2018 SHOP TALK
Jop shops in Canada discuss challenges and successes
Almost anyone you ask will tell you that uncertainty is the keynote these days in the realms of Canadian politics and economics. And yet when you lift the hood on the nation’s economic engine, things seem to be turning over pretty nicely. Despite the uncertainties and unknowns, there’s a generally optimistic outlook for Canadian manufacturing.
RBC figures for November 2017 show that Canadian manufacturing sales posted the fastest one-month gain since the beginning of 2015, rising 3.4 per cent. Even when that figure is adjusted for the role price increases played in the jump, sales were still up 2.5 per cent. The automotive sector did especially well, up 14.7 per cent. While machinery sales volumes fell for the second straight month, they were still up 14 per cent year-over-year.
“Looking back over the last year, the manufacturing sector has in many ways far surpassed our expectations,” says Jean-Francois Perrault, senior vice president and chief economist, Scotiabank. “The indicators we look at are for the most part pointing significantly up, whether that’s orders for manufactured goods, shipments of manufactured goods, employment in the manufacturing sector.”
A lot of this strength is being driven by export demand from the US and other global markets, but domestic demand in Canada is also strong, reflecting the general health of the Canadian economy, Perrault says.
“Our economy is running at capacity, which means that to expand production, firms have to invest. Part of that investment is obviously in manufactured products and capital goods. Broadly speaking, investment in Canada has picked up much more significantly than we had thought.”
Despite uncertainty over NAFTA [re]negotiations, Perrault joins many other industry observers in saying the pact has been good for all three nations.
“The North American auto industry is the only industry that has gained market share globally in the last two to three years relative to others. That speaks to an industry that is competitive and expanding from a global perspective – which to our mind is intimately linked to the competitive advantages that flow from NAFTA. NAFTA has been very positive for the economy as a whole, and for large segments of the manufacturing sector as well.”
Perrault believes that one of two things will happen with NAFTA; either there will be a satisfactory outcome eventually or, as he puts it, “we end up in a world where NAFTA negotiations drag on and the decisions hang for a significant period of time.” Ultimately, however, he doesn’t believe NAFTA will be scrapped.
Perrault does believe the persistent uncertainty around NAFTA is affecting how firms do their planning, and that this is a drag on growth. “Other factors are propelling investment forward–the strength of Canadian growth, the strength of global growth–but NAFTA is, at the margin, making things a little bit weaker than they otherwise would be. There’s no question about that.”
It’s a mix of factors, and no wonder it evokes sometimes paradoxical sentiments. For Stephen Rebello, operations manager for Rolark (Concord, ON), the phrase “patiently optimistic” sums up his outlook.
“We wax and wane as the economy does,” Rebello says. “With the uncertainty now, whether it’s about what’s happening with NAFTA or with where the price of metal is going next– because it’s been significantly depressed for a long time–that becomes the new normal. We’re just trying to be cost-effective and provide good value for money. That’s how we’ll be in it for the long run. We’ve been through a couple of these cycles.”
Rolark has a location in Montreal and one in Edmonton, in addition to the Ontario facility, but it’s the situation in Ontario that takes up a lot of Rebello’s attention, with the provincial government’s raise to the minimum wage and other labour law reforms. It has put Rolark into what Rebello calls “hunker-down” mode: waiting and adapting as best it can.
“It’s a challenging environment in Ontario for small businesses in terms of the new rules. I think in principle they are moving things in the right direction, but at the same time they put pressure on small business that has to be worked with. And it’s all happening right now: the challenging economics along with the new, challenging rules. It puts added pressure to manage your business properly.”
But Rebello backs up Perrault’s observation about investment going forward. About a year ago Rolark bought a new Trumpf TruLaser 5060 laser cutting machine. “It can handle up to 80 inches wide and 240 long,” Rebello says. “We see the industry going to that larger stuff and our customers have started demanding more in that range. It cuts fast and has tighter tolerances, which is again what the market is demanding.”
