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Why Canadian factories are losing out to the U.S.

Old cost advantages are gone and it’s time for innovation


 

Adrian Sainz / AP / CP

When Swedish appliance giant Electrolux announced it was moving production of its high-end stoves and ovens from Quebec to Tennessee, it was a scene that has become painfully familiar in Canadian manufacturing. In an employee gathering less than two weeks before Christmas of 2010, Billy Benson, Electrolux’s North Carolina–based vice-president, told workers that the plant in L’Assomption, outside Montreal, “operates at a cost disadvantage relative to what’s available in other markets.” Production, he said, would be phased out by the end of 2013.

Benson’s announcement was in English, but for the plant’s 1,300 predominantly francophone workforce, the message was clear: The factory, which makes appliances for brands such as Frigidaire, would be shuttered. With it would go the last of Electrolux’s Canadian manufacturing operations, which at one time had included factories in Montreal and Cambridge, Ont.

The news was a blow to the community. Nearly half of Electrolux’s L’Assomption employees were over 40, and roughly 80 per cent had only a high school education. The local economic development agency paid to supply a full-time social worker inside the plant after hearing reports that eight workers had attempted suicide. News of the closure was also met with a sense of bitter irony. The factory had narrowly avoided being shut down decades earlier, when Electrolux decided to close a plant in Tennessee and send those jobs to what was then low-cost Quebec. These days, the fate of Quebec’s manufacturing is coming full circle. Canada is now considered the most expensive place in North America for manufacturers, while a recent study by the Boston Consulting Group found that Tennessee had become “among the least expensive production sites in the industrialized world.”

Manufacturers have been flocking back to the U.S., adding 500,000 new jobs in the past three years, and are expected to add another 1.2 million by the end of the decade. Meanwhile, Canada is continuing to bleed factory positions. Since 2006, it has lost more than 355,000 manufacturing jobs—80,000 in the past year. Canada’s automotive industry has been particularly hard hit, and it’s unlikely to see a resurgence any time soon, says George Magliano, head of North American automotive research for IHS Global Insight. In 2000, Canada produced nearly 17 per cent of the 17.2 million light cars and trucks in North America. By 2020, he says, when production is expected to hit a new record of 18 million cars and trucks, Canada’s share of that will fall to just 10 per cent.

The picture in Quebec, where the manufacturing base is more diversified than in auto-heavy Ontario, is equally dim. Manufacturing’s share of the province’s GDP is expected to fall from close to 24 per cent in 2000 to less than 15 per cent in 2015. Employment has fallen even faster, from close to 20 per cent of Quebec jobs in 2000 to 13 per cent in 2010.

More worrying is that Canada’s high dollar appears to be only part of the problem. Other traditional advantages over the U.S.—lower health care costs, cheap energy and competitive corporate taxes—have been eroded as American states and cities become more aggressive in the race to secure jobs. For manufacturing to survive at all in Canada, firms are having to adapt to a new world order, one in which they compete for highly specialized production, using skilled workers and advanced technology.

Local officials in L’Assomption say news of Electrolux’s closure came as a shock. But it’s now clear the company long had plans to move. It suffered a bitter labour dispute a year earlier with the plant’s union, the International Association of Machinists and Aerospace Workers, and was due for a new round of collective bargaining this year. At least three months earlier, the company had started soliciting bids among several U.S. states and Mexico under the code name “Project Journey,” according to an investigation by the Commercial Appeal, a newspaper based in Memphis, Tenn.

Enter Memphis, struggling with high unemployment and anxious to rebuild its industrial base. Its offer to Electrolux included a brand new $190-million factory paid for almost entirely with public money, generous tax breaks and a non-unionized workforce willing to work for a starting wage of $13.50 an hour compared to a base wage of $19.28 in Quebec. Not only would the municipal government help recruit the 1,200 employees, it would pay to train them at a local community college.

In total, the package was worth as much as $300 million, or nearly $200,000 per worker. That’s more than the Canadian government’s entire $200-million fund for advanced manufacturing in Ontario, announced in this year’s budget. It was also far more generous than anything local authorities in L’Assomption could possibly offer, says Stephane Paré, director of business services with L’Assomption’s economic development agency.

While Electrolux was forced to repay $2 million worth of subsidies to the Quebec government when it announced it would leave the community, its cash from Tennessee came with no strings attached. “We’re seeing all the businesses going back to the States, mainly because the government over there is giving out really good packages for businesses to come back,” says Paré.

