business outlook: 2012 - canadian manufacturing

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2 BUSINESS OUTLOOK: 2012

The last three years have not been easy for Canadian manufacturers. They’ve taken some hard knocks from waves of the perfect storm, whipped up by the high value of the dollar, chronic skills shortages, aggressive offshore competition, depressed markets, a disabled US economy, recurring rounds of Buy Americanism and potential global apocalypse.

And yet, when they were asked about their prospects for 2012 and beyond, for the third consecutive year they expressed confidence and optimism. Indeed, PLANT’s Business Outlook 2012 survey found manufacturers loosening the purse strings and investing in their plants.

The survey, conducted in partnership with global consulting firm and sponsor Grant Thornton LLP, questioned 367 senior manufacturing executives from across Canada on their investment intentions and their overall mood going into the next three years. As in previous surveys, most of them (71%) are small and medium enterprises (SMEs), 87% are privately owned, 62% are family owned and just 14% are subsidiaries of multinational companies. Annual revenues for the entire group will average $62.3 million this year and an estimated $70.1 million next year.

Looking at their prospects for 2012, 83% are confident about their forecasting but as in previous surveys, they’re less so about the three-year outlook (55%). They cite cost control as the biggest challenge for the year ahead followed by generating more business, but productivity, staffing, innovation, quality and meeting demand are growing concerns. They are not oblivious to the convulsions in the global economy. Forty per cent of them see it as a major concern but their anxiety trails off looking three years ahead.

Most manufacturers (just less than two thirds) expect orders and sales dollar values to increase next year, while 31% are looking at price increases and 41% are calling for higher profits.

Most of their revenue comes from Canada, followed by the US, which appears to be trending down in small increments. Competition continues to be perceived as the main barrier to growth outside of the North American market and an increasing proportion of the companies report a lack of demand as a constraint to international development.

An increasing percentage report they’ll be hiring and adding lines of business, entering new markets and expanding their plants, and on average they’re investing close to $1.4 million, almost 10% more than last year. Machinery and equipment top the shopping list followed by training, technology and R&D. While equipment is the top priority, R&D ranks in the top for about 20% of the companies.

They’re making the most of their machinery and equipment investments in North America, but when they go abroad Germany is the supplier country of choice.

Ninety-six per cent of the companies tie investments to internal productivity improvements rather than outsourcing and future investments look more to technology. More are training employees to improve productivity and 40% are applying lean manufacturing, but this represents a 7% decline from last year’s survey.

There’s an increase in anticipated spending on R&D and commercialization of new products for 2012, but it appears to be less than last year’s forecast.

Forty-four per cent of companies operate with a formal risk management plan in place, an increase from 2009 (35%) and 2010 (41%), but that also means 56% have no formal plan.

This year’s survey results (with a margin of error of +/-4.3%, 18 times out of 20) reveal some areas that could use some improvement, but overall these manufacturers are an active, entrepreneurial group who are aware of the challenges they must address. They’re taking action and preparing for the future when economic conditions improve and their optimism pays off.

Joe TerrettEditor, Canadian PLANT

Executive summary

2011© Canadian PLANT

OUTLOOK: 2012 3

With 2012 almost upon us, there’s no better time to take a moment and reflect upon the year’s events - as true for businesses as it is for individual Canadians. That’s why we’re proud to once again be able to provide manufacturers in the country with an outlet to share their insights on the year that has passed, and give voice to their outlook and

objectives for the year to come. And Canadian PLANT’s Business Outlook Survey for 2012 has, yet again, provided such an opportunity.

Full-fledged optimism was the name of the game for Canadian manufacturers at the outset of last year, and despite the economic challenges faced by many countries in 2011, that attitude remains on track for 2012 - albeit with a bit more caution when compared to last year. Many are waiting to see what comes of the events currently taking place in Europe, and are keeping a close eye on the cash they have on hand. But despite the concern that Canadian manufacturers and exporters may have about the global economy, it appears that it is not hindering plans for growth in the year ahead.

With the Canadian dollar seemingly stabilized and continuing to ride high, many in the sector are planning to take advantage by investing in machinery and equipment, which promises to help foster Canadian innovation and increase the demand for skilled labour. It goes without saying that the expected impact on the Canadian economy from these trends alone should be a positive one.

Similar to last year, the results point to a sustained interest in expansion, specifically in new lines of business and products, as well as into new markets. In fact, interest in the latter appears to be gaining momentum as manufacturers see the opportunities for growth in other economies. There seems to be particular interest in expanding into countries whose governments offer incentives for businesses wishing to invest, as well as those with an already skilled labour force and a well-developed infrastructure in place. Desire to expand into new territories aside, there is also a healthy percentage of manufacturers surveyed this year who are confident they will see an increase in sales, and are planning to invest in new staff and training accordingly.

Despite the various causes for optimism, the news, unfortunately, isn’t wholly positive. Many of those surveyed are concerned about the effects that an uncertain global economy will have on their

bottom line. Risk management, government-funded research and development assistance, building and maintaining positive relations with banks and other sources of financing -

these are just a few more of the areas of concern for businesses in the coming year.But in spite of these concerns, Canadian manufacturers, on the whole, appear

to be energized about the year to come. Even in 2009, when the economy was at its worst, there were still opportunities to be had. And that’s just as true today; you just need to know where to find them. At Grant Thornton LLP, we believe that the future is bright too. With extensive experience in the manufacturing and distribution industry providing risk management, productivity improvement and corporate finance services - and everything in between - we welcome the opportunity to discuss how we can help your business seize the opportunities just waiting to be found.

