Canadian Manufacturers Look Forward with Optimism

Optimism is returning to Canada's manufacturing sector. The dark clouds looming over the industry since the recession are clearing, and firms now see opportunity and growth in their futures.

They're forecasting rising revenue and increased profits, driven by growing demand in key markets. Many are planning to expand their workforces and invest in new technology and equipment in order to boost productivity and competitiveness.

This optimism is tempered somewhat by their sober assessment of the challenges they face. Labour shortages—and labour costs—are major concerns, and some manufacturers warn that these issues could thwart their ability to grow.

Such insight into the minds of Canadian manufacturers emerged in the summer release of the Canadian Manufacturers & Exporters 2014 Management Issues Survey, New Frontiers, sponsored in part by BDO. In this report, we'll explore its observations further and offer our perspective on how manufacturers can address their challenges to achieve their business goals.

The prevailing business outlook among Canadian manufacturers is distinctly positive. Manufacturers, it seems, are feeling quite optimistic about their prospects over the next three years. It remains to be seen what impact, positive or negative, the recent reduction in worldwide oil prices and subsequent impact on the Canadian dollar and reduction of the Bank of Canada interest rate will have on this outlook.

The prevailing business outlook among Canadian manufacturers is distinctly positive. Manufacturers, it seems, are feeling quite optimistic about their prospects over the next three years.

The vast majority of respondents forecast rising sales revenue— more than three-quarters expect profits to rise as well. A number of manufacturers are particularly bullish, and say they see profits rising ten percent or more.

For the most part, survey respondents see traditional markets as the drivers of this growth. Two-thirds of manufacturers expect domestic sales to rise, and more than sixty percent see U.S. sales rising as well. Clearly, manufacturers are encouraged by signs that the U.S. economy is shifting into a higher gear: one in four respondents say they expect their U.S. sales to increase by ten percent or more.

Manufacturers aren't quite as enthusiastic about the growth prospects of overseas markets. While forty-five percent of those surveyed anticipate overseas sales to grow over the next three years, the majority (53%) expect them to remain flat. It may be that these forecasts are influenced by the difficulty manufacturers have in establishing and growing their business in export markets—a topic we'll explore shortly.

BUSINESS OUTLOOK: MANUFACTURERS LOOK FORWARD WITH OPTIMISM

Buoyed by the prospect of increasing sales and rising profits, Canadian manufacturers appear ready to make a range of important investments in their businesses over the next three years.

Nearly two-thirds of survey respondents report that they intend to increase spending on new machinery and equipment—almost one in five say they plan to boost machinery and equipment spending by ten percent or more. More than half of respondents plan to increase research and development investments, as well as invest more into facilities.

We're encouraged to see that manufacturers intend to capitalize on their improving situation by investing in research and development, machinery and equipment, and new facilities. These investments are vital to improving manufacturers' ability to innovate and become more productive—which in turn can help Canadian players compete on a global stage.

Communities across the country will be especially pleased to hear that survey respondents also plan to invest in creating new jobs. More than half (58%) say they expect to grow their Canadian workforce over the next three years. Forty-five percent of manufacturers foresee between a one and ten percent rise in their workforce. Another thirteen percent of manufacturers anticipate expanding their workforce by a larger amount.

In contrast, Canadian manufacturers have little interest in expanding production overseas. Two-thirds (68%) of respondents expect to make no change to their overseas workforce over the next three years. Only twenty-nine percent are considering an increase. Canadian manufacturers, it seems, are intent on building their business up close to home.

These investments are vital to improving manufacturers' ability to innovate and become more productive—which in turn can help Canadian players compete on a global stage.

The majority of Canadian manufacturers surveyed by CME plan to expand their workforce to support increased demand and seize growth opportunities. The only challenge? Finding the people they need.

Key concerns: Amid the optimism, notes of caution

Manufacturers may be feeling upbeat about their business prospects, but they're not nearly as positive about business conditions overall.

