Innovation is key to success of Canada’s manufacturing sector

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Glen Hodgson is senior fellow and Michael Burt is director of industrial and economic trends at the Conference Board of Canada.

Manufacturing is still an important part of Canada's economy. The sector directly accounts for about 10 per cent of Canadian gross domestic product and half of our exports, making it larger than the energy sector. However, its role in the economy has been steadily shrinking. Manufacturing employs half a million fewer Canadians today than it did in 2000.

The experience of the manufacturing sector in Canada is not unique – it is declining as a proportion of the overall economy in every major developed country. Even China is seeing manufacturing's share of its economy shrink. In short, the declining importance of manufacturing is in many ways tied to the growth of the modern, service-based economy.

The good news is that the manufacturing sector's performance has improved since the end of the 2008-2009 financial crisis, with production increasing and employment stabilized. Regardless, the reality is that the sector is being challenged on many fronts and the question remains: What is the future of manufacturing in Canada?

In today's competitive global environment, many firms have opted against making the investments and structural changes necessary to gain an edge. Outside of a few segments – notably aerospace, pharmaceuticals and electronics – research and development spending in the sector is generally very low. Indeed, investment has been so weak for a number of years that many manufacturing segments have actually become less capital intensive. The result is an erosion in the global competitiveness of Canadian manufacturing.

This loss is perhaps most apparent in Canada's important auto sector. The number of assembly plants in Ontario has shrunk over the past decade, as has Canada's share of North American auto production. Investment in automotive production on the continent has been focused disproportionately on the U.S. and Mexico. The result has been a decline in Canada's capacity for production in the industry. Indeed, a chief concern in the recent contract negotiations between GM and Unifor was the preservation of assembly lines in Oshawa that were at risk of closing.

Yet further decline in Canadian manufacturing is not inevitable; indeed, there are many success stories within the sector. For example, Canada's food production has experienced the strongest growth in the manufacturing sector since the turn of the century by taking advantage of growing demand in international markets and product innovation. Cosmetics reflects another success story; driven by strong relationships with private label brands in the U.S. and targeted market development in emerging markets.

How can more Canadian manufacturing industries succeed? First, firms should seek to fit into the value chains of larger global firms – even if that means shifting parts of their production into other countries, to stay close to the production facilities of their customers. That advice may not be popular, but it will be critical for the success of many Canadian manufacturing firms as providers of key inputs in global value chains.

Next, firms need to focus on specializing in high-value manufacturing segments and activities. It is increasingly hard for Canadian manufacturers to compete with lower-wage countries for final assembly, even for highly sophisticated products like motor vehicles.

Integration of client services into the sale of manufactured goods is another way to improve competitiveness. There is growing evidence that adding service value to manufactured products not only makes them more competitive, but more profitable as well. These client services can take many forms, such as: ongoing maintenance, quality upgrades, collecting and sharing real-time data with clients for product tracking and monitoring, re-marketing later in the product life cycle, and even developing digital twins of the product for trouble-shooting.

Ultimately, innovation is the key to success for manufacturing firms. It could take the form of product innovation, such as adding client services or adapting products to new markets. Or it may come through process innovation, which could be anything from production techniques to management processes. Creating an innovation culture within Canadian manufacturing firms, sectors and clusters is likely a critical and required form of process innovation. The Conference Board has done extensive research on how to create an innovation culture within organizations – which requires strategy and tactics, a structured approach, and most importantly, leadership and risk-taking.

Canadian manufacturing has a future, but success will depend on building products differently. Ultimately, innovation will drive the productivity improvements that are required if Canadian manufacturers are to remain competitive and thrive.