Jim Menzies, CANational LeaderManufacturing and DistributionGrant Thornton LLP

Sponsor’s message


SMEs are loosening the purse strings with an eye on future business growth

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in

OUTLOOK: 2012 5

Participants in PLANT’s Business Outlook 2012 roundtable discussion (L-R): Terry McGowan, Thordon Bearings; Dave McPhail, Memex Automation; Ovidiu Demain, Dejero and SME-Toronto; Rosanna Lamanno, Grant Thornton; Jim Menzies, Grant Thornton; Fabiola Garcia, Grant Thornton; Lars Schwenteck, Blanco Canada; Brent Patton, AirCell; Jim McCoubrey, Troy Sprinkler; and Al Diggins, Excellence in Manufacturing Consortium. PHOTOS: STEPHEN UHRANEY

By Joe Terrett, Editor

The ups and downs of the global economy are enough to make manufacturers dizzy: the European Union is teetering on the brink of a euro disaster, floods and tsunamis have played havoc with supply chains, the US is embroiled in debt turmoil and is overcome by economic

lethargy, the loonie is floating close to parity with the US greenback and eroding export values, we’re entertaining another round of Buy American protectionism, and all of this is on top of the everyday challenges posed by escalating input costs, skilled labour shortages and aggressive global competitors eating our lunch and seemingly taking the box it comes in.


Floating above all this chaos like hawks looking for something on which to dine are Canadian entrepreneurs making investments today that will put them in a position to make a hearty meal of the opportunities that will present themselves when the dust settles. Indeed, PLANT’s Business Outlook 2012 survey finds they are feeling pretty good about the next three years, which was the subject of a roundtable discussion hosted by PLANT in early November featuring eight

panelists from Canada’s manufacturing sector.

The survey, conducted in partnership with sponsor Grant Thornton, a global consulting firm, polled 367 senior manufacturing executives from across Canada. Most (71%) are small and medium enterprises (SMEs), 87% of them privately owned, and 62% of those firms are family owned. Just 14% identified themselves as subsidiaries of a multinational company. Annual revenues for the entire group will “ I have a client that’s got

six locations in Poland and one of the main reasons for going there is some of the tax-free zones that they have…” — Jim Menzies

“We’re just establishing a new relationship with our bank. Our product is looked at as a fit with the bank’s knowledge-based industries group…” — Dave McPhail

BUSINESS CHALLENGES

Next year 3 years

2010 2011 2010 2011

Increasing sales/orders 41% 40% 33% 32%

Controlling/reducing costs 41% 46% 34% 32%

Economy – general 37% 40% 28% 29%

Being competitive 36% 36% 33% 32%

Improving productivity 32% 37% 29% 29%

Marketing and sales 30% 32% 24% 27%

Maintaining sales/orders/staying in business 29% 29% 24% 22%

Canadian dollar increase 28% 26% 20% 19%

Financing/cash flow/accounts receivable 27% 24% 14% 16%

Gain market share 25% 24% 28% 27%

Staffing - training/finding skilled workers 23% 31% 30% 31%

Business development/expansion 23% 21% 35% 30%

Decreasing revenue/sales 22% 20% 11% 14%

New product innovation/new technology 20% 25% 30% 31%

Growth/managing growth 19% 20% 29% 21%

Securing jobs and workers 19% 23% 18% 22%

Quality 18% 24% 12% 16%

Maintaining/meeting product demands 18% 23% 15% 17%

Overseas competition 17% 16% 22% 22%

None/no answer 8% 7% 11% 8%

NOTE: Items less than 2% not shown

OUTLOOK: 2012 7

ROUNDTABLE PANELISTSOvidiu Demain

Video technology for live broadcast over celluar networks.

Al DigginsP

Not-for-profit organization of manufacturers that facilitates the global competitiveness of its members.

Jim McCoubrey

Fire alarm, suppression and detection systems

Terry McGowan,

Manufactures ship bearings for the marine industry.

David McPhail

Provides factory floor data communications and efficiency systems.

Jim MenziesNational leaderManufacturing and DistributionGrant Thornton LLPToronto, Ont.Global consulting company and Business Outlook sponsor.

Brent Patton,

Manufacturers of air compressors and systems.

Lars Schwenteck,

A manufacturer of quality kitchen fixtures.


average $62.3 million this year and are forecasted to reach $70.1 million next year.

Business confidenceMost (58%) of these confident, but cautious manufacturers expect orders to increase, and 59% are looking at sales dollar values rising next year, while 31% anticipate raising prices and 41% are banking on higher profits.

Eighty-three per cent are most confident about their 2012 forecasts, but become less so in three years (55%) and five years out (38%) – a similar outcome to the views expressed in last year’s survey.

PLANT’s survey isn’t the only one showing a certain feistiness among companies, despite the economic uncertainties. A PwC study, which polled leaders from a variety of industries, shows a general business confidence level at its highest since 2005. Eighty-two per cent of the respondents are striving for growth compared to 66% last year.

Of course, there are challenges and what keeps 46% of those who responded to the PLANT survey up at night is controlling costs next year, although the number drops to 32% when they look ahead three years. Increasing sales and revenue in 2012 is a challenge for 40% of them, but in three years fewer (32%) see it as a concern. The

By Matt Powell

Japan’s devastating tsunami in March crippled one of the world’s strongest economies, which is only just showing signs of resurgence. More recently, flooding in Thailand has ravaged global automotive and electronic suppliers,

creating part shortages and logistics nightmares.There are all kinds of business risks, many of them you can

anticipate. And then there are the chaotic natural events that have devastated Japan and Thailand. Are Canadian companies prepared? About half of the respondents to PLANT’s Business Outlook 2012 survey are not.

