Manufacturers cautiously optimistic about their prospects in 2008
Most people are familiar with the list of challenges plaguing Canadian manufacturers. The loonie is hovering just north of par with the US greenback, which is playing havoc with exports and profits; commodities, raw materials and energy costs are soaring; voracious competition from "developing economies" is cutting into their markets; and the US economy is pretty much tanking. Manufacturing has shed 250,000 jobs since 2003, and the erosion shows no signs of letting up, as plants go out of business, shift production outside Canada or lose product mandates. And next year appears to be more of the same. The Royal Bank of Canada is expecting broad-based strength in the West but weakness in the manufacturing sector, with relief coming, perhaps, in 2009.

Yet manufacturers continue to be optimistic�albeit cautiously so�about the year ahead, according to the results of the 2007-2008 Management Issues Survey. The annual report released by Canadian Manufacturers and Exporters(CME)at its Eastern Excellence conference in St. John's, NL on Oct. 23, got 1,014 responses from mostly small and medium-sized companies.

There isn't much change from last year's results, notes Jayson Myers, CME's president and chief economist, who has analyzed many of these surveys over the years.

Production was up, according to 49% of the companies, and 52% expect it to increase next year, but profit expectations are another story. Only 33% saw that growth turn into higher profits. The big surprise for Myers was the 40% who are expecting better returns in 2008.

"They're still optimistic about future growth. That's good news, especially given how challenging it is out there."

Almost half of the companies report stronger sales growth in 2007 and they expect further increases next year, although about a third of them don't expect export sales to improve this year or next.

"But I do notice a lot more companies experiencing a decline in both production and sales. That tells me it's a much more challenging environment this year than they forecast [in last year's report]. Clearly nobody expected the dollar to shoot up 20% in six months. That's the big story this year."

Indeed it is. Because of the dollar, 5% of companies are closing down Canadian production facilities, 3% are closing down production lines and more companies are outsourcing to China or the US, which Myers describes as worrisome.

Also alarming is a growing list of deteriorating business conditions. Topping the list is cost of materials (80%), shipping costs(78%), energy costs(71%), exchange rates(64%), availability of qualified personnel (53%)and unit labour costs(43%).

Manufacturers are responding by focusing more on the dollar and the need to reduce costs and improve ef- ficiencies, says Myers. They also recognize the importance of investing in new technology and innovation to offset the effects of the dollar.

'When you look at investment for next year, one of the things that really stands out is the jump in the number of companies that are increasing investment in machinery and equipment next year."

The results show 31% increased their investments and 43% expect to next year. This is a "good sign of the positive impact the two-year write-off on machinery and equipment is having," says Myers.

This year's survey asked companies about the writeoff provision in the 2007-08 federal budget. Sixty per cent say it will help and they will take advantage of the measure, but 59% said the 21-month window constrained their ability to make use of the write-off.

Federal finance minister Jim Flaherty's recently announced $60 billion in tax cuts did not include an extension of the write-off, something for which the CME has been actively campaigning.

A disappointed Myers described it as 'a very important incentive for manufacturing investment given the economic challenges and cash flow pressures currently facing businesses in our sector," but says Flaherty is considering including an extension of the time limit in the next federal budget.

Cost crunch
Survey results show innovation figuring prominently for just 25% of firms, which report 25% of their sales come from new products or services introduced over the past three years. Fifty-one per cent are planning to launch new products or services, down from last year's 64 per cent.

Not too surprising, says Myers. It takes time to launch new products. Businesses are focusing more on cutting costs and staying a float. They have less than seven minutes from each eight-hour shift to account for profit, he notes. "That's not a lot of money to invest in new products, new technology, restructuring or new markets."

Manufacturing and exporting have been transformed by the emergence of China as the factory for the world. This represents a dichotomy for Canadian companies. While China is proving to be a relentless competitive force in many of their marketplaces, it also offers opportunities to lower costs through offshoring and outsourcing; and it's a potentially lucrative new international market.

Surprisingly, China is still not registering very highly with Canadian manufacturers. The results show 31% see it as an opportunity, 27% see it as a threat, 33% don't see it as an opportunity or a threat and 9% don�t know. One third say China will change the way they do business over the next three years, yet only 22% have a China strategy, an increase over last year's 17%, but still a concern.

