CANADA'S LEADING INFORMATION SOURCE FOR THE METALWORKING INDUSTRY

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CANADA'S LEADING INFORMATION SOURCE FOR THE METALWORKING INDUSTRY

CANADA'S LEADING INFORMATION SOURCE FOR THE METALWORKING INDUSTRY

Outlook 2024

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How can you best prepare your company for the uncertainties we face as we head into 2024? Metal manufacturing’s most influential leaders outline the challenges and opportunities for the year ahead.

SHOP: What are you expecting in terms of business conditions in 2024?

ARCAND: I think 2024 will be a lot like 2023 with a continued slowdown in growth. I characterize 2023 as resilient. Most economists, including me, were predicting a recession for this year and obviously that hasn’t materialized. The ideal scenario of a soft landing appears to be working out so far, but I would caution we could still see a recession next year. The reason growth will be slower next year is because you are still going to see the lagging effect of the interest rate increases we’ve seen the last couple of years. Those take a long time to work their way through the economy and I think we haven’t seen all the consequences yet. That’s even if the central bank starts cutting rates next year, perhaps by the middle of the year as core inflation gets closer to 2%. Those cuts will take time to work their way through the economy. Many economic indicators show the economy is still doing okay, although things are slowing down. The labour market is still tight, the economy is still growing, slowly but still growing. If those things don’t start showing weakness and inflation doesn’t come down, then I think the central bank will continue to raise rates. Everyone has been happy to see headline inflation come down quickly, but the core numbers have been coming down at a glacial pace and that’s what the Bank of Canada is really focused on. Headline inflation is affected by gas pricing which is very volatile. 

One of the negative consequences of higher interest rates is that it makes it more difficult for firms to invest because they’re facing higher interest rates. To what extent it’s affecting investment, I don’t know. If you look at purchasing data, manufacturers remain fairly upbeat about the future outlook so that could offset some of the pain of higher interest rates and persuade manufacturers to continue to invest. On the green economy front you are also seeing government providing more support for those kinds of investments so there is a pickup in investments in clean technology in Canada. 

HERGOTT: It’s tough to say. Things are so up in the air. The end of the last quarter really dropped off for us. We had expected a lot of new projects coming our way and now we found out they’re all going to China. The prices coming out of China aren’t sustainable for us being competitive. It is just absolutely absurd. I can give you an example. I have a die that is a $150,000 tool and (China is offering it) for $40,000. The steel cost alone in Canada for that would cost me $30,000. That’s not even machining it. They are starving for work in China right now and they’re dropping their prices like you’ve never seen. And the big OEMs are taking advantage of that. The sooner the government wakes up and realizes we have to control things coming in from China for our manufacturing sector, the better off we will be. The longer they leave it, the worse it will be. Place tariffs on anything coming in from China. There is a lot of stuff that is not going to stay here otherwise. So to project 2024, I couldn’t even begin. With the numbers I am seeing coming out of China, it’s absolutely atrocious. We are talking about rebuilding manufacturing, and we are very good at it, but you can’t compete with a monster like that, and everyone is going to go to the cheapest price. That’s my primary concern. 

My secondary concern is that electric vehicles aren’t coming out at the rate that gas vehicles would so there seems to be a slowdown coming there as well.

KLOTZ: Right now, some manufacturers are doing really well, and some are slow. It’s the same with suppliers to the industry, some are busy and some are soft. It’s a mixed bag and going into 2024 I see it being similar. We have a partnership with ITR Economics, and they see a slight recession coming. Not like the deep recession we saw in 2008, but still a small recession. I think the higher interest rates are really starting to have an effect on people that are considering borrowing to finance an expansion or a capital equipment purchase. The office real estate market is also going to be hit hard by interest rates in the next six months. And the U.S. election coming up next year adds to the uncertainty. I think a small recession is going to happen and so I think 2024 is going be slower than 2023 or about the same. We will be in a holding pattern, and I don’t think there will be a lot of big purchases made. Also, what happens with UAW labour negotiations could affect things into 2024. We have a lot of members who supply the auto industry, and a strike could really hurt Tier 1 to Tier 4 suppliers. Since COVID the demand for automobiles has been there but the volumes aren’t yet back to where we were in 2019 and this would be another setback. From what I am hearing there is a good chance Stellantis goes on strike and the others may follow, maybe not at the same time, but in a staggered approach. 