“This suggests that half of these companies don’t have risk management processes in place, which to me is staggering. Although there are some risks that you can’t do much to control, such as floods and earthquakes, you can control or mitigate most risks,” says Jim Menzies national leader, manufacturing and distribution with Grant Thornton.

While this year’s survey actually found this year’s respondents are a little more risk averse (44% compared to 41% last year have risk plans in place), there is also an increase in the number who do not (up 3% to 34%).

Still, those who have risk mitigating processes in place may be focused on the wrong factors. Like last year, most of them (73%) are banking on maintaining quality to cover their risks.

And of the respondents that have processes in place, 73% of them say maintaining quality is the most important way to mitigate risk. Forty-one percent set up contingency plans and 31% have a formal plan in place.

Quality may be a solid competitive advantage, but doesn’t count for much if your plant grinds to a halt because of a parts shortage when your key suppliers’ plants are under water or blown away.

“Western Digital can’t supply hard drives for another four months because of the flooding in Thailand,” says David McPhail, president and CEO of Memex Automation. “Imagine your whole business depending on Western Digital hard drives.”

General Motors Corp. had to idle a shift at a Florida truck plant because it sourced a paint pigment from Japan and was unable to build black cars. Toyota shuttered its Cambridge, Ont. plant because it ran out of parts. And Honda suspended production in Alliston, Ont.

Having a plan in place did pay off for Chapman’s Ice Cream when a fire in 2009 started by a welder’s torch burned its 85,000 square-foot factory in Markdale, Ont. to the ground.

Risk managementWhen chaos strikes

FORECASTING CONFIDENCE

2011 Total Confident

Intensity of views Total notConfident

Very Confident

Not at all Confident

1 year 83% 36% 4% 16%

3 years 55% 7% 8% 44%

5 years 38% 7% 29% 60%

2010 Total Confident

Intensity of viewsTotal notConfidentVery

ConfidentNot at all Confident

1 year 81% 32% 2% 16%

3 years 52% 44% 6% 46%

5 years 39% 7% 27% 59%

OUTLOOK: 2012 9

“Talk about a contingency and disaster plan – that was risk management,” said Al Diggins, president of the Excellence in Manufacturing Consortium. “They were back in business in days.”

The company had set up a temporary production facility to keep up with production and had already started laying the foundation for a new, 20-acre steel building just a few blocks from the original plant on land owned by the Chapman family.

“They had a contingency plan with all these dairies around Ontario,” says Diggins. “They just kept on going, everything was paid for, it was all insured – even wages. It took them a year to get that new plant up. It was the perfect example of someone thinking well in advance.”

MITIGATING RISK

2010 2011

Maintain quality 62% 73%

Identify risks 58% 61%

Insurance 38% 61%

Insist on official paperwork for orders (i.e. purchase orders; letters of intent, etc.)

53% 60%

Monitoring internal financial indicators (i.e. cash flow etc.)

57% 56%

Long-term planning 51% 53%

Formal audits and checks 49% 53%

Long-term contracts with suppliers/customers

39% 51%

Know risks to customer/suppliers 44% 50%

Be lean 52% 49%

Monitor credit record of customers/suppliers

52% 48%

Set up contingency plans 37% 41%

Diversify product offerings 41% 40%

3rd party accreditation/certification (i.e. ISO)

33% 38%

Formal risk management plan 34% 31%

Set up internal alert signals 24% 29%

SWOT analysis 28% 22%

Currency hedging 26% 22%

Other 1% 2%

REVENUE CONSTRAINTS

2010 2011

Competition 39% 42%

Transportation issues/logistics 39% 38%

Market demand 24% 31%

Currency fluctuations 24% 27%

Government policies 20% 21%

Managing risk 19% 21%

Global sourcing/supplier issues 21% 20%

Internal resources 20% 19%

Protectionism/tariffs 16% 15%

Financing 14% 11%

Other 2% 8%

Terry McCowan suggested cultural change is a message getting through to unions.


economy is high on the list for 40% of the respondents, but their anxiety level drops off at three-years.

Competition is the greatest constraint to increasing revenue outside North America for 42%, followed by transportation and logistics issues for 38%.

So where is the confidence coming from?

“Well, I think they’ve realized that things haven’t been as bad here as elsewhere in the world,” said Jim Menzies, national leader of manufacturing and distribution at global consulting firm Grant Thornton LLP. “They see what’s going on with Europe, most recently Greece and the real trouble they’re in; or even closer to home in the US and specifically, how difficult it has been for their financial services and manufacturing industries. That has created some confidence.”

“ And what I’ve seen, in our group is a lot of diversification: new markets, a lot of taking equipment and skills, and redeploying those into new products…”

— Al Diggins

“We weren’t necessarily diversifying, but we focused on some projects that had been put aside and now those are becoming the most profitable projects…””

— Brent Patton

BUSINESS INTENTIONS

Next Year Next 3 Years

2009 2010 2011 2010 2011

Hiring new employees 39% 44% 47% 44% 43%

Adding lines of business 38% 23% 30% 33% 33%

Entering new lines of business 34% 21% 22% 31% 30%

Entering new geographic markets 29% 19% 22% 33% 38%

Expanding plant size 12% 11% 13% 23% 29%

Acquiring other companies or lines of business

17% 8% 10% 20% 22%

Downsizing employees 18% 11% 8% 4% 7%

Downsizing lines of business 12% 6% 4% 2% 3%

Selling of company — 4% 4% 11% 13%

Downsizing plant size 7% 5% 3% 4% 4%

Merging with another company 6% 3% 3% 8% 9%

Closing of company 5% 3% 1% 4% 5%

None/No Answer 12% 30% 16% 20% 11%

OUTLOOK: 2012 11

Dave McPhail, president of Memex Automation Inc., has noticed a difference among some of the manufacturers he has worked with this year. His Burlington, Ont. company develops and manufactures factory floor productivity technology.

