Interesting times, be prepared
Topping the list of troubling factors is trade disruption as NAFTA goes under the knife and the possibility of a border tax.
C.D. Howe Institute
We are living in interesting times. Canada’s manufacturers are facing daunting challenges as global trade, protectionism and technology reconfigure the playing field. Fasten your seatbelts.
Topping the list of troubling factors is trade disruption with our biggest customer as NAFTA goes under the knife; and the possibility of a border tax looms as part of the Trump regime’s efforts to make America “great” again.
Meanwhile the latest softwood lumber fandango is playing havoc with the forestry sector. The Conference Board of Canada says duties (between 3% and 24%) will cut $700 million from lumber exports over two years with the loss of 2,200 jobs. BC, as Canada’s largest producer (accounting for about half overall), has the most to lose.
Adding to the uncertainty is the brewing provincial conflict over the Kinder Morgan Trans Mountain pipeline extension. With BC’s change of government, the NDP-Green partnership is officially opposed to the project, which is nonetheless within federal jurisdiction and approved by Ottawa. If the alliance stalls the project, moving more of Alberta’s fossil fuel resources to the coast will be impeded, and that does not bode well for manufacturers serving the industry.
These kinds of issues must be left to the politicians to resolve, but there are factors manufacturers can control that will make them more competitive and ready for whatever lies ahead.
Take investment in machinery and equipment. It’s time to crack open the wallet. Compared to the US, business investment is at its lowest level per worker in more than 25 years, having fallen after years of narrowing the gap, according a C.D. Howe Institute report.
Investment per worker in 2017 at 55 cents is down from a high of 77 cents in 2013, compared to each dollar invested in US workers. Alberta and Saskatchewan show the steepest declines.
Canadian companies also lack enthusiasm for smart technologies. Only 3% of manufacturers responding to a Business Development Bank of Canada study have fully digitized their production, but 17% are preparing to do so. Businesses that switched to digital production are seeing higher growth, greater productivity and lower operating costs.
Manitoba and Saskatchewan top the list of provinces initiating the shift, BC is in the middle, while Alberta trails. However, overall investment is low: under $100,000 – $161,000 less than the international average.
And how many manufacturers are looking at shortages of people with the right skills as legions of baby boomers retire?
In 2016, 243,000 experienced workers punched out for the last time. For every job created, companies had to cover for the loss of 1.8 people, according to a Conference Board of Canada study. Filling technical and skilled trades took 40 days in 2005. Now it’s 60 days, raising the costs from $3,000 to $5,000 per worker.
The smart play is to plan farther ahead than the current two years.
Here’s an FYI for the NDP regimes in BC and Alberta. As Trump aims for a precipitous drop in the US corporate tax rate, be aware that hiking their rates not only creates competitive obstacles for businesses, it ultimately dings the voter.
A report from the University of Calgary’s School of Public Policy shows every $1 in extra tax revenue results in a long-run decrease in aggregate wages for workers that ranges from $1.52 in Alberta to $3.85 in PEI. So the 2% corporate tax increase in Alberta reduces earnings for an average two-earner household by about $830 and results in a $1.12 billion reduction in aggregate labour earnings for the province.
Business will continue in North America with or without a renegotiated NAFTA, but manufacturers must be better prepared for the outcome by being smarter about technology, more productive and by looking outward. Trump proves how unwise it is to be too comfortable with the status quo.