Canadian factories find a new way to make it

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When Rahumathulla Marikkar's customers order a "double double," they don't want coffee. And when they inquire about "home and native land," the national anthem is not on their minds.

They want carpet tile from Belletile Inc., a startup manufacturer that Mr. Marikkar has deftly wrapped in the Canadian flag with those two brands and another called "far and wide."

If not for a series of events that began with the Great Recession of 2008, Belletile, which has been producing carpet tiles since February, would not exist at all. In early 2009, Mr. Marikkar's job as head of technology and environment at the Canadian operations of Interface Inc., the world's largest maker of modular carpet, vanished along with those of about 90 other employees when the company closed its operation in Belleville, Ont.

Mr. Marikkar took a big risk. At a time when thousands of manufacturing jobs were disappearing every month across the country and factories sat idled and shuttered by the recession that felled Interface's plant, Mr. Marikkar put together the funding to launch his own business.

Two years on, he's hiring and expanding.

Mr. Marikkar has found a sweet spot: a high-value product that low-cost producers in Asia have yet to figure out how to make. His carpet tiles are designed to meet stringent North American requirements for high-traffic offices and are made through a process that requires engineering know-how. The niche product has allowed him to escape – so far – the kind of competition from lower-cost producers overseas that has battered so many other companies in Canada's manufacturing sector.

As the new company emerges from the restructuring of Interface, so is Canada's manufacturing industry being transformed after the crisis that devastated forest product companies, heavy equipment makers, the auto parts sector and hit virtually every company or factory in Canada that makes something.

For Canadian manufacturers, the financial crisis was the culminating event of years of pain caused by the explosion of competition from China and other low-cost countries, the rise in the value of the dollar and soaring costs for raw materials. A quarter of a million manufacturing jobs were lost in 2008-09 alone. Total employment in the sector shrank back to its 1997 level of two million from an average of 2.3 million between 2002 and 2004; its contribution to the country's economic output fell to a low of 12.4 per cent from around 20 per cent earlier in the decade.

But beneath the grim statistics that seem to attest to a sector in decline, another set of lesser-known numbers are starting to tell the story of a renaissance for Canadian manufacturing. An analysis of factory output data by Statistics Canada shows that Canada's manufacturing industry has two faces: one gloomy, the other hopeful. Among 20 industry subgroups, half showed sales declines from 2000-08, while sales in the other half are on the rise. The "expanding group" offers hope because it is made up of companies that are well positioned to exploit the growth areas in the world economy, such as petroleum, chemicals and food. The "contracting group" includes textiles, computers and electronics, and automobiles.

The finding highlights how growth is likely to come from nimble, more flexible companies, whether they are in subsectors that are expanding or contracting. Companies that develop expertise essential to global customers, that build the heft to take advantage of low-cost regions abroad while retaining highly skilled work at home, or are an essential link in a global supply chain are now finding themselves able to compete.

Rising from the ashes are companies such as Belletile, which has exploited engineering acumen and geography; electric-motor maker Elettra Technology Inc. of Hamilton, which produces complex and unique motors; "green" manufacturers in Saskatoon, Calgary and Kelowna, B.C., that are turning out components and pieces for solar and wind energy; and a surge of startup companies in Ottawa, where former employees of fallen giants Nortel Networks Corp. and JDS Uniphase Corp. are instilling an entrepreneurial spirit in a city better known for bureaucracy.

These smaller, more entrepreneurial companies now have an opportunity to tap into any number of supply chains, as makers of complex finished goods all over the world farm out the production of everything from the fabrication of components to the assembly of the final product.

But the competition for this work from lower-cost producers overseas will be fierce, and maintaining a vibrant manufacturing industry in Canada will be an uphill battle. The fastest-growing markets are no longer in Canada's backyards – they are overseas in Asia, Latin America and Africa. Tapping those opportunities will require doing business in new languages and adjusting to different legal systems and cultural habits.

The success of these companies – and ultimately the sector – matters because manufacturing remains an engine of growth, particularly in Central Canada, and a source of well-paying jobs that are key to supporting a prosperous middle class.