“Last year and the year before even, we’d call companies and they would say, ‘Call us back in three months and if the phone rings we’re still in business and we’ll take a look at it then.’ It’s not that they didn’t have the time to deal with it, they had a lot of challenges that were well beyond measuring their productivity on the shop floor. Today we’ve ramped up our sales and marketing staff to try to capture some of the additional market share from this up tick in manufacturing.”

And when he says busy, he means it. They’re hiring people and buying equipment. “There’s action this time as opposed to contemplation and planning,” said McPhail.

But, oh – the irony. Now companies are interested in factory floor productivity, but he finds some are too busy to deal with it.

“Probably about 10% have gone the other way and said, ‘Look, we’re booked for the next six months. We can’t take on another project. Give us a call.’ And so we put them in our CRM package and in three to six months we’ll call them back. That’s a change for us.”

Not everyone is taking action, though. Brent Patton,

principal of AirCell in Mississauga, Ont., a manufacturer of air compression systems, has found plenty of interest in its products from some of the larger companies. “But the commitment may not necessarily be there. They’ll continually delay projects while requesting that we order materials, just to have them sit there and it just follows the same thing: ‘Oh, we’ll do it next year, we’ll do it next year.’ It’s that same optimism that you’re talking about, but extremely cautious.”

The dust is settlingLike most SMEs, weathering the recession was an ordeal for Patton’s company, but it was also a time to look at some of the things that were on the backburner.

“In the beginning it was tough, there was time spent twiddling our thumbs,” he said. “Recently, it’s been taking off. We weren’t necessarily diversifying, but we focused on some projects that had been put aside and now those are becoming the most profitable projects.”

For Al Diggins, the dust is starting to settle. “And what I’ve seen, in our group is a lot of diversification: new markets, a lot of taking equipment and skills and redeploying those into new products. And I think that’s helped a lot of the smaller manufacturers,” said Diggins, president and general manager of the Excellence in Manufacturing Consortium, a not-for-profit organization

Jim Menzies attributes Canadian confidence to a realization that conditions here are not as bad as they are in Europe and the US.


based in Owen Sound, Ont. that provides its members with resources to help them become more competitive.

Diversification has been key for Jim McCoubrey, EMC’s chair and president of Troy Sprinkler Ltd. in Owen Sound, Ont., a manufacturer of fire alarm, suppression and detection systems.

A national company, Troy Sprinkler is venturing into marketplaces that were not previously on the radar. The federal government’s huge $33-billion procurement deal for naval warships, supply vessels and other non-combat craft, for instance, is opening up an opportunity for the company. Vessels, he points out, need fire protection.

The company is also stepping out on the international stage.

“We do a little bit internationally that we would not have done before in certain marketplaces where we’re looking at the faster-growing economies and trying to take a shot at some of the opportunities there. And we have also paid a lot more attention to the primary industries in Canada – potash, the gold mines and power plants.”

McCoubrey said the company has invested in people who can get in front of the specifying engineers. “When they’re writing a spec on a new facility, we’re there already. We don’t have to get qualified for it.”

Manufacturers operating in the non-metro areas do face some unique challenges, though. “There’s so much more pressure on being close to your market,” said McCoubrey. “Transportation tends to be an issue. So they’ve had to really work much harder, I think.”

He noted how big operators, such as Parker Hannifin, left the Owen Sound area, “but suddenly another small entrepreneur comes in and takes over that facility and is doing very, very well. It’s a very niche market, makes a terrific product, reputation is growing and I think that if industry is going to survive in smaller areas, that’s where it’s going to come from: the guys that find that niche and get a reputation.”

Having a measure of international reach has helped Blanco Canada in Mississauga, Ont. Its parent company is German kitchen technology manufacturer Blanco.

“In Europe, we’ve seen a really strong base. Markets have been very good to us and at the same time they have gone down very significantly. In Canada, we’ve been relatively stable. A lot of our success came from acting early to the signs of the slow-down. So we adjusted our resources,” said Lars Schwenteck, senior vice-president at Blanco Canada.

One of the challenges over the past year for a business

MARKETS: COUNTRIES & REGIONS

2009 2010 2011

Canada 68.6% 69.8% 69.7%

US 23% 22.1% 20.7%

China 0.7% 1.1% 2%

Mexico 1% 0.7% 1%

Korea 0.3% 0.1% 0.5%

Western Europe (excluding Italy)

1.6% 1.5%1.7%

[COMBINED]

Western Europe (excluding Italy, UK, France, Germany, Switzerland)

n/a n/a 0.4%

Germany n/a n/a 0.5%

United Kingdom n/a n/a 0.4%

France n/a n/a 0.3%

Switzerland n/a n/a 0.1%

Other Central and South America (excluding Mexico/Brazil)

0.9% 0.5% 0.4%

Japan n/a n/a 0.4%

Other Asia (excluding China, Japan, Korea and India)

0.5% 1.1% 0.4%

Australia/New Zealand 0.4% 0.4% 0.3%

Brazil 0.2% 0.4% 0.3%

India 0.6% 0.3% 0.2%

Central and Eastern Europe (excluding Russia)

0.5% 0.2% 0.2%

Russia 0.4% 0.2% 0.2%

Italy 0.2% 0.1% 0.2%

Other 1.1% 1.6% 1.7%

OUTLOOK: 2012 13

that sells kitchen faucets, sinks and other fixtures is the mounting competition from global marketplaces. When the company checked into manufacturers of stainless steel sinks in China, they found 400 small ones.

