The last decade has been difficult for Canadian manufacturers. Demand from U.S. customers has shrunk as they found it harder to get the credit they needed to grow.
As well, the decline of the U.S. dollar means sales into the United States bring back less money to Canada.
The appeal of manufacturing offshore is tempting, to keep costs down. But should Canadian small and medium-sized manufacturers move offshore? If not, how can they stay in Canada and remain competitive?
Chander Datta, founder and chief executive officer of Kingston, Ont.-based Cancoil Thermal Corp. has proudly stayed – and thrived – in Canada.
Originally from India, Mr. Datta moved to the United States to complete graduate work in mechanical engineering.
“Heat transfer was my speciality,” he says. “Heating, cooling and refrigeration is my passion, and I’ve stayed with it my whole life.”
He worked for 12 years in the United States, moving to Montreal to manage a plant for his employer. When it was time to leave Canada, he didn’t want to go. He also felt it was time to start his own company. After some exploration, he fell in love with Kingston.
He started Cancoil in 1983 and has never looked back.
Cancoil manufactures heating, cooling and refrigeration systems and sells them to contractors as well as directly to other businesses, for example, mining companies working in the oil sands, transportation companies, and organizations that need data-processing cooling systems.
Customers want a high degree of customization in the finished product; indeed, Cancoil can be asked to build and deliver a custom-designed system within days.
But these are customers that have themselves been hit heavily by a sagging economy. Seventy per cent of Cancoil’s sales come from the United States and 30 per cent from Canada. How, then, has Cancoil managed to thrive, even survive, as a Canadian manufacturer?
When other North American manufacturers started moving their operations to other countries like China, Mexico, Brazil and India, Mr. Datta wasn’t tempted to follow them.
Although his input unit labour cost of 18 per cent of total cost was much higher than it would be in China, for example, he believed that low offshore wages were a temporary phenomenon.
“I’ve always thought that, as the Chinese economy grows, Chinese employers will have to provide better compensation for their workers – better wages, better housing, and a better quality of life,” he says.
He sees now that his prediction was accurate.
“Their labour costs have increased to the extent that they’re within 10 per cent of ours. When you add that to the high cost of transporting your goods from Asia, in our industry, there is little or no cost benefit to manufacturing offshore.”
He points out that he had the luxury of not responding to economic temptations that he believed would be short-lived.
“We’re fortunate in that we are a private family business and don’t have outside shareholders who worry mostly about short-term profitability,” he says.
“We can decide how much money we don’t want to make.”
Not moving offshore allowed Mr. Datta to focus on making his business better.
There are huge costs involved in moving manufacturing operations, including planning the move and learning how to operate as a distributed company.
Owners of small and medium-sized businesses can become so distracted by the decisions that need to be made, and the extra work that needs to be done, that they drop the ball on the business itself.
Instead, Mr. Datta focused on making Cancoil better.
When times were tight, he focused on being able to respond in a more flexible way to his customers. Not only did the company develop new engineering systems, it also worked closely with employees and their union.
“We have a great working relationship with employees, and the union understands that flexibility in manpower deployment is core to our success,” Mr. Datta says.
Indeed, Mr. Datta believes that a bad economy can provide good opportunities for businesses.
“When the Canadian dollar was low, everyone made a lot of money and people became complacent and wasteful. When things got harder, we had no choice but to shape up.”
He is also convinced that, as a country, we have to pay more attention to the manufacturing sector.
“There is lots of focus on information-intensive and the so-called creative class, and we need a better balance," he says.
"Every morning, we get up and brush our teeth, polish our shoes and use dishes and appliances at breakfast. Everyone, throughout their day, uses material goods continually, and they have to be made. I believe that some of it can be done economically in Canada, and it’s important that we don’t give up.”
Being innovative and remaining in Canada has worked well for Cancoil.
Labour unit costs have decreased to 12 per cent and the company’s productivity has increased 25 per cent over the past 10 years. Financially, it is able to weather the effects of the low U.S. dollar.
“Ten years ago, the Canadian dollar was at 67 cents (U.S.) and now it’s above a dollar. Our prices in the U.S. can’t competitively change, which means that we make one-third less on our sales. But we’re more efficient now and are able to withstand the hit.”
Mr. Datta is not just optimistic about Cancoil’s future, he also believes in the future of Canadian manufacturing,
“I think manufacturing is here to stay and thrive. The time of the decline is past.”
Special to The Globe and Mail
Becky Reuber is a professor of strategic management in the Rotman School of Management at the University of Toronto.
This is the latest in a regular series of case studies by a rotating group of business professors from across the country. They appear every Friday on the Report on Small Business website.
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