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Is manufacturing poised for growth?

Manufacturing is not dead, yet it is far from healthy.

KPMG, the multinational consulting firm, believes, however, that the tide is turning and that Canadian manufacturers are poised for an upsurge in growth.

But is this wishful thinking? While there are innovative Canadian manufacturers who are doing well, in the aggregate it appears to be a different story.

Certainly it is a critical issue. As the KPMG survey on the outlook for Canadian manufacturing points out, “manufacturing is responsible for almost one-third of Canada’s exports, contributing significantly to the country’s overall wealth and economic stability.” Last year, close to 80,000 manufacturers generated $591 billion in sales and employed nearly 1.8 million Canadians. So it is hard to see a strong Canadian economy, with good jobs, unless there is a strong manufacturing sector.

The state of manufacturing is also important politically, particularly in southern Ontario, which will be a critical battleground in next year’s federal election. This critical region is still struggling.

For example, mayors representing 13 Ontario cities have found it necessary to form the Ontario Auto Mayors’ Roundtable to address Ontario’s failure to capture new auto industry investment. All have been feeling the pain from the continued shrinking of Ontario’s most important manufacturing sector.

In its bullish report on manufacturing, KPMG argues that Canadian manufacturing is “well positioned to become more relevant and influential than ever before.” Yet while the U.S. economy is recovering, creating export growth potential for Canadian companies and costs are raising in China so that there is less outsourcing and more reshoring of components to North America, it does not follow that Canadians will be big beneficiaries.

While the federal government is focused on efforts to make Canada an energy superpower, the U.S. is focused on how to make itself a manufacturing superpower, with major investments and incentives to drive a new industrial revolution in advanced manufacturing. At the same time, Mexico is easily outdoing Canada in attracting automotive and other tech-based investment.

The latest step in a wide-ranging U.S. manufacturing strategy is the launch of the National Network for Manufacturing Innovation, regional public-private partnerships or hubs designed to accelerate the development and commercialization of advanced manufacturing technologies. So far, four have been established, with a US$240-million federal investment and matching funds from private partners.

Moreover, KPMG’s report, based on a survey of 154 Canadian manufacturers, finds that companies are focusing their efforts on the U.S. market, as opposed to growth opportunities elsewhere, and that their attention is heavily on continuing cost reduction, whereas their global competitors are more focused on increasing research and development and new product lines, organizational restructuring and improving speed to market. This Canadian focus hardly seems like a recipe for long-term success.

A recent C.D. Howe Institute report found that Canadian business investment per worker, which includes R&D as well as machinery and equipment, is falling relative to the U.S. and other advanced economies.

In 2014, the average investment per Canadian worker appears likely to be 71 cents for every $1 of new investment per U.S. worker. Canada’s numbers look better than they should because investment in Alberta and Saskatchewan oil and gas and pipelines is high. But this is in the construction phase. Once built, oilsands plants and pipelines provide relatively few jobs. But the really bad news is in Ontario, where investment per worker this year is projected at barely half the level in the U.S. and in Quebec to slightly less than half.

Even though corporate taxes are higher in the U.S. than Canada, Michigan alone reports that it has attracted almost US$5 billion in announced investments by Tier-1 auto parts suppliers in 2009-13 and roughly US$14 billion by auto assemblers in the same period. Actual capital investment in all of Canada in the same period by all parts suppliers totalled less than half that amount and by auto assemblers roughly one-third of that amount.

The reality is that Canada has to take manufacturing a lot more seriously, and this has to include the political level.

As Steve Rodgers, president of the Automotive Parts Manufacturers Association observed recently, “it would appear that the vast majority of our politicians have lost sight of the importance of manufacturing in our economic health and well-being.”

It is indeed remarkable that none of our political parties has tried to become the champion of manufacturing, given its vital importance to our future well-being.

Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.

 
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