Canada doesn’t look too good against its international peers, particularly the US.
The stars appear to be aligning favourably for Canadian manufacturers. An Export Development Canada (EDC) forecast notes OECD nations are driving global growth and they’re generating demand that will energize emerging markets through this year. Meanwhile the US economy is looking at growth of about 3% and just under 4% in 2015 – good news for our manufacturers who are ideally positioned to serve their biggest customer. But are Canadian businesses prepared to make the most of these opportunities?
Lagging per worker business investment suggests they are not.
The C.D. Howe Institute lays out the numbers in a policy brief, and Canada doesn’t look too good against its international peers, particularly the US. It averages $13,200 per worker this year, compared to $14,800 among OECD nations and a whopping $18,500 for the US. Central Canada, where most manufacturers are based, is even farther back in the pack. For the first time in three decades, businesses in this region are investing the least (Ontario averaging $7,000 and Quebec $5,700).
Canada has long lagged the US in investment, but the Toronto-based not-for-profit research firm points out companies were catching up between 2008 and 2012, making the timing of this inertia puzzling.
Business prospects are promising. A KPMG outlook announces a strengthening US economy, a more favourably valued dollar and a trend to reshore manufacturing in North America are all conditions moving them past survival mode to actually increasing their revenue. Reshoring is key to this growth. Only 14% of companies intend to source from China this year compared to 31% last year (and 3% from India compared to 12%). Barring any glitches with the Canada-EU Trade Agreement (keep an eye on Germany), CETA will add $12 billion to Canada’s GDP.
But to capitalize on these opportunities, manufacturers need to invest in their operations. And more aggressive business investment is critical to improving productivity, which also lags our international peers.
So what’s the problem? Companies may be spooked by global business prospects. Bank of Canada governor Stephen Poloz has noted a lack of confidence and investment, but caution is also reflected in the results of the 2014 EMC-PLANT salary survey, which shows average wage gains for many executive and management titles have stalled.
Statistics Canada says private companies were sitting on $626 billion in cash holdings as of the first quarter, but KPMG has some ideas about how some of that money would be well spent. For example, be less risk averse and invest more in breakthrough innovation as well as the safer, more routine incremental improvements to existing technologies. And spend more on technologies for the shop floor. Automation is a good start but also spend on data and analytics that will expand business intelligence in-house and into the supply chain.
Of course many manufacturers – mostly SMEs – aren’t hoarding huge piles of cash and don’t have an easy time prying capital loose from banks or other third party sources. To that end, the C.D. Howe Institute has some recommendations for policy makers that would create a more hospitable investment environment:
• encourage private sector funding of infrastructure construction;
• reduce taxes on profits from innovations, and various business taxes (retail, land transfer and property); and
• create an investment-friendly fiscal and royalty regime in the energy sector.
Manufacturers have an opportunity to significantly improve their prospects by leveraging a skilled, educated workforce, their reputation for producing quality goods and a close proximity to one of the most lucrative markets in the world. It’s up to companies and policy makers to take the risk.