“We were blown away by that,” said Schwenteck. “And we see more and more competition coming out of India.”

Finding skilled workers is also a big concern for companies, particularly in the Technology Triangle of Kitchener, Waterloo and Cambridge, Ont.

Filling the skills gap“I have over 16 years experience serving manufacturing in general in several industries – telecommunications, high tech – in the past six or seven years I’m very familiar with what is going on in Waterloo Region. There are a lot of companies, highly innovative, not necessarily large in size, and I see a concern about finding skilled workers,” said Ovidiu Demain, senior mechanical engineer of Dejero, a Waterloo, Ont. tech company and developer of a unique video product that broadcasts over cellular networks.

Schwenteck noted there are skilled people new to Canada who could fill some of the gaps, but their skills are not being properly utilized because of red tape.

“It’s a pity in Canada, that you have a lot of skilled people from other countries and they can’t apply their full knowledge – they don’t have the stamp or the paperwork. I think it’s a waste of a perfectly good resource.”

Diggins said EMC members are “desperately” trying to find bodies, “but you just have to do everything you can to keep your people happy to retain them. Where we’re going to get people five years from now, I do not know. It’s going to be a real challenge. I know at one plant, one very good facility up in the Barrie, Ont. area, that is actively looking for young guys with manufacturing skills, and six months of searching, they still don’t have one.”

Also of concern is the China factor. Up until now they have been losing business to overseas competitors with impossibly low labour costs, and/or having to source work or products overseas to stay competitive. Either way, it has meant an erosion of jobs and value-added manufacturing here. But it appears there is about to be a bit of a

ORDERS, PRICING, PROFITS, SALES 2012

per c

ent

64%

58%

31%

41%

59%

11%15% 15%

24%27%

52%

34%

25%31%

43%

63%

8%

17%23%

14%

22%

48%

31%

20%

2009 revenue results/2010 forecastTOTAL 503

0

10

20

30

40

50

60

70

80

SalesProfits

PricingOrders

Remaining the sameDecreasingIncreasing

per c

ent

0

10

20

30

40

50

60

Remaining the sameDecreasingIncreasing

2012367

2011384


turnaround. The Boston Consulting Group released a report recently that suggests some of the work and the jobs that migrated to China because of the cost advantages, will be coming back over the next five years because of quality issues, energy costs, logistics challenges and escalating wages demanded by a more affluent Chinese workforce.

Diggins confirmed these concerns about working with suppliers in China are shared by a lot of EMC members, with an emphasis on disappointing quality. McPhail has no interest in selling

Memex’s product in China. He expressed concerns about the loss of intellectual property and that China is not a signatory to any IP treaty. However, Menzies, noting the North American market is shrinking, pointed out China is a market that offers real growth.

“A lot of other companies are really frustrated and just throw in the towel, in some respects, because the headaches are too difficult to deal with; but the rationale is, that’s where the real growth is. So if you want to grow, you’ve got to go there.”

“ There are a lot of companies, highly innovative, not necessarily large in size, and I see a concern finding skilled workers…””

— Ovidiu Demain

“We do a little bit internationally that we would not have done before in certain marketplaces where we’re looking at the faster-growing economies…””

— Jim McCoubrey

MACHINERY COUNTRY OF ORIGIN

Canada 88%

US 83%

Germany 34%

Japan 18%

Italy 15%

China 13%

UK 10%

Korea 7%

France 7%

Switzerland 7%

Western Europe (excluding Italy, UK, France, Germany, Switzerland) 6%

Mexico 4%

India 3%

Czech Republic 2%

Australia/New Zealand 2%

Brazil 1%

Other Central and South America (excluding Mexico/Brazil) 1%

Other Asia (excluding China, Japan, Korea and India) 1%

Poland 1%

Russia 1%

Central and Eastern Europe (excluding Czech Republic, Poland, Russia) 1%

Other 4%

OUTLOOK: 2012 15

By Matt Powell

When it comes to R&D and innovation, Dave McPhail is a big fan of the Canada Revenue Agency’s Scientific Research and Experimental Development (SR&ED)

program. “It’s the best program for having a partner that

doesn’t want equity in your business. Every dollar we’ve ever claimed, we’ve been credited,” says McPhail, president of Memex Automation Inc., a developer and manufacturer of shop floor productivity technology.

While the word on SR&ED is generally good, only 26% of the companies in PLANT’s Business Outlook 2012 survey took advantage of federal funding.

On the bright side, the amount of revenue companies pumped into R&D and commercialization rose to 3.8% from 3.2% in 2010.

But the number of companies that are aware of SR&ED and haven’t used it rose to 31% from 26% in 2010.

SR&ED is the flagship of federal innovation programs. It funds up to 33% of the first $3 million a company spends on R&D and commercialization, and another 20% for anything more.

But a federal panel reviewing the program is recommending changes, among them simplifying the SR&ED program by basing tax credits for SMEs on labour-related costs, and redeploying

funding from the tax credit to a more complete set of direct support initiatives.

“I’m really concerned,” says McPhail. “For a company like ours, the grey area where we don’t know the rules could wreak havoc on our plans for the next big innovation. How do they determine who’s got a great idea and then it could be wrought with political patronage after that. The process, the way they have now, works.”

The government program is key to helping SMEs improve their competitiveness by encouraging

innovation, an area that has plenty of room for improvement.A World Economic Forum report ranks Canada 12th out of

142 countries on global competitiveness, which is pretty good, except innovation performance scores 14th out of a 17 peer-country average.

