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USA: "Inside the U.S. Government's Much-Anticipated FCPA Guide". 13-page Client Alert by Baker & McKenzie.

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Yes, There Is a Future for Manufacturing in Canada

One could be forgiven for believing that a perpetual fog of woe betides Canada’s manufacturing industry. Despite the end of the recession nearly 3 years ago, headlines continue to trumpet plant closures and job losses. However, this is the common problem of confusing firm performance with sector performance. Manufacturing in Canada is not in decline—output today is up nearly 14 per cent from the nadir it reached during the recession. But manufacturing is most definitely in a state of change.

Many major segments of Canada’s manufacturing sector are currently reporting rising production; some are even surging. For example, robust investment in the oil sands is driving very strong gains in production in the machinery and fabricated metal products industries, which are major suppliers. The ongoing recovery in North American vehicle sales is driving rising production in industries like transportation equipment, primary metals and plastics. A few industries have even attained production today that is above where it stood at the start of the recession; in short, they have fully recovered.

That said, the rising tide of manufacturing output is not lifting all boats. Canada’s paper products and printing industries continue to suffer from the shift in information and entertainment away from print to electronic media. Building materials production, such as cement and aggregates, has failed to rebound due to the tepid performance of North American construction spending since the end of the recession . These underperforming segments may be giving the false impression of a more general manufacturing malaise.

Manufacturing employment is also perpetuating the impression of gloom. Although production has made healthy gains in the past couple of years, employment has not—it is little different today than it was in the summer of 2009. The combination of a recovery in output in many manufacturing segments but few job gains means that labour productivity is rising substantively. Unfortunately for frustrated workers in the manufacturing sector, this is an effective way for manufacturers to overcome the twin challenges of a strong dollar and rising global competition. This ongoing improvement in labour productivity is part of the necessary and ongoing transformation that manufacturing must undertake in order to be successful beyond the post-recession rebound.

Ultimately, the manufacturing sector will have to change what it does here, and how it does it. Part of this transformation will involve further increasing engagement with emerging markets, both as customers and as links in the supply chain. For example, Canada’s textiles and apparel industry has gone through a painful transformation over the past decade, shrinking by more than half as a result of competition from developing economies. However, the industry has achieved some success in recent years by focusing on high-value activities and products (such as high-end suits and safety attire), and by taking advantage of low-cost inputs from those same developing economies.

Increasing the amount of services that manufacturers provide with their products is another strategy. The Conference Board’s recently-published study on small- and medium-sized manufacturers in Quebec reported that companies are increasingly providing services that complement their products.1 Linking products and services together helps to build competitive advantages, better client relationships and pricing power for manufacturers. As well, it diversifies firms’ revenue mix away from the sale of physical products, which can be much more volatile.

Canada’s manufacturing sector is and will still be here for many years to come, but not in its current form. The mix of what we produce will continue to change, and the performance among the manufacturing segments will vary. Growth in manufacturing employment growth may not be robust as firms concentrate on boosting productivity to stay globally competitive. It will not be manufacturing as we knew it a generation ago, but yes, there will be a manufacturing sector in Canada.

By Michael Burt, Director Canadian Industrial Outlook

Source: Morning Post Exchange - GAI

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