Over the years, small and medium-sized businesses have downsized or even shuttered their local factories in exchange for importing from China. This isn’t necessarily a new phenomenon; offshore sourcing from Hong Kong, Japan, South Korea and Taiwan has been going on for decades. But the practice has certainly heated up in the past two decades as China quickly built low-cost manufacturing capacity across a range of industries.
Not helping matters was the fact that Canada’s economy pushed both wages and the loonie higher. Wages had an obvious impact on competitiveness and the dollar’s increase squeezed margins for manufacturing exporters selling in the world’s international currency, the U.S. dollar.
At first, poor quality from China and a ‘Made in Canada’ halo kept the local factories going. But eventually the quality of goods produced in China caught up, the dollar hit par with the greenback and Canadian manufacturers joined the rest of the world in replacing domestic manufacturing with offshore sourcing.
To say the tide is turning back in our favour would be a bit of an exaggeration. With labour rates a good 75 per cent cheaper than in Canada, China can still offer lower costs in many categories. But costs in China are starting to rise aggressively. Minimum wage in many industrial towns have been going up by 15 per cent per year by mandate from the government. Costs of transporting goods from China have also increased along with the amount of bureaucratic red tape. Lastly, Chinese manufacturers have yet to fully adopt lean manufacturing principles and other productivity protocols that have kept Canadian factories in the game. Their tendency is still to throw more labour at a problem, rather than chase root causes and more thoughtful and productive solutions.
Comparatively, Canada’s cost structure has stabilized and manufacturers are beginning to come to grips with the true cost of importing from China. For example, a new product made in China can take 90 days just to be made and delivered, to say nothing of the product development and prototyping phases. Long lead times don’t allow very dynamic response times to changes in customer demand. Minimum orders from big China factories, coupled with a desire to keep freight costs down, mean Canadian importers often buy and stock more than they need. More inventory ties up cash and takes up space.
When the total cost of importing is built into the product, the cost of doing business overseas is much higher than a perceived low-per-unit price from a China factory.
So here in Canada, SMBs are slowly finding their way back into manufacturing. The currency exchange rate seems to be settling just below par and factories have adapted. Small and nimble shops are finding they can be competitive by focusing on high end, high value products and turning orders around quickly in smaller batches. Customer demands can be met more quickly and offering customization makes many Canadian manufactured goods impossible to source from places like China.
And so the future seems bright for Canadian small manufacturers. Lean manufacturing, innovate designs, flexible output and a stable economy are favouring local manufacturing again. It may take time before the statistics or surveys prove manufacturing is back, but it has started. You can see it happening at the grass roots level and you can support it by shopping as close to home as you can, personally and on behalf of your business.
Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.