Canadian Manufacturers Test Their Survival Skills
Recession, an overvalued dollar, and US competition are forcing many Canadian goods-producers to shut down. Others are adapting. CANADIAN COMPETITIVENESS
ANY economist in Canada can tick off theories explaining why manufacturing companies in this country have been hit so hard in the past three years.
But for Alex Geddes there is nothing theoretical about the competitive "restructuring" shaking some Canadian industries and crushing others, including his own.
"The name of the game is survival," says Mr. Geddes, president of Joyce Furniture Inc., a medium-sized Toronto company that has laid off 15 percent of its workers at two factories. "We're in survival mode. Our challenge is to stay there for another year. After that we'll be in a strong position to come out of the recession."
Hammered by recession, an overvalued Canadian dollar, and fresh challenges from United States companies, Canada's manufacturers are struggling to remain competitive. That struggle is reaping rewards in improved productivity and innovation, economists say. But it has exposed weakness in unrelenting fashion.
Geddes, who represents an association of Canadian office furniture firms, says half of Canada's furniture industry has ceased to exist in the last 18 months.
Such failures might slow if the economy moved forward strongly instead of teetering between fragile recovery and a return to recession. Gross domestic product grew just 0.9 percent in the third quarter, following a strong second quarter.
Because the Canadian and US economies are closely linked, much depends on what happens south of the border in the sagging US economy. Yet many Canadian economists are more concerned about what they see at home:
* In November 61,000 Canadians lost manufacturing jobs, a 3 percent cut in the nation's manufacturing work force.
* Roughly 400,000 manufacturing jobs have been lost since the 1989 US-Canada Free Trade Agreement (FTA) took effect - 20 percent of the total at that time. The US loss in manufacturing jobs was 6 percent.
* Canada's dollar appreciated 20 percent between 1985 and 1990, making a Canadian-made item 20 percent more expensive to buy in the US, and more costly to manufacture in Canada.
* Manufacturing's share of national output has fallen from 19 percent in 1989 to just 17.2 percent. Economists say they are not sure manufacturing will bounce back as it did after the 1982 recession.
"Manufacturing is very important to us because it represents half of our exports," says Judith Maxwell, chairman of the Economic Council of Canada, a government-funded agency. "We won't know for four or five years if this is a step backwards to go forwards - or whether we have permanently lost a certain amount of capacity to produce."
Since the FTA went into effect, US companies have often found it cheaper to boost US production and close branch factories in Canada. And an increasing number of Canadian companies have found that fighting US companies in addition to coping with sagging sales is too much. Companies closing or leaving the country account for twice as many of the job losses in this slump as in 1982.
"We're vulnerable because we're such a splintered industry largely made up of small companies," Geddes says of Canada's furniture industry. "The danger now is that these large US companies - and when I say large I mean maybe 10 times as big - can easily come into Canada and buy up market share, undercutting us on price by 20 percent or more."
With nationwide unemployment at 10.2 percent (12.3 percent for manufacturing), polls show Canadians blame free trade with the US for much of the country's economic hardship. The sentiment is only partially justified, economists say.
Heavier US competition from the FTA probably accounts for 100,000 manufacturing job losses - about one-fourth of all lost manufacturing jobs, says Andrew Jackson, an economist with the Canadian Labour Congress.
Behind these losses, and at the crux of the Canada's competitiveness problem, are years of lagging productivity growth, weak management, unfavorable exchange rates, fast-rising wages, and lagging research spending.
Wage costs rose 40 percent from 1985 to 1990 and productivity growth remained flat during that period. Manufacturing output rose only 6 percent and Canadian employers were "overly optimistic" in their hiring plans, says Theresa Chandler, a Toronto Dominion Bank economist. US productivity rose sharply during the same five-year period, output rising nearly 20 percent, while wage costs remained flat.
On top of those cold numbers, a recent report by competitiveness guru Michael Porter dropped like a bucket of ice water.
The key to improving Canada's manufacturing, the Harvard Business School professor said, involves shifting from reliance on abundant unprocessed resources, as in the mining and timber industries, to "high-value added" manufacturing.
An example Mr. Porter gives in the study for the Business Council on National Issues, a group of top executives, is making logs into specialty papers instead of shipping logs overseas.
Many Canadians, including Robert Schad, say that while they agree with Porter, his message was not news to them.
"We're now in this competitive shakeout of the '90s," says Mr. Schad, president of Husky Injection Molding Systems Ltd., a Bolton, Ontario maker of huge injection-molding machines. "Speed is most important. We must ask, how can we make decisions faster? How can we correctly foresee the trend in the market to globalize our marketing and manufacturing approach?"
Schad has shaped his $250 million company into what is probably a prototype for Canadian manufacturing success in the '90s. Pushing to be No. 1 in a technological race, Schad is spending prodigiously - aided by a Japanese equity partner - to develop machines to expand market share against German and US rivals many times Husky's size.
"We've revamped one of our plants completely to get twice as much out of that plant without adding more people," he says.
Of the pressures brought to bear by the FTA, Schad pauses a moment before speaking. The agreement, he says, has been "a tremendous benefit to Canada because if we don't adapt to ... [global competition] now, it might be too late to catch up."