The future of manufacturing is a recurring question at many economic outlook events where we are invited to speak. People ask, is manufacturing in Canada dying, or at least on life support? No, but it is under constant pressure to adapt and evolve in order to stay competitive.
Reports of manufacturing's demise have been greatly exaggerated. After dropping from nearly 16 per cent of gross domestic product in 2000, Canadian manufacturing output has stabilized since 2009 at about 10.6 per cent of GDP. This decline and then stabilization largely reflected China's emergence as an economic powerhouse and its role as the assembly workshop to the world; the rapid rise in commodity prices and the related soaring of the loonie; the 2008-09 financial crisis and recession; and the tepid global and U.S. recovery.
Manufacturers still directly employ 1.7 million people – 10 per cent of Canadian employment, although down half a million jobs from the 2004 peak. This is equivalent to the combined employment of the professional and financial services sectors –and over fifteen times the direct employment in oil and gas.
Of course, aggregate numbers mask the forces at play in individual sectors and enterprises. In the high-profile vehicle manufacturing sector, sales revenue and profitability have recovered nicely from the 2009 recession, with profits finally breaking through the $1-billion barrier. The U.S. recovery has been critical to the rebound, since more than 80 per cent of vehicles manufactured in Canada are exported. Employment has also grown since 2009, but much more slowly than output; manufacturers are increasingly relying on investment in technology to produce cars and trucks.
In vehicle parts, sales and profits have improved but not as strongly, and employment has not increased since 2011. Moreover, in order to be included in key supply chains, parts manufacturers have to position their production close to their clients' sites for final assembly. This means investing in productive capacity outside Canada. Vehicle and parts production is highly globalized; location and related production costs both play a central role. Canada does not automatically have future special advantages in these areas.
The story is much different in food manufacturing. The food industry is surprisingly large; revenues reached $95-billion in 2014, more than 50 per cent higher than revenues from auto manufacturing, and profits exceeded $4-billion. Employment has grown steadily but slowly. The food sector has the advantage of being stable through the business cycle (unlike a highly cyclical sector like vehicles) and relies upon the Canadian domestic market as a foundation, which reduces the risks due to currency movement.
With these examples as a backdrop, what does The Conference Board of Canada's research into globalization and business innovation suggest for the future of Canadian manufacturing? Sectors and firms should be examined and understood on their own merits, but we believe some principles can be applied across the wide array of manufacturing sectors.
First, Canada's competitive advantage in manufacturing has already shifted. We can no longer rely on factors like a relatively weak currency or duty-free access to the U.S. market. Nor can Canadian manufacturers compete on the basis of low labour costs; others can do repetitive manufacturing jobs much more cheaply. Canadian manufacturing firms have to constantly innovate, specialize and focus on higher value-added activities if they are to compete successfully.
Next, Canadian manufacturers need to use their business strategies to create and project a competitive advantage, not just react to opportunities. Firms should position themselves to compete by moving up the value chain based on product design and process innovation, new intellectual property, development of work force and management skills to compete and market themselves globally, and by constantly seek ways to boost productivity. A strong link between manufactured products and providing related services to clients can help to shape that competitive advantage.
Ultimately, manufacturers need to embrace the benefits of globalization and manage the risks if they are to compete to win. Creating barriers to change is not a winning strategy. Today's successful manufacturing business strategies are built around highly integrated global value chains, buying inputs from around the world and selling into other businesses' value chains as well as directly to consumers. In some cases, like vehicle parts, firms will need to use foreign direct investment to build manufacturing and service capacity abroad in order to get close to their customers' global production.
The prognosis? Canadian manufacturing is clearly not dead, but it has changed and must continue to change, sector by sector. Many production processes are already globalized and becoming ever more granular. And the competition is unrelenting; manufacturing firms in a growing number of emerging markets are building the capacity to operate at ever more sophisticated levels of production. Ultimately, the future of Canadian manufacturing is like running an endless marathon to stay ahead of the competition– but running in the marathon is far better than the alternative of dropping out.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.