Incentives were just one of the factors at play in the company’s move. Electrolux spokesperson Eloise Hale says the company shifted production to Tennessee because it already had a second assembly plant nearby, which helped lower transportation costs among suppliers and to its retail customers, most of whom are in the U.S.

There is a third issue that contributed to the closure of the L’Assomption plant, says Howard Silverman, a site selector who has worked with manufacturers in Quebec, including Electrolux. It’s one that presents a more urgent problem for manufacturers. For decades, Silverman says, local management at the plant had relied on the cheap Canadian dollar to boost its profit margins while letting the factory and its equipment fall into disrepair. By 2010 it had fallen so far behind, he says, it was nearly impossible to compete with a brand new state-of-the-art facility in Memphis. “That plant, five years ago, had bricks falling off the roof,” he says. “It had very qualified people, but old equipment, old everything. So how do you catch up over five or 10 or 15 years of lack of investment? You end up getting closed.”

Even as Canada’s currency advantage began to erode, which has been happening steadily for the past decade, manufacturers stuck to the idea that they could compete solely based on a return to a cheap dollar. “We were in a power play all the time. We had five men on the ice and our competitors had four,” says Louis Duhamel, a partner with Deloitte Canada who has been holding a series of workshops for Quebec manufacturers this year. “Of course we were winning a lot of games. But now we’re playing five against five. It was very hard for manufacturers to envision that. We were too dependent on that.”

Between 2002 and 2009, investment in new machinery at Canadian manufacturers declined by two-thirds, he says, even as the steadily rising Canadian dollar made it cheaper to import new technology. In 2001, Quebec manufacturers spent an average of $1 million a year on R&D. By 2006, that had fallen to $600,000. Manufacturing’s share of total business investment in the province went from 18 per cent in 2000 to just four per cent by 2010.

Duhamel says Canadian manufacturers have begun to recognize that the old cost advantages are gone, likely for good. Manufacturing investment in new equipment and technologies has been steadily rising since 2010. In Quebec, it has jumped by more than 50 per cent in the past three years to $5 billion.

In the future, we’ll most likely see more traditional assembly jobs flee the country for cheaper destinations. But in their place will be new opportunities for Canadian manufacturers to capitalize on our other strengths, such as a highly educated workforce, smaller and more specialized factories and a growing expertise in industrial software and automation. “Yes we lost some jobs, but maybe those are the jobs that we would have lost anyway,” says Duhamel.

To see what the future of Canadian manufacturing might look like, take a drive 90 minutes northwest of L’Assomption to GE Aviation’s factory in Bromont, Que. For more than 30 years, the plant has made blades and other components for the engines of commercial turbo jets such as the Boeing 737 and Airbus A320.

It was historically a foundry where workers heated, stamped and polished metal under gruelling conditions. These days, nearly a third of the production at the plant is done by robots, making the facility the most automated within GE Aviation. Last month, GE CEO Jeffrey Immelt landed his corporate jet at the Bromont airport to cut the ribbon on a new $61.4-million R&D centre for robotics and automation. Technology developed in Bromont will be exported to GE’s more than 80 aerospace facilities across the globe.

The plant is in the process of adding 60 new employees to its 650-person workforce. Most are skilled engineers and technicians who will develop manufacturing robotics to meet the demands of the next generation of jet engines, which must be lighter and more fuel efficient, requiring important changes to the structure of their components. “We’re to the point where it can no longer be manually done,” says Alain Ouellette, the Bromont facility’s director of operations.

The new research facility is looking to develop intelligent robotics systems that will not only perform a single task over and over—what manufacturers call “pick and place”—but will incorporate visual inspection technology to detect problems and then correct them. For instance, a robot could inspect an engine compressor blade for imperfections invisible to the human eye. If it found any, rather than tossing the blade aside, it could generate a diagnosis and then rework and retest the blade until it was flawless.

Despite the shift from humans to robots, Ouellette says the plant has roughly the same number of workers as it did a decade ago, although they now produce 50 per cent more parts. Where once an employee may have sat at a work station and held a metal blade to a rotating polishing wheel, he’s now monitoring the computer that polishes the blade, preparing the next components for production and inspecting the finished product.

In a world where policy-makers call for more manufacturing workers to have degrees in science and engineering, production employees at GE in Bromont are still only required to have a high school diploma.

While the company has hired engineers to design and repair the robots, it is training its existing workforce on how to operate them. Many have been trained to operate more than one robot, Ouellette says, adding to the plant’s productivity. “We’ve never laid off anyone here because of automation,” he says. “If anything, we’ve brought in more work. It makes you more competitive on the market. It brings new investments. It gets the wheel rolling.”

