Hidden costs: Will Canada’s rush to resources stifle future growth?

(Photo: Eric Kounce/WikiCommons)

Manufacturing and resource sectors have always had a strained relationship.

Ever since the term “Dutch Disease” was popularized in the 70s and 80s, it seems the debate surrounding the benefits and perils of a resource-inflated dollar gets more polarizing each day.

Canada’s been no stranger to this debate, and with oilsands growth expected to double by 2020 it’s likely more conversation is ahead.

Compounding the issue in Canada is that most manufacturing is in the country’s east, while much of our resources, namely oil, are found out west, leading to a divisive and political split in opinion.

The reality is the debate over Dutch disease is never as cut-and-dry as many might like it to be – there are simply too many more factors at play.

Natural selection?

But not everyone sees oil as the culprit for this decline in Canadian manufacturing.

“A lot of the changes that took place in Canadian manufacturing over the last decade would have happened regardless of what happened with the dollar,” says Michael Burt, the Director of Industry Sector Economics at The Conference Board of Canada.

Burt, who co-authored a December 2012 report about Canada’s trade patterns, views manufacturing’s decline as a case of natural selection.

“China was not anywhere near the same factor it was in 2001 as it is today, and it’s captured market share in Canada. It’s captured market share in the U.S. and so we’ve seen a development of a new equilibrium in North American trade,” says Burt

“The dollar has probably accelerated that transition, but it would have happened to a large extent anyways.”

He also suggests that it’s simple economics.

“If you look at it in terms of the raw materials we make here in Canada, prices for those items have risen by about 75 per cent over the last decade. Over the same period, prices for manufactured goods have risen about 15 per cent, so as a business… I’m chasing after where the better returns are.”

There are other skeptics of oil’s role in the decline of manufacturing, notably Jack Mintz, the Palmer Chair of University of Calgary’s School of Public Policy, who recently published a study citing declining manufacturing as a trend amongst other OECD countries as well.

Naturally though, that opinion is divided. A contrasting report from the Canadian Centre for Policy Alternatives, titled The Bitumen Cliff suggests our push for oil is a going to hurt the manufacturing industry in the long run, and the damage has already started.

It argues that since 1999 Canada’s manufacturing sector has declined faster than those of other OECD countries, and they use the auto industry as a prime example.

“When the industry peaked in 1999, Canada ranked as the fourth-largest assembler in the world and benefited from a $15-billion trade surplus in automotive products. Canada’s auto industry was well placed in terms of labour productivity and cost competitiveness,” the report states.

“By 2006, however, the large automotive trade surpluses had melted away, generating Canada’s first automotive trade deficit in a generation. By 2011, Canada was running a chronic automotive trade deficit of $15 billion per year. During the same period, some 50,000 well-paid auto jobs were lost.”

Some, like Howard, try to take a more diplomatic approach, suggesting there are benefits too,

“A lot of the Ontario manufacturing sectors have retooled, have realigned their source material, so they can compete globally.”

But, once shops retool, there will still be a higher dollar getting in the way of their export business, and one major factor is often left out of the equation – one that really divides the two industries.

The x-factor: Innovation

There is an intangible value to manufacturing that we tend to forget.

During the creation process trial and error takes place. Mistakes are made, lessons are learned, and the end achieves an improvement to the process or design.

The value of this process is hard – if not impossible – to properly quantify, but must be considered.

The Obama administration has started to do just that with the creation of the National Additive Manufacturing Innovation Institute (NAMII). It’s a signal the country is getting serious about manufacturing again, embracing inventive technology, which requires extensive research, but could have enormous payoffs.

But Canada has routinely dragged its heels in this regard.

“There’s good evidence broadly speaking, that Canadian manufacturers spend less on R&D than our American counterparts. You know, other measures like rate of productivity, rate of growth, those sorts of things we already lag on,” says Burt.

“There’s a lot of discussion about why… it may be management practices here in Canada. We’re a little more conservative than other countries, it may be the fairly high amount of foreign ownership in our manufacturing, it’s more of a branch plant mentality. We’re not doing the research here. We’re doing the doing, if you will.”

Whatever the reason, Canada has been slower to commit more focus and financial resources to manufacturing, even though Ontario employs nearly a million people in the sector, making it the second biggest in North America, behind California.

But, the Americans have embraced industry all over again – and they’re seeing results. Recently, General Electric’s Appliance Park has reopened, and found a way to make a more efficient version of their water heaters and sell them for less money.

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Another example of the value of innovation is the machine tool maker DMG/Mori Seiki. The multinational company opened a new facility in Davis, California in July of 2012.

At the International Manufacturing and Technology Show (IMTS) in Chicago this past September, company president Dr. Masahiko Mori spoke to an audience of industry journalists about the decision to put the operations in Davis.

He talked at length about the value of having a company that could build more than just machine tools. A good company, he said, should be able to build good engineers.

A sentiment that Adam Hansel, the COO of Mori Seiki’s Digital Technology Laboratory Corp., echoes.

“Why we chose to do California specifically, instead of the Midwest, or say, Chicago, is because we’ve had an R&D facility there since 2000, and we wanted the R&D and production to be able to work together to make a better product,” he said.

The new factory currently builds the company’s NHX4000 and NHX5000 machines for the North American market, but the collaboration between the new factory and the R&D facility is where the real value lies.

“The idea is that the factory is an incubator for people to learn all about machine tools, and how they work, and the people who have greater aptitude will have greater opportunities in the company.

“It’s not just a factory that’s taking drawings from some design group somewhere and building something… it’s a collective effort, and it goes both ways. Not just the guys building machines learning, we have our mechanical engineers get out on the floor and experience it firsthand too, so they become better engineers and are able to design a product that’s easier to work with.”

Part of the company’s decision to come to the U.S. was driven by economic factors, and an overall strategy geared towards international growth. But there’s still been a concerted effort to put some focus back on industry, especially with new and innovative technologies opening up more possibilities.

The Conference Board of Canada recently held a summit on innovation in downtown Toronto and in a statement, the think-tank’s CEO, Daniel Muzyka emphasized its value, saying, “Only the constant pursuit of innovation can ensure long term success.”

But overall that innovation isn’t happening here.

The previously mentioned Bitumen Cliff report also paints a bleak picture for Canadian innovation, and it's particularly critical of the oil patch’s role in such a field.