loss of 15,000 union jobs in Canada and addition of 60,000 non-union jobs in the automotive sector in Canada in the last eight years. But the unions were still able to be able to deliver lots of government money to their employers in 2004.

DesRosiers: The unions are in crisis and have lost a lot of members despite their denials. Buzz Hargrove is the most talented labour leader in the country and the squeaky wheel gets the grease. However, it is GM, Ford and DCX which have lost all the share and thus the jobs and they are the ones that are unionized.

But Canada would be in serious trouble if these companies reduced their presence in Canada any further. The global automotive investment game is one of incentives. If you want vehicle company investment, with or without Buzz harping away, governments have to play this game.

Unions do need to rethink their fundamental position. I firmly believe that we have unions because of historical bad management in many companies and thus the workers need to unionize to protect themselves from bad management. But today there is no room for bad management, thus no need for unions. Therefore unions need to redefine their role. They haven't and thus they have lost thousands of workers.

Adam Smith and his invisible hand is more powerful than any union leader and unless they redefine themselves to fit into the modern economics of the auto sector they will continue to be in crisis.

Vaughan: Tell me what's going on in the intellectual side of the auto sector. There were a bunch of announcements last year about research, design, development and testing of vehicles and parts in Canada.

DesRosiers: I personally think this is the most exciting development in the Canadian automotive sector today. I did a study on this in 1974 and concluded that Canada would never be able to attract research, design, development and testing (RDD&T) facilities. Since then, information technology has allowed R&D to migrate away from head office and in today's auto sector my earlier study would be wrong.

Today, the fastest-growing aspect of the Canadian automotive sector is the growth in the intellectual side. We have attracted into Canada about $1-billion in intellectual capital over the past number of years and our prospects for added growth is very strong.

There were numerous announcements last year in Canada for additional RDD&T work for both vehicles and parts. Indeed, the GM Beacon project, which could be the biggest story in Canada during 2005, is about increasing the amount of RDD&T that GM does in Canada. They put a design centre in Canada a few years ago that is very successful.

Navistar announced they are going to build two R&D centres in Canada this coming year. The federal government's Auto 21 [network of centres of excellence] is very successful and there are dozens of automotive-related research chairs at Canadian universities.

Most OEMs are looking to expand their intellectual capabilities in Canada. Canada has to hold on to as many blue-collar workers as possible but our growth is going to come from being smarter than others, which is intellectual capital.

Vaughan: About 40 per cent of the cars sold in Canada are compacts or subcompacts and last year we started to see some pretty good new entrants in the field. But they run from $12,000 Korean Chevys to $70,000 German racers. What's happening here?

DesRosiers: There used to be a perception that compact vehicles had to be cheap; that is no longer true to the same degree. Of course there will always be a market for less expensive vehicles in Canada; but we are heading in the general direction of the European market, where premium compact vehicles command a higher price tag and still sell fairly well.

The best recent examples would be the Mini, Honda Civic SiR, Acura EL, Smart and the upcoming Audi A3. I think we will get a slow trickle of European-inspired compact premium cars, maybe a BMW 1 Series, maybe a Mercedes B-Class, possibly a Nissan C-note. If they come, they'll take some market share, most likely from the sports car segment.

Vaughan: Car companies have had no choice but to embrace the governments' social policy agenda. The OEMs have eliminated 98 per cent of the emissions in a vehicle that are harmful to humans and are now working on eliminating the emissions in a vehicle that are harmful to the environment (i.e. greenhouse gases). For the most part, vehicles are safer, more fuel-efficient (despite horsepower improvements) and environmentally friendly. What should we force them to do next?

DesRosiers: We quickly are coming into an era where governments will no longer have to "force" the vehicle companies to embrace social policy agenda items.

Differentiating yourself from your competitors on these issues has become a very important competitive advantage for the OEMs and they are embracing them on their own. Indeed, if governments aren't careful, they could actually work against the introduction of environmentally friendly vehicles.

Diesel, for instance, has tremendous upside potential for helping with the greenhouse gas issue and upcoming regulations could work against the growth of diesel vehicles. So I'm not sure governments should "force" them to do anything. The old model of government-auto industry relations is broken and doesn't work any more. We need to come up with a new model based on mutual trust and understanding of each other's goals and responsibilities.

Michael Vaughan Live is on at 6 to 7 p.m. Monday to Friday on Report on Business Television.