The Conference Board of Canada’s report says 54% of the 181 firms in the survey struggle to acquire capital for innovation, while 24% of them suggest government subsidies aren’t enough to keep the Canadian R&D ship afloat.

The innovation issue would benefit from some harmonization between the Industrial Research Assistance Program (IRAP) and the Natural Sciences and Engineering Research Council (NSERC), says McPhail.

Al Diggins, president of the Excellence in Manufacturing Consortium, suggests that reducing the claim amount isn’t a solution to iffy R&D consultants that help companies access SR&ED funds, that don’t necessarily make it into innovation activities.

“There are definitely some guys out there spoiling the soup for the rest of them,” he says.

McPhail suggests the root of those problems lie with the consultants, not the companies.

“The government shouldn’t be going after the companies, they should be going after the consultants that are being frivolous,” he says. “We need to regulate them.”

To learn more about SR&ED and other R&D funding programs, go to www.cra-arc.gc.ca/sred/.

Investing in R&DConcern about the SR&ED

TAX CREDIT

2010 2011

Total Yes 41% 44%

Yes-last year 33% 34%

Yes-this year 29% 26%

Yes-before last year 29% 32%

No 49% 52%

INVESTMENT IN R&D

per c

ent 21%

15%

11%

34% 33%30%

16%18% 19%

7%

11% 10%

6%

10%7%

16% 17%

21%

Percentage of revenue for R&D/commercialization

0

5

10

15

20

25

30

35

40

No answerMore than10%

7-10%4-5%1-3%0%

2010(384 replys)Average 3.22011(367 replys)Average 3.8Forecast 2012(367 replys)Average 4.2


InvestmentAlthough the loonie is hovering at just about parity with the US greenback and is interfering with manufacturers’ export revenues, its higher-value and the Harper government’s extension of the two-year write off for machinery, equipment and technology investments are encouraging many of the respondents to spend some money on their plants over the next two years. Machinery

and equipment top the list for 61% of them and are among the top three priorities for 75%. Forty per cent of the companies cite machinery as their top priority. Training is next for 55% of those who plan to invest, followed by technology for 51% and R&D for 49%.

What are the likely reasons for the sudden interest in investing?

Menzies thinks a lot of companies have cut back in the

INVESTMENT PRIORITIES

2 Years 3-5 years Top 3#1 Priority

(2012-13) (2014-16) Priorities

Machinery and Equipment 61% 26% 75% 40%

Training 55% 20% 70% 24%

Technology 51% 20% 67% 21%

Research and development 49% 21% 66% 27%

Plant facilities 26% 16% 50% 13%

Enterprise software 25% 9% 44% 8%

Warehouse/supply chain management software 13% 8% 31% 11%

Customer relations software 12% 4% 41% 21%

Business intelligence 11% 5% 38% 8%

Best of breed software 5% 4% 19% 3%

Other 2% 2% 33% 8%

FUNDING FROM GOVERNMENT SOURCES

per cent

24%24%

5%3%

27%25%

31%34%

31%26%

74%65%

FINANCING CONFIDENCE367

0 10 20 30 40 50 60 70 80

No – Do not know of any

Used at municipal level

Used at provincial level

Used at federal level

Aware, but not used

Yes

20103842011367

FINANCING CONFIDENCE

per cent

46%

40%

8%

2%

86%

10%

FINANCING CONFIDENCE367

0 20 40 60 80 100

Total not confident

Total confident

Not at all confident

Not very confident

Somewhat confident

Very confident

OUTLOOK: 2012 17

past few years and there’s some pent-up investment.“I have a client that’s got six locations in Poland and

one of the main reasons for going there is some of the tax-free zones that they have. Certainly, I can think of three companies that have invested in Quebec, and one of the main advantages is the government program, Investissements Quebec, which is having a real impact.”

Canadian companies prefer to do their shopping closer to home: 88% look for machinery from Canada, 83% from the US. Germany is a distant third (34%) followed by Japan (18%) and Italy (15%).

Almost three-quarters (74%) of the respondents are aware of or have used government incentives, but there are still 24% who identify themselves as unaware.

Most (26%) are investing under $100,000 next year, while 19% are putting up between $100,000 and just less

Ovidiu Demain observed from the survey more manufacturers are interested in investing in lean manufacturing.

FINANCING

per cent

46%8%

1%1%

2%14%

8%6%

13%21%

14%13%

15%28%

27%10%

51%17%

57%

-

FINANCING367

0 10 20 30 40 50 60

None used/investigated

Other

Internal cash flow/Reserves

Private sources – E.G. Venture capital

Family/friends

Businessdevelopment bank

Direct financingfrom suppliers

Government programs

Company funds

Banks/financialInstitutions

UsedInvestigated


INVESTMENT IN MACHINERY & EQUIPMENT

per c

ent

19%

14%

9%

29% 30%

26%

17%14%

19%

7% 6% 7% 7%9% 8%

2% 3% 3%1% 1% 1% 1% 1% 1%

18%

22%

27%

2010Average $835,002011Average $1,372,00Forecast 2012Average $1,323,200

NA

$1,020,000

$1,240,100

0

5

10

15

20

25

30

35

40

45

No Answer$20,000,000or more

$10,000,000-$19,999,999

$5,000,000-$9,999,999

$1,000,000-$4,999,999

$500,000-$999,999

$100,000-$499,999

$1 -$99,999

None

2010 Tracking 2011 Tracking

OUTLOOK: 2012 19

than $500,000. Looking at all companies, they averaged $835,000 in 2010 compared to almost $1.4 million this year and an anticipated $1.3 million or so in 2012.