Nor has it been difficult to find skilled workers, he says. Bromont is surrounded by five engineering schools, and employee turnover in Quebec has traditionally been low as workers prefer to stay in their home province. Ouellette wouldn’t disclose how much workers at the facility are paid, but said it’s competitive with salaries in the Quebec aerospace industry.

This type of advanced manufacturing holds the greatest promise for Canadian businesses, says Silverman. While we can’t compete with the U.S. in industries that survive on cheap manual labour, our skilled workers often come at a discount compared with their American counterparts. Students might graduate from top engineering schools in the U.S. with $300,000 in debt and will demand high salaries because of it, he says. In Canada, an engineering student might leave school with $50,000 in student debt and be willing to take a lower salary. “We are very competitive on the high end,” he says. “Our students don’t have the expectations that these people do who are in debt from the day they leave school.”

Canadian plants also tend to be smaller than their U.S. counterparts because of our smaller market. That has given Canadian manufacturers a unique expertise in retooling plants for short production runs, making it easier to compete for more specialized work in niche markets.

Silverman points to Bridgestone’s tire factory in Joliette, Que., which a decade ago faced closure as production was being shipped off to low-cost Indonesia. Instead, it invested in technology to do shorter production runs of specialized tires. It now makes more than 40 different types of tires for cars, trucks and SUVs—up from 19—some costing upwards of $300 apiece. “It’s the salvation of manufacturing in Canada,” Silverman says. “We can’t compete with low-cost countries and low-cost states for a particular type of manpower. We can compete with mid-range and high-end manpower, provided we have the technology.”

That’s what Paré hopes is in store for the future of manufacturing in L’Assomption. The economic development agency is doing a study, to be released early next year, on exactly what kind of manufacturing it would like to attract to fill the void left by Electrolux. But he says it will hopefully involve a variety of smaller manufacturers, each employing 50 to 100 people and engaged in more specialized, high-tech work. “We’re trying to leave the traditional manufacturing behind,” he says.

In the meantime, L’Assomption’s Electrolux plant is still humming. Its closure is now tentatively set for December of next year. A few employees have retired and others have found new jobs. But so far all have been replaced and the plant is actually hiring an additional 50 employees. The Memphis plant has hired close to 400 workers and is still in testing phases. Production there is slated to begin next June.

Paré is not optimistic the community will be able to attract enough jobs to employ all the workers who will eventually be laid off. That will likely mean many of the families who have existed for generations on the promise of well-paying factory work will be forced to leave. Those who stay will almost certainly end up with jobs that pay less than they made before. “For sure the people working in Electrolux will find jobs in the short term,” he says. “But the same advantages? The same salary? Probably not.”


 

Why Canadian factories are losing out to the U.S.

  1. “In total, the package was worth as much as $300 million, or nearly $200,000 per worker.”

    Wow… talk about a race to the bottom, I’d like to see the math on the ROI for that.

    • Sometimes better to cut and accept your loses than to stay and bleed.

  2. ‘roughly 80 per cent had only a high school education’

    ‘These days, nearly a third of the production at the plant is done by robots’

    ‘For manufacturing to survive at all in Canada, firms are having to adapt
    to a new world order, one in which they compete for highly specialized
    production, using skilled workers and advanced technology.’

    Gosh….exactly what I’ve been saying for years

    • But we subsidize education for consumption jobs like lawyers, sexologists, Arts, BA and MBA….

      When we need miners, manufacturing engineers, sciences….now we don’t have the economics nor the skills to pull it off. I left manufacturing in 1995 as I could see why the industry was failing and had no futures in Canada. I used to do the robots, automated manufacturing but got paid pennies more than a union slacker grunt spiking the automation as more union was good.

      So I left manufacturing. Glad I did, the plant closed in 1999 and the other one in 2001. But got my pension out before the write downs. Never looked back. Between management, unions and governemtn un-economics…I don’t invest in Canadian manufacturing to this day.

      Until they become pragmatic, realistic, logical and less greed, and decide they want to do what it takes to succeed, the industry is dead unless it has to be built here on more of governments other peoples money.

      Canada manufacturing is run by the economically insane fantasy types.

      • Dave….you are full of it.

        • Perhaps, but I am not losing money in investing in Canadian manufacturing. Me, I am a pragmatic bottom line type, economics isn’t there then why not do like union Canada does, don’t invest.