THIARA: There has been a steady decrease of work for moldmakers this year. The moldmaking industry has been contracting consistently for almost four months straight now and I think that’s attributed to a number of factors, both internal and external. I think the top factor right now for the manufacturing sector is the high cost of borrowing alongside the shortage of workers. 

CERON: The biggest roadblock I hear from industry right now is the fear of a lack of workers and the skills gap. Everyone is a little bit afraid of recession because of cuts but right now most companies don’t have enough employees to even meet the demand that they have. So, if we don’t go into recession and things do ramp up, that’s almost worse if you don’t have the workforce in place. We are seeing lots of money being invested into training programs, into upskilling, and making sure there are enough employable workers even during a recessionary period, so as to plan for a post recession uptick.

HASROUNY: This year has been very quiet for equipment sales up until recently. Even before the end of last year sales were starting to cool off and the first six months of this year it was like a drought. I believe most equipment distributors were struggling with sales. Everybody was busy quoting and there was interest from customers but the fact that getting financing was more difficult, the prices of equipment were still high, and you had to pay extra on the interest rate, stalled a lot of the momentum that was created for new equipment sales after COVID. But for the past two months things have started to swing the other way. Shops are finding themselves in situations where they have no choice anymore and they have to pull the trigger on orders. They have commitments they need to meet. I think as suppliers we have also become more creative. A lot of us are finding ourselves partnering with financing companies to help us secure financing at better rates for our customers. We have to take more risks in order to help some of our customers reach their goals.

SHOP: Economics aside, manufacturing has faced a host of issues in 2023. Heading into 2024 how would you describe the state of the industry? 

THIARA: We are on a positive trajectory, despite the recent slowdown. Canada is home to some of the leading mold makers globally.  Moldmaking is a critical component of the overall industry’s supply chain, and as such there will continue to be a need for our trade. Plastic consumption is in virtually every facet of our daily lives, and as the global population grows so will the consumption of plastic products.  There needs to be stronger voices showcasing the positive innovations that are taking place within the plastics community from research for bio-degradeable resins, to energy efficient machinery to the ownership of corporate responsibility.   There is, and will continue to be, an issue with skilled trades that is directly impacting our industry. The reaction to solving this issue is slower than the need demands. So it will continue to be a problem that will get to a critical stage, if it’s not addressed. 

CERON: The industry is in a very strong growth position. The supply chain issues coming out of COVID exposed a very obvious lack of in-country manufacturing and that brought back a lot of entrepreneurship with new companies looking to fill the gaps that the supply chain issues exposed. That I think bodes well for Canada. We have such a strong supply of resources and such a strong education base for our trades that we really shouldn’t be outsourcing as much as we have been. We should be finding better, more lean, more economically feasible ways to create all our end user products here. It is a bit of a learning curve taking on things that we had gotten used to outsourcing but in the long run creating more in-country products is going to help our manufacturing.

I think we are on the horizon of everything coming together under the auspices of automation and innovation. When we look at education in welding, for so long it was you’re going to go to school, do your three years of apprenticeship and you’re going to be on the shop floor and over time you’re going to climb (the company ladder). But now we’ve opened up the door to what welding and the trades are and to be able to say you can be an engineer in welding, you can have a doctorate in welding, you can be a part of this industry that has such a bright future, and you don’t have to be pigeonholed into a specific role. Whatever dream you have there is a parallel career to that in the welding field. This piece which has been missing for so long is what’s going to bring it together because you’re going to have people coming in to support the trades on the floor but you are also going to have people coming in from the universities to support the robotics, and the lean management, and value stream mapping, and all these things that had previously been reserved for other industries but are here now. They’re part of the manufacturing process and necessary if we are going to compete against the offshore companies. To be on par with them we really need to embrace the idea that we need everyone on base and every tier filled from the highly technological to the highly skilled on the shop floor. We have great colleges now that are really pushing the weld technicians, the weld engineers, and lasers and robotics. We are being leaders in these areas.