And 86% are either very or somewhat confident about getting financing. Not a lot of manufacturers have nice things to say about banks, yet 57% of the companies are using them to finance investments; however, 51% are coming up with their own funds and government programs are part of the mix for 27%.

McPhail is one manufacturer who has something good to say about his bank, which he says actually understands Memex’s business.

“We’re just establishing a new relationship with our bank,” he said. “Our product is looked at as a fit with the bank’s knowledge-based industries group. And I met the banker for the first time and we hit it off right away because they understand what we do. They understand that we’re going to have lumpy statements because of the nature of our business. And just because we have one bad month doesn’t mean we’re going to have a bad quarter, which doesn’t mean we’re going to have a bad year.”

He is less enthusiastic about venture capitalists. “We did entertain several venture capitalists. I heard the scenarios. I had to actually study just so I could talk intelligently about some of the scenarios that these guys come up with. At the end of the day, what it meant for us was: we develop the product internally, we develop the market and we spent a pile of money doing it; and somebody [offers to] drop a million bucks into it and they want 51%. We said, ‘That’s just a non-starter.’”

Improving productivityInvestment in technologies is key to productivity improvement plans for 33% of the senior executives, followed by employee training for 28% and automation for 24%. The survey results show companies are investing in product development again. In 2010, 21% spent nothing on it, but that number dropped to 15% this year and just 11% will be keeping a lid on R&D next year. Most (30%) will be spending between 1% and 3% of revenues. The anticipated average for all companies is 4.3% next year, compared to 3.8% this year. More than half (52%) of the respondents have not taken advantage of the SR&ED tax credit compared to 44% who have done so.

Manufacturers are still playing primarily to a home audience: on average almost 70% of them derive most of their sales from Canada, although numbers reflect a slowing of trade with the US (23% in

“ Ships are probably leaking the equivalent through their systems of about three Exxon Valdese tankers a year in oil…””

— Terry McGowan

“ It’s a pity in Canada, that you have a lot of skilled people from other countries and they can’t apply their full knowledge – they don’t have the stamp or the paperwork…”

— Lars Schwenteck

Brent Patton has found larger manufacturers are being extremely cautious.


2009 to 20.7% in 2011). But they’re slowly increasing their dealings with China, up from 0.7% in 2009 to 2% this year.

Thordon Bearings is making a couple of key investments. The Burlington, Ont. manufacturer makes bearing systems for marine vessels worldwide, but they aren’t the kind you’ll find keeping the wheels of industry rolling. They’re a plastic sleeve lubricated by seawater.

“Ships are probably leaking the equivalent through their systems of about three Exxon Valdese tankers a year in oil,” said Terry McGowan, the company’s president. “Eliminating the oil in the stern tube eliminates that possibility.”

The company is building a plant in Poland to back up its Burlington location. “We could have gone to a place down the street but there are a bunch of incentives in Poland for capital investment. Also, there’s a good skill trades base. We’re also expanding our facilities in Burlington and buying more capital equipment.”

Investment at AirCell will be focused mostly on R&D, said Patton. “We’re always looking to change the way that things are done in the compressor industry because it has been stagnant for a very long time. You can continually come up with new ways to reduce your product cost and make more of it cheaper but if nobody wants it...”

Panelists noted companies are finding better ways to handle purchasing. With 35 locations across the country, McCoubrey said in the past Troy Sprinkler probably had 35 approaches to buying. Now the company is trying an enterprise-wide strategy, which is deriving benefits from suppliers.

“That helps us improve our cost base. And now we’re going out for bids on certain commodity items to the major suppliers. Major suppliers in our industry have never experienced this approach, so there’s been a certain reluctance to jump onboard. But we awarded the bid for various products to a couple of suppliers in the last two or three months and suddenly the attitude of suppliers is, “Oh, you’re really going to do this.”

EMC has tackled the supply issue by setting up a separate, not-for-profit manufacturing purchasing co-op owned by the members, the first in Canada. Diggins notes savings for courier costs alone are more than 45%. And an energy purchasing group is providing savings of up to 45%.

ProductivityProductivity improvement growth is not something Canada is doing particularly well, especially compared to the US. Over two decades Canada’s growth has averaged

a pokey 1.4% compared to 2.2% in the US. A Conference Board of Canada report reveals – based on a simulation boosting labour productivity growth by 0.8% over 20 years – that real GDP per capita would have been $8,500 higher in 2008. Personal disposable income would have been $7,500 higher, corporate profits 40% higher, and federal government revenues 31% higher.

A new report by the Institute for Research on Public Policy discloses average Canadian manufacturing productivity growth was 3.2% between 1987 and 2000. US growth was 4%. From 2000 through 2008, Canada’s productivity growth slid to 0.9%, while US productivity grew 4.4%.

Someshwar Rao, IRPP research fellow and author of the study, says the lag can be blamed in part on Canada’s disproportionate ratio of small and medium-sized businesses that don’t have the minimum critical mass and scale to profitably implement the newest, most advanced techniques and technology.

This year’s Business Outlook survey shows manufacturers are addressing productivity issues. Sixty-five per cent cited employee training as the top measure taken for productivity improvement, while 28% intend to do so. Fifty per cent have invested in technologies with 33% intending to do so, 42% implemented lean or intend to (16%), 37% have installed automation systems and 24%

OUTLOOK: 2012 21

intend to do so. More than a quarter of respondents (27%) are outsourcing manufacturing, while 12% intend to.

Seventy per cent of the senior executives measure productivity by product output, 42% by financial measurements, and 23% use internal experts. Most (36%) are very or somewhat (52%) satisfied with these measurements.

Schwenteck said when Blanco purchased its Canadian plant 15 years ago, the plan was to mirror processes in Europe.