"China is changing the business environment in Canada, so even if a company doesn't have anything to do with it directly, it still needs a China strategy," says Myers.

A lot of companies see China as a way to lower costs through outsourcing, allowing them to focus on higher value products produced in Canada. But Myers says a lot of companies are going into the Chinese market unprepared. With the product safety and quality issues that have risen this year, he warns companies need to go into China "with their eyes wide open."

The most pressing challenge for 57% of companies is keeping costs under control. In their battle to tame the effects of the higher dollar, 59% say their top strategy is improving operating efficiency. Forty per cent cite cost cutting. Do the math and it adds up to eliminating waste. This is where lean manufacturing should come into the big picture. But the results show only 45% of companies are getting the message. Of those who are implementing lean improvements, 25% are in the planning stages, 39% are in early stages, 25% are extensively involved and just 11% are at an advanced level.

"If you can take out the non-value-adding activity, you're also saving a pile of money, which should provide the cash flow needed to reinvest," says Myers.

The trouble is even with improvements, for some companies the high dollar is too overwhelming.

"That's a real concern," says Myers. "If there is some stability with the dollar future operations improvements will lead to a stronger cash position and that will enable companies to make the necessary strategic investments." RBC expects Canada�s economy to grow 2.5% next year, down a bit from this year�s projected 2.7 per cent. Scotiabank's growth projections are for growth are even lower�2.2 per cent. It expects weaker-than-expected growth in the US will have much more negative implications for Canada.

But as the economic cards are played out, manufacturers can at least look forward to some long-awaited tax relief. Flaherty's recently announced cuts include an immediate one per cent reduction in the corporate income tax rate, and a continuing decline to 15% by 2012. The small business income tax rate will also be reduced to 11% next year, one year earlier than expected. Myers says these measures will cut the federal corporate income tax rate by one-third over the next five years.

That's a start, and something that should further stoke manufacturers' sense of optimism in 2008.

For a copy of the survey results visit www.cme-mec.ca/pdf/cme08.pdf.

Joe Terrett
joe.terrett@plant.rogers.com

Most innovative manufacturers honoured
Canada's most innovative business has developed a method of reducing costs for manufacturing advanced carbon fibre composite parts used in aerospace and defence structures, a market pegged at $1 billion.

Integran Technologies, a Toronto-based manufacturer of high-performance metal products, collected the 2007 Innovative Business of the Year award for its latest product: Nanovar. It's a low thermal expansion, hard metal coating for carbon fibre reinforced tooling. It increases surface hardness by 15 times and is not porous, which protects against vacuum leaks, potentially doubling tool lifespan. The company notes the carbon fibre composites market is growing more than 15% annually.

Integran was one of several winners of Canadian Manufacturers and Exporters Innovation Awards, presented Oct. 22 at the association's Eastern Excellence conference in St. John's, NL.

Linamar Corp., based in Guelph, Ont., won Manufacturer of the Year honours. This the first year for the award, which goes to the company that demonstrates innovation, agility, flexibility, best safety practices, employee engagement and community involvement.

The Diversification of Export Markets award went to HLS HARD-LINE Solutions Inc., in Dowling, Ont. The company provides industrial robotic control systems and communications infrastructure to mines worldwide.

The Innovation Award for New Technology went to Measurand Inc., in Fredericton, NB. The company patented a 3D shape-sensing technology that is becoming the global standard for geotechnical measurement.

Novik inc. won the award for New Product Design & Commercialization. The St-Augustin-de-Desmaures, Que. company designs and makes unique copolymer residential and commercial roofing and siding systems.

The award for the Promotion of a Healthy & Safer Workplace went to Nova Scotia Power Inc. for leading health and safety practices.

The Environmental Technology award went to Eco-Tec Inc., in Pickering, Ont., which makes water purification, gas processing and chemical recovery systems for industrial operations.

Orphan Industries Ltd., part of the DF Barnes Group of Companies in St. John's, NL, won the Productivity Improvement award. Orphan undertook a one-year pilot project examining the production of their Launch and Recovery System(LARS), used for sub-sea service and repair. Through lean and continuous improvement, Orphan has reduced labour hours by up to 40 per cent.

PLANT