HASROUNY:  Shops aren’t sure what to expect for 2024. Look at Windsor for example. It was bad for a year, with things really slowing down in the automotive industry and EVs still not in full swing. New programs were not being released. But we can see now that Windsor has movement over the last two months. Usually, July and August are slower months but now it’s very busy, projects are on the table and they’re moving forward. It’s a good sign.

KLOTZ: I think even though it may be a slow year for the economy, you will still see investment in automation. The workforce may open up a bit more, but manufacturers know they have to invest in automation to stay competitive with other countries. Investment in equipment, however, will be slower because of interest rates, as mentioned. There might be investment on a smaller scale instead of multi-million-dollar equipment investments. Some manufacturers will be reluctant to go after new business, preferring to hold on tight to the business they already have. Companies entering their third or fourth generation of ownership may also be facing uncertainty and may want to hold back on their investments for a while.

ARCAND: I would use the term resilient, just like the overall economy. GDP growth in manufacturing for 2023 has just been modest but that’s better than what we were initially expecting. For 2024 there are forecasts that it would pick up to maybe 1.3% growth. I will reevaluate when I do my next forecast, but I don’t think it will be much different than that. One of the main reasons that manufacturing output in Canada has been resilient has to do with the auto sector, which struggled to produce cars during the pandemic due to the global semiconductor shortage, creating pent up demand. The semiconductor shortage is easing, enabling automotive manufacturers to increase production throughout the year. This has kept the automotive sector stronger than what it normally would have been during such a high interest rate environment. The aerospace industry also saw growth this year. It was one of the hardest hit sectors during the pandemic and it’s still recovering.

HERGOTT: I think we are well poised to take on manufacturing and to produce. We are in a rebuild stage just because we don’t have the employees we need. For our company, I could hire six machinists tomorrow. I am bringing people in from the Philippines and other countries. But everyone has the same problem. I was out for dinner and the restaurant manager came over and apologized because the restaurant was full and he only had two waitresses. We just need to work around the current situation. Automation takes a process and gets it to a point where you can modify it to gain efficiency and productivity. But if you are doing one-off custom business, how do you automate something that you are only going to make once? There are facets of automation that can help, and we are working on that, but it’s not an all-in answer for custom tooling. Automation can only take you so far. You can automate maybe some of the machining components, but you can’t automate the fitting, the development, the testing. My customers are so short on tool makers right now that we are having to go into their plants and do everything ourselves for them. CTMA is still focused on getting kids into the trades and doing very well at it. Getting back into the high schools is one of the best things that anyone has done in a long time in this industry. Manufacturing is alive but we must do some things to make sure it stays that way. 

SHOP: What is the most important issue that still needs to be addressed?

HERGOTT: Getting and keeping skilled trades in Canada. We do that through the correct immigration. Not engineers but machinists, tool makers, programmers. We don’t need any more engineers. 

THIARA: The skilled employee shortage is top of mind for many mold shops  I visit. The advanced age of the average worker is very evident and there isn’t the influx of newcomers into the trade to offset the exodus that is taking place and will continue to take place. There are activities that are happening, but I don’t see things occurring at the speed with which the problem requires to resolve the issue. There needs to be structured activity taking place with regards to attracting talent into the trade of mold making. Upskilling existing workers and making the overall trade attractive and a desirable career choice.  Yes, there are some courses that exist at a handful of colleges and universities, but not to the scale that is required.  Canada is a hotspot of international students, which could potentially represent the next generation of tradespeople.  Unfortunately, I don’t feel we are doing a good enough job of attracting and exposing these prospects in our direction.  What needs to happen to ensure that these newcomers are aware of the opportunities that exist within the Canadian manufacturing sector?  

HASROUNY:  I think Canada suffers from being an expensive manufacturing hub. Look at industrial rents and how they have increased since COVID. When you have to maintain a shop that now is costing you 25-30% more just to maintain the property, that’s a big cost. There is a shortage of skilled labour and everybody is taking operators from the competition and paying them more. Add to that the increased cost of borrowing, higher equipment prices, higher materials prices, increased transport costs. Compounded this is causing a lot of pressure. As we bring more immigrants in, the cost of living won’t be going down. It will be going up and so will the cost of manufacturing. We need to become more specialized in manufacturing. We need to get into higher technologies. As long as we stay in high tech manufacturing, we will survive. We need to make sure shops can reduce their overhead costs and be competitive.

