The natural disasters that devastated Japan's northeast coast on March 11 forced thousands of factories to shut down, an event that helped push the country's fragile economy into recession.
More than 10,000 kilometres away, in Kingston, Ont., Transformix Engineering chief executive officer Peng-Sang Cau sensed that the supply shocks could impact her company. Transformix makes automation equipment for manufacturers, and some of the devices incorporate complex electronic controllers that likely contain Japanese-made parts.
The company's solution wasn't to deconstruct the controllers and follow the supply chain back to the source to figure out who made each part. Instead, Transformix ordered more controllers from its distributor as quickly as possible to ensure it had enough in stock in case the supply dried up.
For Transformix, like so many small and mid-sized companies in the new world of Canadian manufacturing, the supply chain is a complex global affair - parts, components and materials arrive from down the street, across the country and around the world.
The company forms one crucial link in that worldwide supply chain, which extends from its suppliers through to its customers, and its customers' customers. Transformix engineers design a custom product built for a specific client's production line. It builds the machinery using parts and material made in-house or gathered from around the globe, then the complete machinery is shipped to the client's manufacturing plant, wherever it is located.
The key component that Transformix adds to this value chain is intellectual property - the design and construction smarts of its engineers. That's the model that is helping Canadian manufacturers transform from the low-skill assembly model of the past. Those that survive in this new order will do so by innovating and adding engineering skill to the vast tentacles of the worldwide value chain. No longer will it be good enough just to build simple parts or devices for the local market.
Successful manufacturers will make use of components supplied from anywhere in the world, as long as they are reliable and priced right. Then they will sell their value-added end products wherever there is a market.
For Transformix, customers can be in Canada, the United States, South America or Europe. "There are borders but we don't really see them," said Ms. Cau, a Queen's business graduate who teamed up with two engineers to start Transformix in Kingston in 1995. "We just operate our business as if it is one big market. Who we buy from and who we sell it to - the nationality no longer matters to us."
The company specializes in complex custom-made automation machinery that assembles parts at remarkable speeds - up to 1,000 a minute. It also makes other huge machines, some up to 90 metres long, that cut, clean or manipulate pipes and tubes. Clients are manufacturers who make electronic equipment, tools, health care devices or almost anything that has to be assembled quickly.
The expertise built up over years of designing and building complicated, precision, high-speed assembly equipment out of modular components is what attracts customers, Ms. Cau said. "What brings the client to the table is our ability to think outside the box. Our ability to innovate is why these companies are coming to us."
[Watch a Youtube video of Transformix's hybrid assembly machine here.]
Without this approach to innovation, Canadian manufacturers just can't survive, she said. "There is always cheaper labour [somewhere else] You have to add some value."
And price is no longer a selling point. "We tell our clients all the time: 'If you want the cheapest, don't call us.' Our clients tends to be sophisticated and understand what we bring to the table - the ability to innovate and design flexible equipment that is durable and reliable."
Indeed, in the new world of manufacturing, where any stage in the production process can be completed anywhere in the world, trying to compete on price is not enough. For a company to succeed, they have to identify what their strengths are in the value chain.
"Companies that can add value are going to be able to succeed in a more sustainable fashion," said Danielle Goldfarb, associate director of the Conference Board of Canada's International Trade and Investment Centre.
As a consequence of this shift, it is becoming increasingly clear that public policy should no longer focus on placing duties on tariffs on specific products, Ms. Goldfarb said. Those barriers no longer make sense when intellectual value is the key component Canadian companies should be adding to the supply chain.
As Transformix discovered with its components that contain parts from a number of locations, "questions [about the source of any specific part]may be unanswerable today because electronics have components from all over the world and each one of those components is made up of [other]components," Ms. Goldfarb said. "It makes no sense to have trade barriers in a world where we have these kinds of globalized supply chains where you can't even tell where things are coming from."
An additional problem is that statistical data do not accurately reflect the intellectual component of manufacturing. The failure to capture this "value added" factor means our trade figures may be woefully inaccurate.
The trade statistics we do record often count the entire value of product - a car, for example - every time it crosses the border, even if only a small bit of value is added at a each assembly location, Ms. Goldfarb said. "We don't collect our trade data on the basis of value added," she said, "so it is very difficult to say in the overall aggregate if we are adding value at particular stages of the supply chain."
Adding intellectual value "is the reality of how companies are operating today," she said. "[But]we've set up our entire statistical system to measure final goods travelling across borders starting in one country and that being the end of the story. That's not really in line with how business operates today."
Canada could look to Germany for a model of how to thrive in the new world of manufacturing. Despite an expensive labour market, Germany has a highly competitive manufacturing sector, consisting of hundreds of mid-sized firms that are strong exporters.
The country's success, according to Bernd Venohr, a professor at the Berlin School of Economics and Law, stems from those firms' obsession with innovation, efficient process design, and the choice of very focused niche markets.
At the same time, Prof. Venohr noted in a presentation last fall to a forum in Vienna, about 90 per cent of the 1,500 German market leaders are in the business-to-business segment. In other words, they are placing themselves at a sweet spot at the mid-point in the global supply chain. Just where Canada needs to be.
A helpful next-door neighbour
It is clear that Canadian manufacturers must plug into the worldwide supply chain if they are to survive and thrive, but this country still has one huge advantage over many other nations: our proximity to the world's largest market.
Having the United States on our doorstep has been - and still is - a huge competitive leg up, said Jonathan Kallner, national industry leader, industrial markets, at KPMG. "From a cost perspective, we're able to get our goods to the U.S. market more efficiently, and as logistics and transportation become a bigger issue in moving these goods around the world, this certainly is a very positive factor for Canadian manufacturers."
Canada is ideally placed as a supply chain intermediary, taking components from around the world, adding value, and then delivering products into the U.S., he said. Canada is also in a good position to add value to items headed from other countries to burgeoning Asian markets.
"The [issue]is how can we add that value, how can we add an element that makes Canada important, while leveraging our location [close]to the U.S. and to Asia."Report Typo/Error
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