At stake is Canada's ability to maintain a diversified economy that is better able to weather cyclical downturns in demand and create jobs.

The jobs Mr. Marikkar fought so hard to create – and the ones he has yet to create – will be at risk if he can't continue to compete.

"I am trying to help the people whom I've known most of my life in Canada," the native of Sri Lanka says of his decision to start Belletile. "This project is my legacy."

The factory death knell

Manufacturing is far from the only way for an advanced economy to generate wealth – some economists even argue that an economy based entirely on services could grow to be as wealthy as one with factories at its core. But with the possible exception of Singapore, few have: Indeed, the world's strongest economies have a significant manufacturing base.

In Canada, the manufacturing sector had long been a key engine of economic growth and source of well-paying jobs, especially for workers lacking post-secondary education. For generations of Quebeckers and Ontarians, assembly line work offered a middle-class lifestyle and the promise of a decent pension in retirement.

Just a few years before the economic downturn, it looked as though Canada would escape the relentless decline that had ravaged such manufacturing powerhouses as Europe, the United States, Japan and Australia. Factory employment here actually grew in the early part of the 2000s, averaging about 2.3 million jobs between 2002 and 2004, compared with two million in 1997. But that growth was temporary. Factory jobs fell to 2.11 million in 2006, and continued to decline.

Then, the Great Recession hit.

For the factories so long-regarded as a key to Canada's economic health, the global downturn of 2008-09 looked like a death knell.

Across the country, one-industry towns were left hollow versions of their former selves, as factories were idled and shuttered, and lower-end assembly jobs vanished, many of them migrating to Mexico and Asia. Between August, 2008, and December, 2009, job losses in the sector averaged a staggering 14,500 a month. Manufacturing as a percentage of Canada's gross domestic product slipped from 14.5 per cent at the end of 2007 to as low as 12.4 per cent.

In the cascade of catastrophic economic news that battered North America through the winter of 2008-09, the closing of a Belleville carpet maker created barely a ripple beyond the eastern Ontario city that is home to 49,000. The decision by Atlanta-based Interface to shut down Belleville was just one among scores of other plant closings across the country, most of which were dwarfed by what appeared to be the imminent collapse of the auto industry.

As the recession deepened in the last weeks of 2008 and lenders tightened the screws on even the most creditworthy businesses, Interface, like thousands of companies around the world, sought to slash costs. Since the collapse of the U.S. real estate market was one of the causes of the recession, the supplier of carpet to the office and residential construction industries was hit particularly hard.

Five days after Christmas, 2008, Interface lowered the boom on Belleville, the company's smallest plant, as part of a restructuring that eliminated 530 jobs across the company, or 14 per cent of its global work force.

For Belleville, a small city near the eastern end of Lake Ontario, the Interface closing coincided with cutbacks at a number of other manufacturing plants, notably auto parts makers. But Belleville was spared the kind of total collapse that swept other manufacturing-heavy cities, especially in Ontario.

"In the auto sector, we had plants that were running at less than full capacity or companies that had more than one plant and cut back to one or two plants as opposed to running two or three plants in the city," Mayor Neil Ellis says.

At Interface, about 80 per cent of the laid-off employees had worked at the plant for 15 to 20 years, putting them squarely in the Canadian demographic most affected by the meltdown in manufacturing during the recession. Some found themselves among the rising numbers of laid-off manufacturing workers facing long-term unemployment: In 2009, 14 per cent of the country's 1.9 million unemployed manufacturing workers were without a paycheque for more than 27 weeks, up from 10 per cent of the 1.3 million who were unemployed in the sector the previous year.

"I was out for eight months," recalls Kevin Taylor, a 55-year-old mechanic. Unable to get a full-time job, he found work doing odd jobs at a local electrical contractor. "It was pretty hard. I worked steady graveyard [at Interface]so I had to get my life back [even]to trying to figure out when to sleep properly."

Overall employment in Canada has returned to pre-recession levels, but thousands of the manufacturing jobs that vanished have not been recovered. The number of manufacturing jobs declined again last year.

