Outlook 2008 (The watch list): Manufacturing

If things are going to improve for the manufacturing sector, it must let go of its reliance on a low dollar.

Manufacturers could be forgiven for thinking they’re on the industry equivalent of the Titanic. A strong dollar and growing competition from cheap imports burst what fragile confidence they had going into 2007, and 2008 isn’t looking any better. This once powerful sector, still accountable for 15% of Canada’s GDP, is sinking, and fast.

While not all manufacturers hit the ice — Bombardier Inc., for one, saw global demand rise for its business jets, while costs dropped for those that use U.S. parts — there’s a general industry malaise. Just 25% of manufacturers said they would increase production in the final quarter of 2007, according to the most recent business conditions survey in October by Statistics Canada, a figure that is largely offset by the 23% forecasting a decline. And Canadian-made, labour-intensive and easily shipped mass-produced goods, which have little to set them apart on the market, may soon disappear entirely, notes a BMO report.

If things are going to improve in 2008, the sector has to let go of its long-held reliance on a low dollar, says Erwin Stuart of Mintz & Partners, a Toronto-based accounting and advisory firm. For years, the struggling loonie made buying new machinery and technology — often imported from the U.S. — a relatively more expensive way than hiring more employees to increase output. But manufacturers are now paying the price for their old-school habits and must find better ways to become more efficient than just cutting bloated workforces — already down nearly 9% in the sector since 2004. Canadian manufacturers have to take advantage of the dollar and existing tax programs to catch up on modern equipment, as well as pump some cash into R&D for the future, says Stuart.

It can be done. R&D poster child Pratt & Whitney Canada Corp. is collaborating on 600 projects with 20 universities in the coming five years to help build the next generation of green engine technologies, and develop advanced manufacturing technologies to increase speed to market. The aerospace company — which has 42,000 of its engines powering aircraft and helicopters in 194 countries — spends $2 million per working day on R&D and has invested more than $3 billion in such activities over the past 10 years. While such efforts help the company secure the next generation of top engineers, they also enable Pratt & Whitney to make better-performing, more fuel-efficient engines — which, in turn, improves its cost-competitiveness.

Indeed, the very basics of manufacturing competitiveness are changing, warns Jayson Myers, chair of the Canadian Manufacturing Coalition, which is made up of 37 national and international industry associations. The soaring dollar and higher costs are threatening, but so, too, are rapid technological change (an area in which Canada has traditionally lagged) and the longer-term impacts of globalization.

With the weak Yankee dollar, Stuart thinks Canadian manufacturers should turn to markets other than the U.S., such as China and India, although they will face increased competition from their Yankee counterparts because of the weak greenback. “It’s cyclical,” Stuart says. “We had our turn.”

That means it’s likely to get worse for Canadian manufacturers before it gets better.