Canada / Industry Insights
The State of Canadian Manufacturing: Winners and Losers in 2018

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by Ediz Ozelkan, Industry Analyst
May 16 2018

Manufacturing is an integral part of the Canadian economy, and the dynamic global landscape of international trade flows and supply chain networks have dictated trends throughout the sector. Ultimately, value-added products are expected to flourish while industries with the potential to relocate will suffer in 2018 and beyond. The industries that are expected to grow most rapidly in 2018 include the Automobile Engine and Parts Manufacturing industry, the Boat Building industry, the Motorcycle, Bike and Parts Manufacturing industry, the Train Subway and Transit Car Manufacturing industry and the Petroleum Refining industry. These industries generate a combined 10.0% of manufacturing sector revenue and are expected to shape the manufacturing outlook moving forward.

The fastest-declining industries include the Wiring Device Manufacturing industry, the Clay Brick and Product Manufacturing industry, the Printing Services industry, the Lighting and Bulb Manufacturing industry and the Major Household Appliance Manufacturing industry, which comprise a paltry 0.4% of total manufacturing sector revenue. These industries have already been on the decline and their continued contraction is a result of longstanding trends in manufacturing, especially the ability to relocate operations abroad.

The Means of Production

The primary catalyst for these trends, both positive and negative, is the value of the Canadian dollar, which has influenced international trade flows. IBISWorld estimates that total exports are expected to rise 1.6% over 2018, aided by the loonie depreciating at an annualized rate of 3.5% over the five years to 2018. Nonetheless, imports are forecast to grow a more dramatic 2.5% in 2018 alongside a concomitant rebound in the value of the dollar by an estimated 1.0% that same year. While a steep 10.7% depreciation of the loonie in 2015 boosted manufacturing revenue for most operators over the past five years, its recent recovery spells disaster for many industries since most manufacturers are reliant on international trade. Exports’ average share of revenue for all domestic manufacturing industries is expected to reach 41.7% in 2018, connoting a heavy dependence on foreign demand for industry growth. Conversely, the average share of domestic demand satisfied by imports for the manufacturing sector is 50.1% in 2018, demonstrating the influence of foreign products in the domestic space. Crucially, the five fastest-growing industries have a much lower average share of revenue destined for exports markets (32.1%), cushioning them from international competition. In contrast, the five declining industries are less reliant on exports but also have a much higher average import penetration at 55.7%.

Domestically, promising conditions for consumers have done little to mitigate the threat of import competition. Disposable income is expected to climb 3.5% in 2018 while new vehicle sales, another barometer of economic health, is forecast to rise 3.2% that same year. Ultimately, the coalescence of these domestic trends alongside an appreciating loonie is expected to bolster consumer spending, particularly for imports, which are more attractive compared with domestic goods due to this currency valuation. Still, manufacturers have endured different hardships. Most prominently, industrial capacity utilization rates are expected to plummet 3.0% in 2018. This means that manufacturing facilities have not been operating at full capacity, contributing to pressured profit margins and industry exits for unprofitable companies.

Producing Value

The five manufacturing industries projected to expand most quickly share some defining characteristics. First and foremost, they are not completely reliant on foreign demand, thereby situating their performance alongside domestic economic trends, which have been mostly positive over the past five years, discounting the recession in 2015. Also, they have low levels of import competition, with 33.8% of domestic demand satisfied by imports for these industries on average. Ultimately, most of these industries are focused on the production of complex and specialized transportation equipment, which has been a bastion of economic activity historically. Import competition for these industries is primarily from standardized and generic products, which garner lower price points and profit margins. Moreover, with vehicle sales and production on the rise throughout North America, Canadian automobile parts and motorcycle components are an important facet of one of the largest automotive markets in the world. Since many automakers have relocated to keep production close to their major markets, upstream suppliers have also established operations in similar areas, producing a strong manufacturing sector that serves the North American Free Trade Agreement (NAFTA) region. Plus, many of these parts are heavy, making logistics endeavours costly, thereby curtailing the prospect of intense import competition. Hence the strength of the Petroleum Refining industry, which is outside of the transportation equipment sector (NAICS 336), but directly related.

While transportation industries have benefited from falling input costs and pressured oil prices, the Petroleum Refining industry is poised to grow due to the expected 9.0% recovery of crude oil prices in 2018. Similarly, domestic downstream demand for transportation and logistics has been strong. Demand for the Ocean and Coastal Transportation industry and the broader Truck Transportation sector are projected to expand a respective 3.0% and 2.1% over 2018, undergirding these manufacturers’ growth. In the end, these downstream industries are localized, sustaining domestic demand from domestic manufacturers while limiting import competition. Meanwhile, these manufacturers have consistently provided value-added and technologically advanced products to remain competitive.

Relocating Demand

In contrast, the aforementioned declining industries endure heavy import competition while also being heavily dependent on domestic demand. These industries’ average share of revenue derived from exports is below the manufacturing average at 24.5%, meaning that they must generate revenue from domestic markets. However, they are also susceptible to heavy import competition, implicitly curtailing their growth prospects. Ultimately, these declining industries are easily relocated to lower-labour-cost countries with the exception of the Printing Services industry. The Printing Services industry provides ancillary services for the Printing industry, which has increasingly diversified its product and service offerings, thereby encroaching on the Printing Services industry’s demand. Thus, manufacturing industries on the decline can be understood as susceptible to external competition from supplementary industries and import competition, as is the case with these five exemplars.

Edited by Rebecca Simon. Designed by Miranda Romano.

Industry Impact: Automobile Engine & Parts Manufacturing; Boat Building; Motorcycle, Bike & Parts Manufacturing; Train, Subway & Transit Car Manufacturing; Petroleum Refining; Wiring Device Manufacturing; Clay Brick & Product Manufacturing; Printing Services; Lighting & Bulb Manufacturing; Major Household Appliance Manufacturing; Ocean & Coastal Transportation; Transportation in Canada; Printing; Manufacturing in Canada

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