Dealing with workers whose worlds were upended by the decline in manufacturing employment remains one of the most important challenges facing federal and provincial governments. Most of these people are in their 50s – a purgatory that leaves them a decade or more from being able to collect retirement benefits, yet lacking the education and skills to persuade an employer to select them over younger candidates.

Belletile rolls the dice

When he learned that Interface was planning to shutter the Belleville facility, Mr. Marikkar, now 60, had put in 19 years.

"I had job offers from other places. Much easier jobs; I would have made good money," he says. His wife and three daughters urged him to take one of those jobs.

But Mr. Marikkar decided to work with a couple of colleagues from the Interface plant to set up their own carpet tile business. He was convinced he had some critical competitive advantages over both older, bigger manufacturers such as Interface and lower-cost producers churning out carpet halfway around the world. As he weighed starting his own business, Mr. Marikkar and his colleagues were spurred on in part by customers looking for a local carpet tile supplier that would be able to deliver orders in time.

Demand for carpet tile – a market of between $90-million and $100-million in sales annually in Canada and $900-million in the United States – is growing by about 4 to 6 per cent a year as developers replace standard broadloom with carpet tiles. Pulling up one or two pieces of carpet tile allows access to a subfloor to install or repair wiring.

Any number of countries – Iran, China, Brazil, Thailand – can produce carpet tiles at a much lower cost. But Belletile, like many of the Canadian manufacturers that are now driving the sector's recovery, has found a specialized area of its market where it is able to add value.

In this higher-end market, "the developed countries have maintained a lead," Mr. Marikkar says.

To meet stringent North American smoke and fire regulations and to inhibit the buildup of static electricity, Belletile makes the tiles out of nylon fibres. This material is more readily available in North America than in developing parts of the world.

Belleville's location near the eastern end of Lake Ontario and proximity to the big commercial real estate markets of Montreal and Toronto gives it an edge against bigger rivals farther away that face higher transportation costs. The list of competitors includes Interface, which now supplies Canada out of its U.S. plants.

Shortening the distance to customers is critical to Belletile's bid to capitalize on the growing trend of developers putting up commercial buildings that meet the criteria for LEED (Leadership in Energy and Environmental Design) certification, which include reducing energy use for transportation.

To get started, Mr. Marikkar and his colleagues secured a $2-million (Canadian) loan from the city of Belleville and spent $1-million of it on equipment to set up an assembly line. The Ontario government came up with a grant of $2.8-million.

Mr. Ellis, the mayor, says the Interface plant was one of the "flagship industries" of the city. When Belletile showed the city its business plan, Mr. Ellis says he had confidence that Mr. Marikkar's plan would help to protect the jobs at risk – and highly skilled jobs at that.

Mr. Marikkar and his colleagues found creative ways to get up and running quickly so they could start taking orders. The group built a new production line in a matter of months, not the usual two or more years it takes to establish a carpet file factory. They were able to do that in part by buying some equipment that had been used to make seat covers for automobiles and modifying it to make carpet tiles.

The plant has been set up to minimize waste, both of the materials in the tile itself and the chemicals needed to suppress smoke and flame. It was also designed so that the line can be stopped as soon as there is a problem, another step in reducing waste.

The customers who urged Mr. Marikkar to set up shop followed through with orders. There are now 17 employees running tufting and cutting machines, including Mr. Taylor, the 55-year-old mechanic who was unemployed for eight months after Interface closed.

Some of the former Interface employees offered to work for free. They're not; the minimum wage in the plant is $17.50 an hour.

As Belletile works on signing up dealers and selling to customers, the production line is running a couple of days a week. By next month, Mr. Marikkar hopes to be rolling carpet tiles off the line five days a week. By next year, he plans to employ 31 people.

Eventually, he aims to have 80 people working on his assembly line at the warehouse he found in a small industrial enclave sandwiched between a leafy residential area and Belleville's main CN rail yard. It's just three kilometres away from the old Interface factory, which sits idle in the north end of town.

Finding a niche

In his push to grow, Mr. Marikkar has a window of opportunity, because low-cost producers in Asia have yet to figure out how to make what he's making.

