How Canada’s manufacturers can make the most of the U.S. recovery

After years of merely surviving, several manufacturing sectors show signs of life. Tooling up to meet the demand will be key

A worker welding the bottom of an INKAS custom armoured car at the company’s Toronto facility

(James MacDonald/Bloomberg/Getty)

With the loonie at lows not seen in a decade, and the U.S. recovery finally building steam, conditions seem ideal for a revival of Canada’s manufacturing exports. Following 15 years of struggling with increased competition, sluggish demand, and a high-valued Canadian dollar, many manufacturing industries are not yet prepared to take full advantage for the U.S. rebound. Firms will need to further expand production capacity and hire new workers to take on U.S. demand.

New research by the Conference Board of Canada identifies several manufacturing industries that can expect growing U.S. demand and that are competitive in U.S. markets, but that do not yet have sufficient people and physical capacity to ramp up production. These are:

  • Wood product manufacturing;
  • Pharmaceutical and medicine manufacturing;
  • Aerospace product and parts manufacturing;
  • Rail and shipbuilding manufacturing;
  • Clothing manufacturing;
  • Motor vehicle parts manufacturing.
Chart showing Canada’s manufacturing exports to the U.S., selected sectors, 2009–2015

These manufacturing industries have already begun to experience a boost in U.S. demand (see chart above). This has pushed most of these industries to operate close to full capacity, making full use of the resources they have. They will need additional space, machinery and technology, and/or people if they hope to further ramp up production in response to U.S. demand.

Many of these industries lost production capacity the last decade or two due to weaker demand, the higher-valued Canadian dollar, and increased competition from China, Mexico, and a host of other emerging nations. Companies were forced to shut down, cut production, or change their target markets and products. These struggles have left them with 22% fewer workers than they employed a decade ago (on average), and net capital assets (such as factor floor space and machinery and equipment) that have shrunk 2.2% per year on average.

It will be challenging to invest in machinery in the face of a low loonie and relatively lacklustre profit margins. Hiring qualified people may also be a challenge, given that many of these industries have been in decline for the last decade. Companies may need to be open to hiring people with different skills and commit to training them internally.

If they can overcome the challenges and increase their capacity, these companies will inject new life, capital, and skills into the Canadian economy. This is welcome after several years of lacklustre investment by Canadian businesses across the economy. Moreover, the next generation of manufacturers may be some of the most competitive and capable Canada has ever seen, having endured the struggles of the last decade or two.

Can Canada’s manufacturing sector once again generate major growth for the economy as it did in the decades before oil and other commodity prices surged to record highs? Many manufacturing industries have a competitive edge and are experiencing increased U.S. demand. Investing in people, machinery, and physical capital is what they need to succeed in this next trade era.

Jacqueline Palladini is Senior Economist of the Global Commerce Centre at the Conference Board of Canada.