It is now cheaper to make goods in once high-cost countries such as Japan or Britain than in Canada, according to a new map of global manufacturing competitiveness.
For Bank of Canada Governor Stephen Poloz, who is counting on a surge in exports to help drive a stronger economy, the unflattering comparison points out the enormous challenge ahead. Canada's inability to produce internationally competitive products, outside of energy and raw materials, is proving to be a powerful drag on job creation, especially in Ontario.
Statistics Canada data show that only 1.7 million Canadians were employed in the manufacturing sector this year compared to more than 2.3 million a decade ago. Auto makers, in particular, have been pouring billions of new investment dollars into the United States or Mexico while giving this country the cold shoulder.
All of that aligns with the findings of the Boston Consulting Group's new report on the shifting economics of global manufacturing. It shows Canadian factories rapidly losing their ability to compete, especially in comparison to the emerging champions of the new world order – the U.S. and Mexico.
The consultants' report benchmarks the relative cost of making goods in the top export economies by comparing the cost in each country to levels in the U.S. On an index where U.S. costs are equal to 100, Canadian factories tick in at 115 – a rise of 11 points since 2004.
In contrast, Mexican factories score a bargain-basement 91 on the index, undercutting even China, which has seen its manufacturing competitiveness plunge in recent years, mostly as the result of soaring wages and energy costs.
Boston Consulting says its results underline a massive shift in the relative costs of making goods in various countries. Manufacturers have long regarded Asia, Latin America and Eastern Europe as the places to shop for sweet production deals, but changes in currency values, energy costs and wages are redrawing the map.
Brazil, for instance, is now a very pricey place to make goods, while Russia and Eastern Europe are just as expensive, if not more so, than the U.S. Meanwhile, once doddering Britain has become the lowest cost manufacturer in Western Europe.
Boston Consulting divides most of the countries it surveys into one of four groups – those that are Under Pressure (such as Brazil and China), others that are Losing Ground (including France, Italy and Australia) or Holding Steady (such as Britain and India), as well as Rising Global Stars (U.S., Mexico).
Canada's situation doesn't fit neatly into the typology because it has encountered both negative and positive factors in recent years – rising wages that have been offset to some degree by falling energy costs. For that reason, the consulting group doesn't consider it a Losing Ground economy, although Canada's challenges are plain to see.
"Fundamentally, the story for Canada starts with the run-up in its currency," says Peter Dawe, a partner at the Boston Consulting Group in Toronto. The rise of the loonie in recent years has revealed serious structural problems with the country's manufacturing sector – notably, a lack of investment in productivity-enhancing equipment and too much reliance on smaller, less productive factories.
The answer, he suggests, begins with developing a technologically expert workforce that is suited to the demands of today's increasingly automated factories. Also important is attracting large-scale plants that are geared to serving more than Canada and encouraging management at Canadian companies to think of catering to a continental or even global market.
Will that be enough to turn around Canada's dismal performance in the global manufacturing race? It is, at the very least, a good place to start. Unless Canadian factories re-engineer their businesses, it's difficult to see how Mr. Poloz's export boom can ever take place.
Ian McGugan