One of the by-products of the global COVID 19 pandemic is that all of a sudden people are paying attention to where things are actually manufactured. On Monday morning April 13, the lead headline on the CBC website was “Canada building its own PPE supply chain…in China”. As the Toronto Star noted in its April 7, Editorial – “Canada Needs a New Industrial Policy”, when Canada is left scrambling for medical equipment, relying on goods that are manufactured halfway around the world “doesn’t seem like such a good idea anymore”.
There has been a lot of talk during the federal election campaign about how to create more good, “middle-class” jobs. But there has been only limited recognition of the need for a much more active government role if we are to build the more innovative and sustainable economy we need to create such jobs.
There is a lot of talk about the need to build a “knowledge-based economy” if we are to retain and create good jobs in a world where production is shifting in a major way to lower wage developing countries.
To compete, Canada must indeed produce high value-added goods and services commanding a price premium in world markets because they are sophisticated and unique. But, there are few signs of a sustained transition to a more innovative economy in Canada. Indeed, we are moving in the wrong direction.
It is hardly news, but the scale of the manufacturing crisis in Canada continues to astound.
Between 2002 and 2013, manufacturing employment fell by 557,000 jobs, meaning that one in four (24%) of the jobs that existed in 2002 have disappeared. As a share of all jobs, manufacturing fell from 15.0% to 9.8% over this period.
There has been no meaningful or sustained recovery from the Great Recession for the manufacturing sector. Total employment in 2013 was no greater than in the recession year of 2009.
Posted by NationBuilder Support · February 27, 2014 6:01 AM
Three economists on how the manufacturing sector can bounce back This article originally appeared in the Toronto Star.
Know your advantages
Manufacturing absolutely has a future in Canada, and in particular southwestern Ontario. The key to understanding the future of the industry is in knowing where our competitive advantages lie.
Low labour costs will never be a comparative advantage for Canadian manufacturing, but given those “costs” are largely wages, this should not be seen as a problem. Less obvious is how proximity to markets is no longer a comparative advantage for traditional manufacturing regions. The world’s economic centre of gravity is heading toward Asia, which places goods from southwestern Ontario at a geographic disadvantage compared to most other parts of North America. Even markets within North America are changing. In 1900, neighbouring cities such as Cleveland (7th), Buffalo (8th) and Detroit (13th) were among the biggest cities in the U.S. Now those cities are 48th, 73rd and 18th in population.
This disadvantage may pose less of a problem than it to appears at first glance. With supply chains becoming increasingly global, a smartphone assembled in China may have an operating system designed in Kitchener-Waterloo and Brantford, applications programmed in London and Windsor and use precision-crafted parts from St. Thomas and Sarnia.
The region maintains a number of advantages, including a financial sector that is familiar with the industry. We have one of the most well-educated workforces in the world, which gives us an advantage when it comes to precision manufacturing and products where high-quality control is important, such as food. Although our labour costs are high, there are significant cost advantages in other areas, such as access to land and clean water. Manufacturers that use these advantages are well-positioned for future growth.
— Mike Moffatt, assistant professor, Ivey Business School
Three ways to act now
Ontario manufacturing has had a rough ride over the last decade. A number of factors have been at play, including the rise of the dollar, the deep U.S. recession, and the growth of competition from emerging economies. However, we should not conclude that Ontario manufacturing is down for the count. Far from it.
In some research looking at leading Canadian firms done at Ivey’s Lawrence Centre, we find reasons for optimism. Firms such as Linamar, Magna and Shawcor are competing and winning at home and in global markets. Focusing on high value-added manufacturing, they are making the most of Canada’s skilled workforce and capacity for innovation to win new business around the globe.
Business and public-sector leaders convened with Ivey researchers in November to translate our research findings into action. They agreed on three recommendations for immediate action.
Leaders agreed that the primary responsibility for manufacturing success lies with the private sector. Therefore they aimed their first two recommendations at firms. Their first was to find a mentor: Firms seeking to expand into international markets need the counsel and advice of seasoned executives.
Their second recommendation was to form partnerships with local educational institutions. To attract the next generation of skilled workers and managers to manufacturing, firms need to connect directly with students by visiting classrooms and hosting plant tours. Linamar is a good example of a firm that is putting these ideas into practice.
Finally, leaders are looking for governments to raise their game, particularly in the area of attracting investment. Despite Canada’s many advantages, jurisdictions such as Mexico are winning the investment attraction game, even when wages are a small part of the total business proposition. Ottawa, provinces and municipalities need to work together to put our best case forward.
Ontario can compete and win at manufacturing. The leading firms we studied prove it. We need to stop focusing on our problems and start taking action on solutions.
— Paul Boothe, director of the Lawrence Centre at Ivey
How to work together
The recent depreciation of the Canadian dollar combined with recovery in the United States opens up a temporary window for recovery of Ontario’s hard-hit manufacturing sector. Those companies that have survived a brutal decade have the opportunity to grow. However, recovery will not happen automatically, and will require a major effort on the part of many players.
Support for new corporate investment is critical, but lowering the overall corporate tax rate has had little impact. Ontario’s corporate tax system should use enhanced tax credits to reward companies that invest heavily in new machinery and equipment, research and development, and worker skills.
Governments must also ensure access to the “patient” equity capital needed to finance investment that has a long-term payoff. Given the small scale of venture capital funds in Ontario and the focus of banks on short-term loans, we should establish an Ontario public investment bank focused exclusively on manufacturing. Such a body should operate at arms’ length from government, on the model of the federal Export Development Corporation.
Ontario has had a patchy record of fostering collaboration between the key players in a successful modern economy: government, companies, the post-secondary educational system; local governments; and unions. Drawing on past successes, Ontario should establish province-wide and local sector councils, bringing key players together to promote and deliver skills training and collaborative research programs. Community colleges can play a major role in rebuilding local manufacturing.
A revival of Ontario manufacturing will require active government leadership, and a spirit of partnership. It will certainly not come about if public institutions and unions are seen as the enemy.
— Andrew Jackson, Senior Policy Advisor, Broadbent Institute
On January 16, the Macdonald-Laurier Institute published a study by former Statistics Canada analyst Philip Cross, entitled “Dutch Disease, Canadian Cure.” It argues that “after 10 years of a muscular dollar, Canadian manufacturers have adapted well to a strong currency – demonstrating that Dutch Disease is economic myth rather than reality.”
Mr. Cross argues, quite reasonably, that high commodity prices are not the only reason for the strong appreciation of the Canadian dollar after 2000. However, as Mark Carney noted in a recent speech, they are an important part of the story, explaining about one half of the exchange rate appreciation.