How to cope with the high costs.
Despite slight productivity gains and a more stable economic performance as the rest of the world wobbles, Canada’s job creation is lacklustre, while high labour costs are becoming a perpetual competitive handicap to manufacturers.
Labour costs are driven by a number of factors, including slower gains in productivity, investments in innovation and R&D and the high-value loonie. KPMG Canada estimates 55% of manufacturers’ spending goes to labour costs. That’s up from 14.1% in 2008, according to Statistics Canada. Labour costs for companies in emerging markets such as China, India and Mexico represent about 30% of overall expenditures.
Closer to home, Canada’s wage advantage over the US has disappeared. The average per hour wage is $35.76, compared to $34.74 in the US. And Canadian manufacturing salaries have increased by 3.1% in 2012, topping $896 per week, according to Statistics Canada.
“Gains in output haven’t been matched by gains in jobs because the economic outlook is pretty uncertain (thanks in part to turmoil in the EU) and the US was recovering at a slower rate, so companies have been overly cautious,” says Dina Cover, a TD Economics economist. “Manufacturing will recover, but its share of the economy is unlikely to gain much ground.”
Today, manufacturing accounts for 10% of Canadian employment, or about 1.6 million jobs, according to Cover, who says it’s unlikely manufacturing will pass 12% in the near future. That’s down from its peak of 16% in 2000, and because labour productivity is a key determinant of GDP per capita, it adds to Canada’s labour cost problem.
So what’s a company to do?
Martin Lavoie, director of manufacturing policy at Canadian Manufacturers & Exporters (CME), says improving the country’s labour challenges will also come down to bridging a disconnect between industry and education. How we make things in Canada will become more advanced.
“Advanced manufacturing means more automation and more advanced production processes to increase productivity, so now the trend is to have fewer people on the shop floor and more in support positions,” he says. “Those kind of positions require people with higher education levels to develop those processes, technology and automation applications.”
It comes down to a refined mix of process improvement, investment, innovation and entering new markets.
Here are some of the ways successful companies are driving down labour costs, although not all of them are pretty.
• Automate. Brian Smith, Ontario and Atlantic lead of supply chain management at KPMG Canada, is a big fan of automation, but concedes this usually means getting rid of shop floor jobs, although that’s not always the case.
“Canada needs to learn to get ahead by competing based on superior design, manufacturing processes and, ultimately, automation,” he says. “Almost by definition, being more automated means some jobs are lost. Some [companies] are still finding ways to create jobs, but that means being really smart about automation.”
Improving automation also allows producers to team with sister operations for shared applications that increase output volumes in specialized manufacturing operations. Doing so spreads out fixed costs.
Lavoie agrees automation and improved design will help improve Canada’s labour costs, but much will depend on manufacturers recognizing the need to become more advanced.
Some companies are getting it. Statistics Canada says manufacturers are increasing spending on capital equipment and machinery by 6.6% this year, and Cover says more automation levels will lead to greater opportunities, crucial to improving competitiveness, increase cash levels, and improve job growth prospects.