How to cope with the high costs.
August 14, 2012
by Matt Powell, Assistant Editor
Despite slight productivity gains and a more stable economic performance as the rest of the world wobbles, Canada’s job creation is lacklustre, while high labour costs are becoming a perpetual competitive handicap to manufacturers.
Labour costs are driven by a number of factors, including slower gains in productivity, investments in innovation and R&D and the high-value loonie. KPMG Canada estimates 55% of manufacturers’ spending goes to labour costs. That’s up from 14.1% in 2008, according to Statistics Canada. Labour costs for companies in emerging markets such as China, India and Mexico represent about 30% of overall expenditures.
Closer to home, Canada’s wage advantage over the US has disappeared. The average per hour wage is $35.76, compared to $34.74 in the US. And Canadian manufacturing salaries have increased by 3.1% in 2012, topping $896 per week, according to Statistics Canada.
“Gains in output haven’t been matched by gains in jobs because the economic outlook is pretty uncertain (thanks in part to turmoil in the EU) and the US was recovering at a slower rate, so companies have been overly cautious,” says Dina Cover, a TD Economics economist. “Manufacturing will recover, but its share of the economy is unlikely to gain much ground.”
Today, manufacturing accounts for 10% of Canadian employment, or about 1.6 million jobs, according to Cover, who says it’s unlikely manufacturing will pass 12% in the near future. That’s down from its peak of 16% in 2000, and because labour productivity is a key determinant of GDP per capita, it adds to Canada’s labour cost problem.
So what’s a company to do?
Martin Lavoie, director of manufacturing policy at Canadian Manufacturers & Exporters (CME), says improving the country’s labour challenges will also come down to bridging a disconnect between industry and education. How we make things in Canada will become more advanced.
“Advanced manufacturing means more automation and more advanced production processes to increase productivity, so now the trend is to have fewer people on the shop floor and more in support positions,” he says. “Those kind of positions require people with higher education levels to develop those processes, technology and automation applications.”
It comes down to a refined mix of process improvement, investment, innovation and entering new markets.
Here are some of the ways successful companies are driving down labour costs, although not all of them are pretty.
• Automate. Brian Smith, Ontario and Atlantic lead of supply chain management at KPMG Canada, is a big fan of automation, but concedes this usually means getting rid of shop floor jobs, although that’s not always the case.
“Canada needs to learn to get ahead by competing based on superior design, manufacturing processes and, ultimately, automation,” he says. “Almost by definition, being more automated means some jobs are lost. Some [companies] are still finding ways to create jobs, but that means being really smart about automation.”
Improving automation also allows producers to team with sister operations for shared applications that increase output volumes in specialized manufacturing operations. Doing so spreads out fixed costs.
Lavoie agrees automation and improved design will help improve Canada’s labour costs, but much will depend on manufacturers recognizing the need to become more advanced.
Some companies are getting it. Statistics Canada says manufacturers are increasing spending on capital equipment and machinery by 6.6% this year, and Cover says more automation levels will lead to greater opportunities, crucial to improving competitiveness, increase cash levels, and improve job growth prospects.
“Diversifying export markets improves business position,” she says. “The US is doing this by creating new trade agreements, which also suggests there’s already more competition by default for Canadian firms looking to diversify.”
More Canadian businesses are looking beyond the US. In 2000, 88% of Canada’s manufacturing exports went to the US. Today, it’s 77%, while exports to Asia and other booming economies are up by 150%.
• Education and training. “It’s trendy to blame natural resources for what’s going on in manufacturing… but there’s a major gap in the bridge between education and industry that’s slowing growth and productivity,” says Lavoie.
More skilled workers will be required to operate more specialized equipment.
“The challenge when you have 30% of the population in manufacturing positions that don’t require high education is that you were offsetting the educational gap by having those jobs around,” he says. “Nowadays, high-paying jobs require education and we no longer have the shop floor jobs to bridge the gap.”