ARCAND: I think labour shortages remain a key issue for manufacturing. If you look at a lot of the indicators for manufacturing, they’ve all been sluggish except for manufacturing employment. Manufacturing employment in Canada right now is at its highest level since December 2008. Job vacancies in manufacturing are down by a third but they were still around 60,000 in May. As of July, year-over-year wage growth in manufacturing was 7.6% whereas the historical average is just about 2.5%, which shows you how shortages are causing manufacturers to raise wages. This is something that will continue to impact manufacturing in 2024. A lot of it is demographics related. The manufacturing workforce is older than the average workforce and you are looking at a lot of retirements still coming over the next few years. 

KLOTZ: Here in the United States, it’s the issue of R&D expensing. It’s a big issue we are fighting in DC right now. The law put in place a couple of years ago requires amortization of expenses and we want that to go away. It’s going to cause companies not to want to invest in R&D as much. The people in DC who understand manufacturing understand this needs to be reversed, so that companies can fully expense their R&D activities and not have to pay the added tax.

SHOP: What’s your advice to our readers as they prepare for 2024?

CERON: Look for collaboration. Look for the companies around you whose expertise you can leverage to take on bigger projects and technologies. Keep your ear to the ground for opportunities to improve the way you do business and interact with your customers, staff, and suppliers. The steps to advancement are not as big and scary as we used to think. Think small steps and keep moving forward and you will be fine. And use your associations and resources to stay up to speed on the pulse of what’s happening. 

HASROUNY:  Think big. Don’t be small minded. Don’t think that whatever worked for you the last 30 years is going to continue working for you for the next 10 years. You have to think in a way that is all focused on efficiency, better technology, automation. Our saving grace will be in becoming a country where job shops are high tech and it becomes a no brainer to want to manufacture here. You go to some shops in Windsor, and they are state of the art. Once you are established as a high-tech shop, you’re flying. If you continue having a small-minded mentality, you may survive for a while but not long term. As suppliers we also have to think big and be proactive in things we bring to the table for our customers.

HERGOTT: Build your team and pay off your debt because I think there is a slowdown coming. No one can forecast what the switch to electric vehicles is going to bring. You build all the tooling and if the sales aren’t there and you’re not running, then what? If those volumes slow down, is the government going to put in more incentives to buy these vehicles? In the meantime, there is still a lot of investment going on in manufacturing, which tells me it’s still very much alive. But we need to do some things in the near future to make sure it stays that way and that means the big OEMs government is giving all the incentives to are keeping the tooling and manufacturing in Canada. In the meantime, keep plugging away and moving forward. That’s all you can do. 

THIARA: Keep your focus on what you do best and perhaps look at what funding is available to your company that can assist you with implementing new and innovative processes and equipment.   Now more than ever, is the time to be innovative and a solution provider.  Canada wants its export market to grow and is there to support your growth, you just need to tap into the help.  Remember that your associations are there for you to lean on for support and guidance.    

It’s also important to remember the industry has had its ups and downs but we always manage to come out the other end. We have the resources and the know how to persevere and today’s challenges will pass and will make us stronger.

ARCAND: Prepare for continued economic challenges from the massive interest increases of the last couple of years. But there is light at the end of this tunnel. Rates will start coming down at some point next year. There is also a huge push in North America to near shore or friend shore manufacturing. Whether we are successful with that remains to be determined but having an industrial policy is back in vogue. There is a renewed interest in making sure we can make things that we need in this country. There are also considerations about de-risking our relationship with China so we are looking to make our supply chains more resilient, which will also lead to more investment in Canada and North America. So there will be opportunities to grow business. 

KLOTZ: It’s still an employee market out there. They can easily find work elsewhere. So make sure you have a strong culture in your organization. The organizations with great culture have a sense of pride from the office all the way to the shop floor. Companies with great culture are set up for success and those without it will need to make sure they correct that within their organizations. SMT

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