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Gwyn Morgan

Eyeballing Canada's post-manufacturing economy Add to ...

Gwyn Morgan is the retired founding CEO of Encana Corp.

Canadians marked our national birthday last week firm in the conviction that there's no better place to live.

Yet, beneath the surface of this year's Canada Day celebrations was the worry about how long what has been labelled the great recession will last. Some say it will end soon, others say it won't be over for a long time. But what will "over" actually look like?

The short answer is that our economy will never return to the pre-recession status quo.

Prior to the financial crisis, the process of relocating global manufacturing to Asian nations was already well advanced, but new job creation in other sectors kept unemployment rates surprisingly low. Now, job losses throughout the economy, combined with shuttered factories, have sharply increased unemployment. Economic recovery will bring renewed job growth, but the transformation of Western nations into post-manufacturing economies is an unstoppable force.

The crucial question is: What will Canada's post-manufacturing economy look like? Some of the basic categories that will determine our post-manufacturing future include services, transportation, natural resources, agriculture, construction, global value-chain management and specialty manufacturing.

The highest employment category is services, which includes areas such as food marketing and distribution, legal and accounting, banking and wealth management. Technology and technical services such as engineering design will be in high demand here in Canada and also internationally, where Canadians enjoy a world-class reputation. Tourism and hospitality will continue to suffer from further weakening of the U.S. dollar and an overhang of American household debt. Our aging demographic will place even more pressure on acute and long-term health services which cannot be met within our dysfunctional and inefficient government health-care monopoly model. Canada will have no choice but to join all other Western countries in contracting out for private provision of publicly funded services, and allowing user-pay options.

Ground and air transportation will suffer from the decline of manufacturing, reduced tourism and the likelihood of higher fuel prices.

Asian demand will continue to strengthen prices for oil and base metals. Natural gas may have a slower recovery from currently depressed prices, but the longer-term picture is bright due to its environmental superiority over coal-fired power combined with expansion of its use as a motor fuel. Saskatchewan's huge uranium and potash deposits will thrive in an energy- and food-challenged world. The outlook for forest products remains bleak, given the housing overstock and inefficiency of older paper mills.

Agriculture has transformed from the small, mixed-product family farm of my youth into large-scale, single-product food crop farms or cattle ranches that ship calves to enormous feedlots owned by major agri-business firms. Poultry and hog production have also become huge, concentrated operations. The biggest challenge for this sector is the increasing public realization that pollution from agri-business causes the biggest negative environmental impact of any industry on watershed health and safety, as well as air quality.

An overhang of inventory will mean a very slow recovery for housing, office and retail construction. The end of stimulus projects and sharply higher government debt levels will mean transportation and other public infrastructure needs will need to be met through public-private partnerships.

Global value-chain management is the real opportunity arising from the movement of mass production manufacturing offshore. Margins earned by Asian manufacturers are very thin. The real money is made from controlling the value chain.

The best Canadian example is Research In Motion. Canadians form the brain trust behind the BlackBerry, including R&D, product design, software, marketing and distribution. These are not only the highest-paying jobs, but also create the highest returns. RIM can choose to farm out low-margin component manufacturing but keep control of the technology and the brand. It can also choose to keep the most crucial parts of the value chain, such as final assembly, in its Canadian plants.

Our southern neighbour's biggest competitive advantage is a large number of U.S. headquarters of global value-chain companies. In the post-manufacturing era, Canada needs more of these international champions. As I said in my May 25 column, the Obama administration's plans to impose double taxation on international companies could provide the opportunity to attract them north of the border.

Large-scale, commodity-type production line manufacturing may disappear, but "bespoke" specialty manufactured items are still best produced locally, where there can be strong communication with the client. There are many firms and jobs of this nature across the country.

Over the longer term, is transformation to a post-manufacturing economy a problem or an opportunity?

Like most challenges in life, the result depends on our response. For example, some people respond to losing their job by adopting a victim mentality, and expect government or someone else to bail them out. So, too, it is with some companies, as the auto bailouts demonstrated. Other people learn as much as possible about the opportunities available, decide what interests them most and then get the necessary training. How many times have you heard positive-thinking people say, "Losing my job turned out to be one of the best things that have happened to me?" Here again, both people and companies adept at anticipating and adapting to change are the ones most likely to thrive in our post-manufacturing economy.

Gwyn Morgan is the retired founding CEO of EnCana Corp.

 

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