Reflecting on the Manufacturing and Distribution Industry Present and Future

December 22, 2015

Amidst a flat-lined market characterized by tumbling oil prices and a flailing Canadian dollar, large companies are foregoing long-term strategic planning in favour of simply managing quarter-to-quarter.

This presents a real challenge for small- to medium-sized enterprises (SMEs) who attended BDO hosted round table events earlier this year.

SMEs rely on a solid grasp of their clients’ long-term vision to make their own strategic decisions. And, in spite of their own uncertainties, clients continue to pressure SMEs to make investments that will improve productivity and competitiveness.

The issues Canadian manufacturers faced in 2015 have been both complex and substantial. Yet, the sessions also revealed that productive collaboration and meaningful client engagement may be the keys to building a brighter future for this sector.

Challenging Conditions Prevail in 2015

Overwhelmingly, manufacturers cite the lack of support from government as a key factor in deterring them from making investments themselves.

In the CME’s recent survey, MIS 2014: New Frontiers, when asked whether they believed that governments are supporting investments in and growth of their company, 46% of respondents said no. That number jumps to 55% at the provincial level and 72% at the municipal level.

Given that Canada’s depressed dollar isn’t kick-starting manufacturing as well as it has traditionally done, they say governments could be doing more to support a “buy Canadian” supply chain. Otherwise, the prevalence of a globally integrated supply chain forces manufacturers to buy parts from the US or Asia in American dollars, which keeps overall costs high and competitiveness elusive. Only those companies with considerable “value-add” are insulated from the worst impact of a fluctuating currency.

Meanwhile, recent federal programs developed to support Canadian business are deemed too complex to be of meaningful value to SMEs. As the government moves away from scientific research and experimental development (SRED) tax credits in favour of targeted tax incentives and other tactics to spur innovation, round table participants maintained that the new approach generates too many niche programs that officials don’t have the time or capacity to monitor. What’s more, manufacturers expressed frustration that impractical requirements, such as the need for business plans are too future-focused. This results in fewer organizations that can meet the criteria and access necessary funding.

Round table members also zeroed in on inadequate investments in the college and university programs that could produce qualified future employees for the sector or that could serve as incubators for industry innovation. They point to countries like Poland, lauded for investing in education and R&D programs, as well as for providing tax incentives to attract new private investment into the sector.

On a provincial level, attendees are concerned that governments aren’t doing enough to keep energy costs down, especially in Ontario where costs are higher than those in the US. High prices, plus the added pressure of the necessary emissions, mean Canadian manufacturers are struggling to remain competitive against companies in China where such standards don’t exist. Meanwhile, emerging environmental policies such as carbon taxes are cited as potential factors in driving even more of the manufacturing sector out of Ontario, as has already been experienced in BC.

Arguably the hottest topic at the 2015 round tables was Ontario’s new Pension Plan, which is limited to Ontario only and currently is not expected to become a national plan. Participants argued that they are already supporting employees with private, defined contribution plans that are more efficient—a fact they claim is being ignored by the government. With the plan expected to add a cost of 1.9% per employee and the likelihood that employees over the age of 50 may never benefit from their own contributions, round table members were vocal in their concerns about the plan’s impact on both competitiveness and employee support.

Harness Opportunities through Bold Action

In spite of the considerable challenges and growing complexity of market conditions, round table attendees believe
there are opportunities ahead for manufacturers, especially if they are willing to take the lead and pursue creative

Round table participants agreed that three key factors as essential for success in today’s—and tomorrow’s—market:

1. Improved government support

Governments at all levels need to provide more concrete and accessible support to Canadian manufacturers. Although manufacturers have been lobbying governments, a more concerted effort both federally and provincially may be required.

2. Greater collaboration

Whether it’s between peers or with other organizations, collaboration was identified as an effective tool for driving innovation and creating opportunities. Companies can share knowledge and experience, particularly in seeking out the agencies and programs that can help them expand internationally. Meanwhile, SMEs may find that working directly with educational institutions and other associations can yield productive partnerships. In fact, those who
have already taken this route report positive experiences.

3. Exceptional customer service

No matter how challenging the market conditions, those manufacturers that are succeeding are the ones that remain relentlessly focused on providing exceptional customer service. They work with clients early on to engage them in their R&D processes and encourage their collaboration in innovation and idea-sharing. After all, the more involved clients are, the less inclined they’ll be to find another partner.

Move Forward on Innovation and Automation

Large companies may be in an extended “hold” position, but that’s no excuse for Canadian manufacturers to sit still. Investments in innovation and automation are critically important for shoring up competitiveness; today’s weak dollar and lower interest rates may mean such capital improvements are within reach with long-term benefits for those who take action now. Leveraging existing programs and agencies to penetrate new markets, and a concerted effort to seek out better government support and productive collaborations are the imperative steps that smart organizations are taking to overcome enduring market challenges and generate that sustained growth that will build tomorrow’s success.

Originally printed in the November/December 2015 issue of the Canadian Manufacturers & Exporters’ Magazine, 20/20.

Daniel M Hlavacek, CPA, CA
Partner/Principal/SVP, A&A
416 865 0200

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