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Cash flow + R&D = innovation

The September numbers for manufacturing shipments were a bit of a downer. Statistics Canada reported a 0.6% decrease with 13 of 21 industries registering lower sales. This has pundits wringing their hands over how manufacturing’s ongoing malaise is going to mess up the Bank of Canada’s growth forecasts.


December 8, 2010
by Joe Terrett, Editor

The September numbers for manufacturing shipments were a bit of a downer. Statistics Canada reported a 0.6% decrease with 13 of 21 industries registering lower sales. This has pundits wringing their hands over how manufacturing’s ongoing malaise is going to mess up the Bank of Canada’s growth forecasts.

Manufacturing took quite a clobbering in the final innings of last year’s recession. The sector, concentrated in Ontario and Quebec, shrank by 28% and more than 185,000 workers were laid off. Plants have recovered about 45% of their production, but the sector is still off by 18% compared to pre-recession levels.

You’d think the SMEs, who comprise the biggest share of our manufacturing world, would get the hint and feel more pessimistic about their prospects, but according to the results of PLANT’s Business Outlook: 2011 survey, senior executives at 384 Canadian firms are feeling pretty good about things, thank you very much. They’re expecting orders and sales dollars to increase (prices and profits to a lesser extent). Most are almost exclusively serving the domestic and US market, but a growing number of them are planning to jump the fence and see what the rest of the world has to offer. They’re also looking at expansion: more hires, plant capacity and new lines of business. Incidentally, almost all of them intend to invest next year in process improvement, plus some training, machinery and equipment, and R&D.

It’s generally acknowledged that for manufacturers to make their way in the world, they’ll need to be more productive and place greater emphasis on innovation.

If they need persuading, a comprehensive Canadian Manufacturers & Exporters (CME) study of product design and development proves the point. It shows best in class firms derive more than 35% of their revenues from new or significantly improved products. They invest more than the laggards in R&D, commercialization and market research.

SMEs have some work to do in that regard. They’re proud of the quality they produce and consider it a competitive advantage, but the PLANT survey shows innovation is well down their list of competitive advantages.

Of course, it takes money to be innovative and that’s hard to come by, what with tight bankers and economic meltdowns interfering with cash flow and good intentions.

During a PLANT-hosted roundtable, Al Diggins, president of the Excellence in Manufacturing Consortium, noted SMEs have ideas and they have patents, but many opportunities have slipped away because they couldn’t secure financing.

That’s precisely the kind of thing that’s bugging CME president and CEO Jayson Myers. He’s tired of government lecturing businesses on the need to innovate and improve productivity. Government, he says, needs to help improve the investment environment by leaving more cash in manufacturers’ hands.

It’s federal budget time. CME wants government to extend the write-off for machinery and processing technologies, and to make the SR&ED tax credit refundable.

That might be a bit of a hard sell to a cash-strapped, minority government wallowing in deficit, but Stephen Harper and friends should consider the impact a floundering manufacturing sector has had on the economy during the past two years, and view such measures as a wise investment