Forty-one percent of survey respondents feel that global economic conditions have worsened over the past three years. Another twenty-eight percent feel there's simply been no change. Despite this, only twenty-three percent of respondents report that they see the global economy as a significant challenge to their business, down from forty-one percent two years ago. Manufacturers may not like what they see when they consider the economy, but they're not exactly losing sleep over it.

Nearly two-thirds (63%) of respondents also find that the overall cost of doing business has grown worse in recent years. Labour costs are a major part of this: thirty-eight percent of respondents say labour costs are one of their most pressing business challenges, driven by persistent labour shortages. Fifty-eight percent of respondents say attracting and retaining skilled labour is a major business challenge, up from forty-six percent two years ago.

These sentiments shouldn't detract from a positive outlook. We believe that manufacturers can achieve their growth ambitions, but there will be more than a few hazards along the way. Our chief concern is that costs will persuade manufacturers to delay key investments in people, innovation and technology that will benefit the business over the long term.

LABOUR SHORTAGES: IS MANUFACTURING'S UPWARD MOMENTUM ALREADY AT RISK?

The majority of Canadian manufacturers surveyed by CME plan to expand their workforce to support increased demand and seize growth opportunities. The only challenge? Finding the people they need.

Fifty-eight percent of survey respondents said that attracting or retaining skilled labour is one of their most pressing business challenges—up from forty-six percent two years ago. In fact, more than half (56%) report that they're already facing labour and skills shortages.

The talent crunch manufacturers face isn't confined to a single area. Forty-six percent of respondents report that it's already challenging to find the skilled production workers they need, such as welders, machinists and equipment operators. Yet they note that scientists, engineers and technicians are in short supply as well: thirty-four percent of respondents say it's increasingly difficult to find people for these specialized roles. It's little surprise to see that fifty-six percent of respondents feel these labour shortages are driving up labour costs overall.

Unfortunately, manufacturers don't expect to see much improvement in this area, even five years from now. Respondents anticipate it will become slightly easier to recruit skilled production workers, scientists, engineers and technicians in a few years. However, by that time manufacturers expect to be facing a significant new talent crunch: forty-four percent believe it will be significantly more challenging to find the management and administration staff they need, up from twenty percent of respondents who feel this is a challenge today.

There's no single answer as to why manufacturers are facing such a labour crunch. Demographics are one factor: many skilled workers are aging and nearing retirement, and there aren't as many younger workers coming up the ranks to replace them. Canada's robust energy sector is another factor, as the workforce manufacturers seek is passing them by en route to the oil and gas fields.

Labour shortages could stall manufacturers' growth

Manufacturers have good reason to be concerned about these labour shortages because they involve vitally important areas of the business. Fifty-five percent of respondents say that scientists, engineers and technicians are critical to the success and growth of their business over the next five years. Thirty-seven percent say that skilled production workers are key, and thirty-three percent believe that management and administration talent will play an important role in their success.

If manufacturers aren't able to overcome these labour challenges and attract and retain the workforce they require, it could have a significant impact on their businesses and the Canadian economy more broadly. Forty-seven percent of survey respondents already feel that labour shortages are hampering their companies' ability to grow and develop new products. The consequences of a relentlessly tight labour market could be even more profound a few years from now. Sixteen percent of respondents say that ongoing labour shortages will force them to consider closing facilities or pass on opportunities. Seventeen percent say they'd have to consider moving their production and investment to other parts of Canada, while twenty-three percent believe they'd need to look at moving production to other countries entirely. In a cruel twist, today's shortage of workers could lead to a shortage of jobs in the future.

Manufacturers are responding to the labour shortage challenge in a variety of ways. More than half of survey respondents say they've increased their focus on operational efficiency, and forty-one percent say they'll continue to search for efficiencies to offset the impact of the labour crunch. Forty percent of respondents are investing in automation to overcome their workforce challenges, and thirty- four percent expect to continue doing so in the years to come. Manufacturers may feel they have little option but to wring out every efficiency they can find and bring in machinery to replace an unavailable workforce. Our perspective is that the labour shortage is simply accelerating changes and investments that need to be made—ones that will pay important dividends to manufacturers for years to come. Process improvement efforts will allow companies to uncover and eliminate waste and unnecessary costs while improving workflow overall.