Investing in education and training creates jobs and provides opportunities for existing employees to improve, he adds.
• Improve productivity and add value. There have been productivity gains but Canada is not keeping up with other G7 nations. Productivity output grew by 5% between 2000 and 2007, says Cover. Gains in other nations, such as Japan, grew by 30%.
“You don’t have to send people out the door to cut labour costs to improve productivity, but much depends on streamlining your processes to ensure your company is as productive per man hour of work as it can be,” says James Milway, executive director at the University of Toronto’s Institute for Competitiveness and Prosperity. “Lowering labour costs and improving productivity comes down to better processes.”
Bridging the gap
Milway believes improving productivity requires top-down management.
“Plants need to become more than just plants,” he says. “There needs to be more designers and creative workers. You can’t look at a plant as a job-shop if you want to improve productivity, keep people employed and lower your costs.”
Improving those factors will make value-added an important competitive advantage, he adds.
“Canadian firms need to focus on ensuring customers understand that they’re not just getting a product, but a service as well,” he says. “Getting costs lower means putting in some good work to your company’s revenue line,” says Milway. “You need to get more value to your customers, understand how you’re going to deliver that value and support those ambitions. It’s not about slashing and burning labour costs, it’s about getting better.”
• Overtime doesn’t cut it. A lot of companies are asking employees to work more instead of creating new jobs or adding shifts. “But this is a short-term strategy that’s usually used when companies are uncertain about the stability of the global economy and the export markets they serve,” says Lavoie.
It’s actually an expensive solution, he says, but it may explain slight productivity increases. The problem is that there’s no correlation between productivity and employment.
• There’s always the CAT solution. Not happy with union demands, then offering a take-it-or-leave-it contract that would have slashed wages and benefits at its London, Ont. Electro-Motive locomotive plant, Caterpillar finally shut the doors, putting more than 500 unionized and non-unionized Canadians out of work.
Production was sent to a plant in Illinois where the less union-friendly state offered generous incentives to attract investments.
• Learn to cope with the expensive loonie. A high Canadian dollar makes our products look more expensive, but it also increases our cost of labour.
Cover notes the loonie, hovering just above or below the US greenback since 2009, is not going down anytime soon; and increased demand generating higher prices for resources underpins a stronger currency, which leaves other exports less competitive.
Export Development Canada (EDC) in its report, The Canadian Dollar, How Canadian businesses are adapting to a strong Canadian dollar (www.edc.ca), offers some advice for coping with the loonie, including: diversifying markets; refocusing on other strengths such as quality, service and innovation; be unique; and deal in US or other currencies.
The German formula
• Higher wages, not so bad. Higher wages certainly contribute to higher labour costs, but they’re not necessarily an impediment to a strong manufacturing sector, certainly not in Germany. It’s a leading world economy with low unemployment and a manufacturing sector that’s a powerful driver of growth.
Labour costs there grew by 19.4% between 2001 and 2011, according to the German Federal Statistics Office. That’s half what France’s labour costs grew (32.9%), and well below the European Union of 36.1%. Yet, Germany’s manufacturing wages average $42.36, 48% higher than the EU average.
So how is it that Germany’s been able to thrive and even weather the current economic upheaval in the EU?
One answer is exports. Although 40% of them go to other EU countries, they represent 50% of Germany’s overall GDP, according to the World Bank. Canada’s exports represent 29% of its overall GDP. Also of note are the strategic clusters of firms that specialize in niche areas of manufacturing, giving labour a say in management decisions and having an apprenticeship and vocational training system in place that keeps skill levels high and youth unemployment low.
Germans also enjoy twice as much vacation time as Canadians, at least 20 days annually.
Canadian manufacturers have some work to do to catch up with their German counterparts. Improvement will depend on investing in automation, improving processes, skills development and coping with a higher value dollar. The pay-off will be a stronger manufacturing sector, stronger companies competing successfully in world markets and like the Germans, perhaps more vacation time.
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This article appears in the July/August 2012 edition of PLANT