Toronto, ON — For decades, Canadian business and policy makers have taken comfort in the rhetoric and the reality of the unique, healthy relationship between Canada and the United States as mutual trading partners and neighbours. According to a Grant Thornton LLP international manufacturing study, Manufacturing Insights 2006 (MI 2006), the rules that have governed business are being fundamentally altered and challenged following decades of unabated success, growth, and the strengthening of Canadian currency and the impact of emerging low cost markets.
According to Jim Copeland, leader of the Grant Thornton Manufacturing & Distribution Division for Canada, the 2006 study reveals significant issues and challenges and the need for mid-sized manufacturers to diversify their markets and embrace competitiveness on a global level.
“The fundamental conditions in this sector have been dramatically altered by the success of Canada’s economy, the soaring currency and what can only be characterized as a Canadian exports ‘order book’ that is virtually monopolized by the United States,” Copeland said.
“MI 2006 found that the U.S. is the primary market for 98% of Canadian mid-sized manufacturers that export to other nations. A stronger Canadian dollar, rising commodity prices that are putting pressure on prices, and decrease in U.S. manufacturer confidence with the rise of China as a U.S. trading partner . . . these factors should all be a red flag to the Canadian manufacturing sector.”
The report suggests Canadian companies must diversify their export markets, both to sustain success and hedge in what is an increasingly global marketplace. Canadian manufacturers can no longer take comfort in having the U.S. as virtually its sole consumer. The real opportunities lie in developing new markets in emerging economies to both balance and mitigate against the risk of having one customer. At the same time, entry into new emerging markets will bring new risks and pressure on competitiveness.
“While the study identifies and details challenges that are well known, it also suggests directions that offer significant opportunity,” Copeland stressed. “The road ahead is not without challenges for mid-sized manufacturers. The signs can’t be ignored. Continued reliance on one market is not sustainable and poses significant and obvious risk.”
MI 2006 is an international survey of the mid-sized manufacturing sector in key global markets. Market research firm Research Dimensions in Toronto conducted interviews with senior executives among the 1,635 survey respondents in 22 countries worldwide, and the resulting data was supplied to Grant Thornton for analysis.
The Canadian study provides insights into Canada’s mid-sized manufacturers and identifies the key fundamentals and changing market conditions which have the potential to drive success.
Canada’s mid-sized manufacturers contribute to a vital sector that represents 21% of the nation’s GDP — or 55% when spin-off goods & services purchases are included. This represents over $25 billion of capital investment and an added-value of more than $200 billion to the Canadian economy. The sector conducts an estimated $400 billion in export sales and provides direct and supporting employment for 4.7 million Canadians. It is a critical employer of skilled labour, which is an essential underpinning of a healthy economy.
MI 2006 reveals that Canadian companies are optimistic coming off what has been a period of increased success and profitability. Grant Thornton cautions that this optimism is based on a status quo that is being quickly and fundamentally altered – with the fast rising Canadian dollar being just one example. The impact of emerging low-cost markets like China is another factor.
“The sense of optimism than many Canadian manufacturers reported is likely more a reflection of their own recent performance and the record economic performance of the Canadian economy at large, Copeland said. “If you are a Canadian exporter, you can’t help but be buoyed by the last decade. It has been historically exceptional, but at the same time it has been influenced by a sole-source relationship with the U.S.”
Another indication of the global shift was evident in the past year as China has closed the gap and at times surpassed Canada as the United States’ largest trading partner. While Canadian manufacturers report relatively low trade with China, U.S. respondents are clearly looking to raise the bar and increase trade.
“One can always take a pessimistic view from the findings or use it for affecting positive change as a prescriptive message.” Copeland suggested that “Canada’s mid-sized manufacturers have always proven to be effective competitors offering flexibility and the ability to adapt. The sector has achieved tremendous success in one of the most competitive environments in the world and as the neighbour to the largest economy on the planet.”
Grant Thornton LLP is a Canadian accounting and consulting firm focused on serving entrepreneurial organizations. Grant Thornton is a Canadian member of Grant Thornton International, which has over 585 offices worldwide and is represented in 111 countries. For more information, visit www.GrantThornton.ca or e-mail info@GrantThornton.ca.