Spending on automation can allow manufacturers to boost output, enhance quality, and improve their ability to be flexible in response to changing consumer and market demands. The result? A more productive, more competitive manufacturer.

EXPORTS: ARE MANUFACTURERS TOO RELIANT ON THE U.S. MARKET?

Exporting remains central to most Canadian manufacturers' businesses. Three out of four survey respondents say they export to outside markets. The U.S. is by far the largest export destination: seventy-four percent of respondent exporters sell into the U.S. market. But some are selling further afield: thirty-four percent sell to the European Union, twenty-nine percent export to Mexico and twenty-five percent sell to customers in South America. A number of respondents (22%) have made inroads into China.

These figures suggest that Canada's manufacturers are seizing the opportunities made available by the global market place. However, survey respondents appear somewhat too single-minded when it comes to exporting. A whopping seventy-nine percent of respondents see the U.S. as the most promising export market in five years. That's more than double the number who feel South American (37%) or the EU (35%) offer similar opportunity, and significantly more that those we feel the best potential lies in China (29%), Mexico (21%) or India (20%).

It's easy to understand why Canadian manufacturers view the U.S. market so favourably. The U.S. has long been Canada's largest trading partner. Language isn't generally an issue and our business cultures are similar. The fact that the U.S. economy appears to be on the road to recovery is a positive sign—and a falling Canadian dollar certainly doesn't hurt exports. These factors make it easy for companies of all sorts, not just manufacturers, to choose to export to the U.S.

Might Canadian manufacturers do well to explore other markets rather than focus too closely on U.S. opportunities? Perhaps—though it's clear that manufacturers feel they face significant challenges in doing so. Thirty percent of survey respondents say they find it challenging to develop new markets outside of Canada, and forty-three percent struggle to identify international customers. Not that these challenges are unique to manufacturers. Many companies find it difficult to establish the contacts and business relationships needed to help them gain visibility in a new market, much less make the first sale.

In our view, manufacturers should resist the temptation to focus most of their attention on the familiar U.S. market and continue to work to develop export markets around the world. International sales success takes patience, however—and the right relationships. Manufacturers should seek out competitors and other players active in target markets to learn more about doing business in those areas, from business cultures and practices to important regulatory matters. They should also ensure they're making use of various government resources designed expressly to support Canadian trade growth, such as Export Development Canada (EDC). It will take time for manufacturers to “do their homework” in this way, but it will pay off in time.

Might Canadian manufacturers do well to explore other markets rather than focus too closely on U.S. opportunities? Perhaps—though it's clear that manufacturers feel they face significant challenges in doing so.

Manufacturers Must Keep the Big Picture in Mind

Canadians should be encouraged by the optimism on display among the country's manufacturers because it bodes well for our communities and our economy. It is still unclear whether this optimism will continue with the recent reduction in worldwide oil prices and subsequent impact on the Canadian dollar and reduction of the Bank of Canada interest rate. However, we are especially pleased to see manufacturers' plans to invest in new technology and improve processes. Whether they do so to capitalize on positive business results or in order to address key challenges, we urge companies to stay the course on these investments and continue to improve their business. A more productive, competitive future awaits.

About CME's 2014 Management Issues Survey

Conducted in the summer of 2014, CME's Management Issues Survey (MIS) contains the views and opinions of 803 manufacturing companies from across Canada. The majority (80%) are headquartered in Canada; the rest are based in the U.S. (11%), the European Union (4%), Russia (1%), Japan (1%), as well as a handful (2%) of companies that call Argentina, Chile, Switzerland and the United Arab Emirates home.

The companies surveyed represent a broad cross-section of Canada's manufacturing industry: 23% are involved in machinery and equipment, 18% produce fabricated metals, and 28% operate in transportation-related areas such as vehicles and aerospace.

The CME survey respondents range widely in size, from small to medium-sized businesses employing less than 100 people to larger enterprises with more than 500 workers.

To learn more about how BDO can help your company with these and other challenges, contact your local BDO office or one of our Manufacturing & Distribution Practice Leaders below:

www.bdo.ca/manufacturing