          Be it jobs or investing, knowing when to get out is as important as to when to get into it.

          • You aren’t making any money either, so stop pretending.

  3. the poor just need to invent the next facebook.

    • Need to get an education in hard core logical science first. Sexology, Arts, BA, MBA, lawyers, whining and other soft consumption career choices doesn’t cut it.

  4. Tasmin your conclusion makes little sense. Almost all those factories, those facilities being closed, are already owned by foreign interests, mostly American. You seem to suggest that somehow Canadians can and should innovate although they don’t even own the infrastructure. You had better go back to the drawing board or stop with the courses on stupidomics.

    • You have to innovate yes, but you have to also make money or no one will invest. And sorry, the Canadians investment landscape is loaded with failures because the economics simply didn’t exist. Most Canadians stocks don’t pay dividends and if they do, its below real inflation plus taxes for a net value loss after inflation.

      You know Stonachs are laughing, they managed to get taxpayers to bailout GM so they got $1.6 of GM receivables paid. Buddy bailout deal for sure.

      Part of RIMs problem were poor choices of OS, poor choices in economics as their products cost too much, and they didn’t go offshore to cut those costs. Happily milking past successes, with no economical innovation coming, they just milked if for management bonuses. Just blindly screwed up because they ignored reality.

      Government and unions can’t fix the issues, they are the cause of the issues. Just costs too much to do manufacturing in Canada. People need high wages to survive in a after taxed economy of debt, just isn’t economical any more.

  5. Bet union and sloppy management BS pushes the myth of a valueless dollar. Heck, they would lose their jobs if we had the 50 cent dollar as all material costs would be 100% more expensive.

    Reality is money is just a marker, and we would hurt a lot more with lower value currency as governemtn would have to pay twice as much for everything, and that means more taxes and a lower value net income.

    Canada is a tax bloated country, too many non-productive living off of the productive people that just drive up costs, and labour costs too. Can’t compete has we are a tax inflated economy of debt and taxes. Add in that the TSX shows Canada as a negative value economy, why invest?

    While liberal-statism types want to ignore it, we can’t afford our governments without a whopping decline in the standard of living. Collectively, we ignore reality, discard logic but reality of Greece, Iceland, Cyprus is coming and is in Canada right now.

    Say you invest $30.000 last year in manufacturer, probably is worth $27,000 today and pitiful to none existent dividends. Yet the same auto it bought last year might costs $33,000. That is a negative value investing, as if returns can’t keep up with inflation+taxes, it is a negative value investment.

    Its why I have reduced my Cadian investments now for over 2 years, going offshore.

  6. Currency advantage? Who writes this garbage?

    Canadian dollar didn’t go up, the value of the USD went down. Lets get that fixed as not to brainwash people.

    http://www.xe.com/currencycharts/?from=USD&to=CNY&view=10Y

    Yuan is after all now the largest currency float in the world.

    Ottawa could give Canadians a 50 cent dollar to appease the race to the bottom crowd, but hey, want a iPad to go from $750 to $1500? Want tires, gas, electric, et al including food to double in price?

    Fact is this closes plants as the inflation will shut down spending value. People will pay more but get 1/2 as much stuff….no stuff then no jobs, as it is goods that drive jobs, not GDP or currency. Good luck getting a raise too as if your employers are paying twice as much for services and materials, well, no raises for you.

    Currency devaluation causes job losses. Part of why the fall of value of USD made US economy a mess. People with less value consume less thus less jobs. Like a snake eating its own tail, stomach is full until the pain comes.

  7. The World Economic Forum updated its “Competitive Index” recently and Canada was ranked #14 again. Funny how that story was mostly ignored by the Canadian MSM and by the team of economist at Macleans.

    While Canada ranked well on measures such as worker mobility and education level, the most telling and embarrassing measure was innovation — Canada was ranked #24.

    It has been my experience that Canadian companies are rather reluctant to spend any money on technology or training which might improve the productivity of their employees if there is a risk that it won’t or if there is a risk that those same employees will be poached or leave for greener pastures.

    The easiest thing to do is wait and see what happens. And that is what Canada does best.

  8. What about anti-dumping laws? Will Electrolux & its brands be permitted to import product into Canada? I once worked for a branch plant in Nova Scotia, and any government funding was a possible kiss of death to exporting into the USA.

  9. are you kidding?,
    ALL of Canada knows that the root of all these manufacturing woes is the 4-letter word: “NAFTA” <- thanks for nuthin' Mr. Mul"Loonie" :(

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