Rolark also added to its payroll around the same time, and recently invested in expanding its truck fleet to expand its reach and carrying capacity.
It all suggests an optimistic take on where things could go. That optimism probably stems from Rolark’s experience with past economic cycles, when it paid to be prepared for when things turned up.
Uncertainty also looms large for Jeff Litster, president of Fidelity Machine and Mould Solutions (Calgary, AB), an engineering-oriented machining and mould making company.
“The big elephant in the room right now is NAFTA,” Litster says. “It’s a punch we’re all going to have to roll with–on both sides of the border–if things go the way they could go. But I think it’s early to know how it’ll play out. That’s the big unknown.”
But like Rolark, Fidelity has experienced the rebound that comes as the economy exits a downturn, and he too knows it pays to be ready. The company is experiencing one right now, as the Alberta economy recovers from the oil price shock of 2014-2015. It helps that Fidelity specializes in more difficult, complex jobs that other shops can’t or won’t take on–and that have longer, more research-intensive project cycles that require customers to think past current conditions, whether they’re good or bad.
“The wave of work on the other side of the downturn has already hit us, and it’s hit us hard,” Litster says. “We’ve never been in a situation like this. We’re turning away POs from really good customers because we’re so busy–and often they don’t have anyone else to send it to, so they send the PO anyway and tell us to do the best we can.”
Growth is good right now. Litster says Fidelity will add 9000 sq ft of space in the next couple of months. “Some of the tools we work on take four or five months to build, so people are ordering them in advance, they’re planning ahead, they’re forecasting, and a lot of customers share those forecasts with us. So we typically see trends probably three to four months earlier than other people.”
Pazmac Enterprises in Langley, BC has also found it pays to defend a unique niche. President and general manager Tim Walls describes Pazmac as a turnkey manufacturer for OEMs–despite appearances to the contrary.
“We may look like a job shop when you walk through the door, but instead of hundreds of customers we have 40 or 50,” he says. “We pride ourselves on running after products that a lot of other people don’t.”
Walls says Pazmac is “deeply embedded” with its customers, almost all of whom take advantage of the company’s design for manufacture (DFM) services and get Pazmac involved with their own engineering teams early in product development.
After focusing on the energy sector for decades, about five years ago Pazmac began to diversify its customer base to insulate itself from the volatility of the energy sector. While energy clients still make up a large proportion of business, Pazmac now also works for customers in the industrial, aerospace, military, robotics and semiconductor markets.
For Walls, the main challenge is the pace of technological change. “When you’re buying a piece of equipment that costs $1 to $1.5 million, and it depreciates so rapidly as soon as it rolls through the door, how do you stay current? What was standard five years ago is now completely redundant. You may not get the full recoup on your investment before you have to take it out of circulation.”
Federal support for technological innovation hasn’t been much of a factor even for an innovative company like Pazmac, Walls says, because a lot of the work isn’t so much leading edge as it is incremental development of current technology. Politics tends to foster a “breakthrough” mentality that favours unique, newsworthy developments and overlooks the grunt-work kind of innovation that gets new and emerging technologies refined and improved in small steps.
It doesn’t help, Walls says, that competitors south of the border are given a lot more support for innovation, regardless of how high-profile their work may be.
“It’s tough to compete. Canada should look more closely at which industries it’s trying to cater to, and not make it all about the fuel cell industry or new energy,” says Walls, who himself spent many years in the fuel cell industry. “There’s a lot of great taxpaying jobs and companies that are working with high tech, and yet they aren’t considered ‘new and innovative’ – they’re just doing the latest iteration of new technology.”
For Stephen Rebello, government policy, and in particular regulatory reform, needs to be formulated in cooperation with the small and midsized business that stand to be most heavily affected.
“Some of these measures may generate added tax revenues for government, but they don’t necessarily take into account some of the economic conditions that small businesses and medium businesses face, and how they’re actually going to work through those changes.
“At the end of the day, there needs to be more of a partnership approach, to make sure the rollout is on timelines that make sense. And maybe give us some assistance to help us adapt.” SMT