Canadian manufacturers need to increase productivity, says investment guru

Toronto, Chicago and Dublin—Increasing productivity is key for Canadian manufacturers to maintain a competitive edge amidst growing global financial concerns, according to a Canadian investment strategist.

“Very simply they need to significantly improve productivity,” BMO Harris Private Banking investment strategist Paul Taylor said about Canadian manufacturers. “Something Finance Minister (Jim) Flaherty has commented repeatedly on is we’re just not seeing the same productivity growth experienced south of the border.”

As airline giant Airbus’ recent announcement to build its first production facility in Alabama suggests, productivity and production costs have improved markedly in the U.S. in recent years.

“Similarly here in Canada we need to spend money prudently to improve, from a capital expenditure perspective, on efficiency,” Taylor said. “But as well, (in terms of) labour productivity we need to ensure we’re as competitive as elsewhere in a very challenging global environment.”

Taylor was joined by Dublin, Ireland-based Eoin Fahy, chief economist with Kleinwort Benson Investors, and Harris Private Bank chief investment officer Jack Ablin in Chicago on BMO’s third-quarter market outlook call.

The three expert panelists spoke of the global impact the European debt crisis carries, as well as other key issues, including slowing growth in China and beleaguered Canadian device maker Research In Motion (RIM).

“From a Canadian perspective, as always, we’re not masters of our destiny,” Taylor said. “The key from a Canadian perspective is how will things land from a Eurozone perspective.”

Canada has to “triangulate” between situations in the U.S., China and the Eurozone in order to figure out how markets play out at home, according to Taylor.

Despite relative uneasiness south of the border and abroad, Taylor said Canadian consumers are propping up the economy through spending.

“The consumer has continued to participate meaningfully through housing, autos and the energy sector,” he said.

While a projected GDP growth of two per cent may be slightly optimistic, Taylor said recession is “not a likely” result for the Canadian economy.

“Broadly speaking, we want to see things settle in the Eurozone,” Taylor said. “The foot-dragging has had an affect on consumer and corporate behaviour both in the U.S. and here in Canada that will cause slightly more moderate economic growth.”

While the Eurozone crisis doesn’t seem to be going away in the near future, Kleinwort’s Fahy said his firm doesn’t anticipate a breakup.

“We do think the chances of a Eurozone breakup are very small,” Fahy said from Dublin. “We’re putting a nominal five per cent probability on it, but even that might be generous.”

After rapid growth in China, the emerging economy has slowed substantially, but Fahy doesn’t see this as a direct result of Europe’s situation.

“I don’t see the slowdown in China being a result of what’s going on in the Eurozone, although I don’t doubt that it has some marginal impact,” Fahy said.

Instead, according to Fahy, it simply comes down to the fact the Chinese economy “overheated” due to food price inflation, among other factors, and policies needed to change in order to scale back inflation.

In terms of U.S. manufacturing, Chicago-based Ablin said certain negative situations in Europe have spun into positives for U.S. sectors.

“Bad news in Europe in some respects is good in the U.S.,” he said. “Those labour costs that had risen pretty steadily, particularly in southern Europe, have made our European competitors less competitive [compared] to U.S. manufacturing.”

According to Ablin, unit labour costs play a key role in attracting firms such as Airbus to U.S. soil, as they are now 30- to 40 per cent cheaper than they were compared to counterparts in Spain, Portugal, Greece and Italy 10 to 12 years ago.

Keeping wages intact while wages outside the U.S. increase significantly has played a factor in competitive positioning, as evidenced in Caterpillar’s decision to shutter locomotive production at its London, Ont., Electro-Motive Diesel plant and move operations to Indiana, where wages hover at less than half of those working at the southwestern Ontario facility.

When it comes to RIM, Taylor said changes at the Waterloo, Ont.-based device maker are “absolutely critical” to keeping afloat.

“They are at a point where the environment for smart phones is clearly aligned along the two operating system domains—Google Android and (Apple) iOS,” he said. “We would argue that there’s still room for a third operating system (and) we felt that RIM had a good shot at that, but with the delay of BB10 that looks increasingly less likely.”

According to Taylor, RIM is in need of a strategic reboot, and this may include severing the business between services and devices.