Many other manufacturers who count themselves among those quietly driving the sector's rebirth have found similar opportunities – and say the key to survival increasingly depends on the design and construction smarts of employees.

Joe Aiello started his electric-motor business much as Mr. Marikkar started Belletile. When Westinghouse closed its Hamilton electric motor manufacturing business in 1994, throwing 280 people out of work, Mr. Aiello and his co-owner Carlo Di Pietro took it over. Today, they employ 38 workers.

Elettra motors propel tunnel boring machines, power pumps at the Bruce nuclear power plant on Lake Huron and drive fans in wind tunnels, such as one in Britain where Mercedes-Benz tests Formula 1 racing cars.

One of the lessons he has learned is that trying to compete with motor makers in China and elsewhere that can mass produce them makes little sense. He urges other Canadian manufacturers to follow his lead and find a niche.

"We make motors that nobody else wants to make," Mr. Aiello says. "It's complex, it's difficult, it's one-of-a-kind and thereby we're successful."

Others have looked to production for a competitive edge. E.H. Price Ltd., a Winnipeg company that makes ventilation equipment, has steadily shifted production to plants in Georgia and Arizona – where wages are cheaper – while keeping its headquarters in Canada; Transformix Engineering, which makes automation equipment for assembly lines, is assembling products in Kingston, Ont., with parts imported from around the world.

And the textiles industry, which was written off years ago as a dying sector, is attempting a renaissance as businesses become smaller and more technology-based. Cambridge, Ont.-based MW Canada, which began life in 1963 by making apparel fabrics, now manufactures materials used in window shades among other specialty products. It is experimenting with nanotechnology to make next-generation blinds that can collect enough solar power to recharge items like cellphones, laptops and iPods.

"There is a lot structural change going on," says Philip Cross, Statscan's chief economist and the author of the study that broke manufacturing into expanding and contracting groups.

Mr. Cross's analysis shows that sales in the expanding group of manufacturers increased 44.8 per cent, or an average of 5.8 per cent a year, between 2000 and 2008 when the recession hit, compared with a 32.8 per cent decline, or an average of 4 per cent a year, for the contracting group.

Sales in the expanding group peaked in July, 2008, at $36.5-billion. In March, sales in the expanding group had recovered to $32.4-billion after growing in each of the previous 12 months. (Sales in the contracting group were $15.1-billion in March, compared with $16.5-billion in February, 2008.)

More important, the companies in the expanding group are plowing money into their businesses. Starting in 1998, investment by the expanding group outpaced that of the contracting group every year through 2011, an important indicator of future growth. Companies in the expanding group said they will spend $12.1-billion this year, which would match the pre-recession peak.

But will that be enough to keep them ahead of the global competition?

The history of industrialization shows that countries start by assembling cheaper products and slowly work their way up. China, India, Brazil and other nations are now moving beyond their industrial beginnings as the assemblers of mass-market commodities to challenge for higher-end products that remain the domain of Canada, the United States, Germany, Japan and other developed economies.

That means Canadian companies will need to continue redefining their role in a world where a manufacturing company might churn out nothing but patents, or may compete for work farmed out by the world's biggest manufacturers – and awarded to only the most competitive and nimble companies.

"Competition over the next decade is going to go up and our concern is that a lot of Canadians don't seem to see it coming," says Jean-René Halde, CEO of the Business Development Bank of Canada. "It is so frustrating because they could be taking steps today to start doing things."

The BDC, which has lent and invested $33-billion in 60,000 Canadian businesses over the past 15 years, has been pushing companies to set up advisory boards of more experienced entrepreneurs – business owners "who have been there, done that, and have a few scars on their backs and can say 'Hey, wake up, because unless you make the following three moves, you're going to get clobbered.' "

At Belletile, Mr. Marikkar is far from worried about competition from China. In early 2010, he visited two Chinese carpet tile manufacturers. He found that their supply chains and raw materials do not match those of North American manufacturers.

"They are decades away from catching up and by the time they do it, the technology will likely change in the developed world," he says.