Surviving firms are stronger, leaner and more productive
TORONTO, April 1, 2014 /CNW/ - After a difficult decade that saw the
number of Canadian manufacturing firms fall by 20 per cent and the
sector's share of GDP drop to 12 per cent, a new report from CIBC World
Markets finds that many industries are ready to reverse that trend and
outperform in the coming years.
"A different manufacturing sector is rising from the ashes," says
Benjamin Tal, Deputy Chief Economist at CIBC. "Though some failed to
survive, many who did are stronger, leaner and more productive. The
long and painful adjustment is starting to pay off, with many
industries better positioned to take advantage of the weaker dollar to
regain positions in U.S. markets and to better integrate into global
supply chain opportunities."
The report, co-authored by Mr. Tal and CIBC Economist, Nick Exarhos,
notes that Canadian manufacturing has seen dramatic ups and downs over
the past 25 years. In the 1990s, when a tumbling loonie lost over 20
per cent of its value, Canada's manufacturing share of GDP rose
dramatically, counter to the trend in other western nations that
increasingly saw manufacturing shift to emerging-market countries.
"Only when the Canadian dollar started its march back to, and through,
parity at the turn of the new millennium, did the adjustment arrive in
Canada," says Mr. Tal. "Canadian manufacturing saw a nose-dive—capped
off by the Great Recession—from the relatively elevated levels it had
seen in the previous two decades."
With currency and market conditions improving, the two economists
analyzed the sector in order to rank which industries, based on their
market characteristics and actions taken during the dark days of the
last decade, have best adapted and are poised to outperform in the
coming years.
Industries Ranked By Brightest Prospects
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Wood Product
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Primary Metal
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Machinery
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Aerospace
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Computer and Electronic
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Miscellaneous
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Plastics and Rubber
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Paper
Their research found the wood products industry is the best positioned
for success. They cite strong productivity growth since the beginning
of the recovery and the benefits of a lower Canadian dollar, which
should see the wood products industry continue to be a leader in
exports to the U.S. The only negative is a relatively high level of
capacity utilization. However, with continued growth the industry will
likely see a strong pace of investment to meet demand.
Primary metals ranked second in growth prospects having had the best
productivity growth since 2009. It is also well positioned to take
advantage of the decline in the loonie thanks to its favourable net
exports position. "Also helping here is the fact that over half of the
domestic market is supplied by foreign sources, suggesting a weaker
currency will—at the margin—benefit domestic suppliers," says Mr. Tal.
"The industry is also well positioned to take advantage of a stronger
U.S. economy, accounting for more than 25 per cent of total U.S.
imports. At only 2 per cent below its long-term average, however,
growth might be limited by capacity constraints, a fact that also
suggests a stronger path of capital spending in the coming years."
Ranked third is machinery manufacturing, which has the strongest net
export position in all of the manufacturing sub-industry groups. "With
the majority of the current market belonging to foreign imports of
machinery, it is best positioned to capitalize on a swooning loonie
driving up the price of imported competition," he adds. "Despite having
registered less than stellar productivity gains since 2009, capacity
constraints, here too, may mean more capital investment in the near
future."
The report notes that the aerospace sub-industry group is another that
will benefit from a weaker loonie due to its advantageous net exports
and import penetration positions. These factors led to it being ranked
higher than its transportation industry group parent, even though the
parent sector has shown more productivity growth (25 per cent vs. 10
per cent). However, productivity gains in the broad industry group have
been driven by plant closures and capacity downsizing which have
hampered its net exports position, leaving it behind that of aerospace.
"A name surprisingly absent from the top of our rankings is the food
manufacturing industry," notes Mr. Tal. "In recent years that industry
has been a winner, primarily in the domestic market sense, but has had
a less impressive net export ranking. Furthermore, because it has fared
better than most of its peers, it has not had to increase its
productivity as fast as others, marking a slight two per cent gain
since 2009. Because domestic manufacturing already takes up so much of
the Canadian market, it will have to nurture its export markets in
search of growth."
He says that while talks regarding large scale repatriation of
manufacturing activity to North America are pre-mature, the
post-recession leaner and smarter North American manufacturing sector
is better positioned to stop the bleeding.
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/if_2014-0401.pdf.
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SOURCE CIBC World Markets
Benjamin Tal, Deputy Chief Economist, CIBC World Markets Inc. at (416) 956-3698, benjamin.tal@cibc.ca or Kevin Dove, Head of External Communications at 416-980-8835, kevin.dove@cibc.ca.