“When we did the initial comparison, we were quite surprised how big the difference was, but over the years the plant has been brought [up to] the best in the world.”

He said one big challenge in the beginning was employee training. It took a very long time but now it’s a strategic cornerstone that’s driving productivity. Metrics are based on German head office standards, which he says are “very financial-driven,” but the Canadian operation is certainly on par.

“Our next challenge is automation. We’re developing robots to replace some of the more weight-intensive functions. Our granite sinks are 35 to 50 pounds so we’ll be replacing people and using robots there.”

Thordon Bearings views productivity a little differently. It’s a 100-year-old company where McGowan says a lot of things are done in the old ways, but productivity is still an

PRODUCTIVITY IMPROVEMENT

STEPS TAKEN STEPS PLANNED

2010 2011 2010 2011

Employee training

58% 65% 22% 28%

Investing in technologies

50% 50% 26% 33%

Lean manufacturing

49% 42% 14% 16%

Automation 33% 37% 20% 24%

Outsourcing manufacturing

23% 27% 9% 12%

Outsourcing support roles

10% 17% 9% 13%

None 4% 4% 2% 4%

Other 3% 2% 1% 3%

No answer - 11% - 32%

David McPhail observed that many companies have no idea what their productivity really is.

’Profile of respondents


per c

ent

48%

13%10% 9% 10%

2%

6%

2%

0

10

20

30

40

50

Noanswer

1,000or more

500-999200-499100-19950-9925-491-24

Number of employees workTOTAL 503

Average 152.9%

per cent

23%

22%

16%

16%

16%

15%

14%

12%

6%

34%

9%

INDUSTRIES367

0 5 10 15 20 25 30 35

Other

Non-Durablegoods

Printing

Agriculture

Packaging

Aerospace

Food Processing

Durable goods

Pulp & Paper

Mining, Forestry, Oil & Gas

Automotive/Transportation

INDUSTRIES

per cent

4%4%

17%18%

47%46%

3%4%

29%28%

LocationTOTAL 503

0 10 20 30 40 50

No answer

West/Territories

Ontario

Quebec

Atlantic LocatedCanadian headquarters

LOCATION

EMPLOYEES

per c

ent

54%51%

46%

17%17%18%

4% 5% 5% 4% 4% 4% 3% 3% 4%

18%20%

24%

0

5

10

15

20

25

30

35

40

45

50

55

No answer$500M+ $100M-$499M $50M-$99M $10M-$49M <$10M

RevenueTOTAL 367

2010 *$60.3M2011 *$62.3M2012 *$70.1M*average (excluding No answer)

REVENUE

OUTLOOK: 2012 23

issue, although a small component of the cost of doing business. “We put in place a productivity improvement program but it’s not a strategic cornerstone of what we do. There are other things that we put more emphasis on.”

Of course, McPhail’s company is all about productivity. It connects a manufacturer’s shop floor to the top floor in real time and he has observed that many companies have no idea what their level of productivity is.

“I’m really surprised, actually, when we go into a new account where we put in a pilot system and the first thing we ask a customer before we install it is, ‘What do you think your productivity is?’ And we get a number – 50%, 55%, 60%. We choose to measure productivity using overall equipment effectiveness (OEE). We run our technology for one, two, three weeks and we’re consistently averaging 35%.”

More interest in leanFor one company, he calculated that a specific process improvement would bring them up from 27% efficiency to 60%, saving them about $400,000 a year over five years.

“They had a cushion with a 20% premium, with their prices being in US dollars, and they’ve lost that with the parity of the dollar. They said, ‘Look, find me 20%. We’ll keep this plant open if we can find 20%.’ And we found them, just on the one machine alone, 100%. We did seven other machines in that plant and I think the aggregate of that was close to 40%.”

Diggins notes EMC brokers lean training and demand for it continues to climb, particularly in last few years. Much of the training has been public but now Diggins sees more of it moving inhouse.

“People are saying, ‘Okay, we need to change,’ ... all that training you had to do, it’s not done overnight and you really need to have that resource inside your building to build in sustainability. So we’ve seen a lot more buy-in.”

Demain, who is administration team leader for the Toronto Chapter of the Society of Manufacturing Engineers (which offers courses and lean resources), sees a need to raise lean awareness. “I’m seeing in these statistics an increasing number of companies interested in investing in lean manufacturing. The money that is saved from eliminating waste can be used more productively.”

The best projects Memex works on have a common denominator: management and employees work together. “As long as the management gives the employees the right interpretation of what the purpose of this initiative is and you get the employee buy-in, you have a successful project. It’s one thing to have a principle, precept, technology or whatever, but if it’s not systemic internally within the company to be a cultural change – and it really is a cultural change – it fails.”

McGowan suggested culture change is a message that is getting through to unions. “I go back a few years when we had a large plant. We established a steering committee and part of that steering committee had members from the steel workers on it and a champion who was our own guy. And a lot of projects rolled through very smoothly, assuming that we communicated well with the steel workers. But they’re getting the drift now if we don’t operate in a lean way with minimum costs or reducing cost, the result is lost jobs.”

The survey results show 47% of the companies intend to hire over the next year, demonstrating just how confident they are.

The world may or may not be on the brink of another recession as conditions in Europe threaten to torpedo global economic stability, yet manufacturers are investing in their businesses and looking ahead with confidence – tempered, of course, by typical Canadian caution.

Comments? E-mail [email protected].

This ad prepared by: Grant Thornton Sandra Naccarato

Client: National Mishka Alarcon

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Delivered: November 17, 2011

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business outlook: 2012 - canadian manufacturing

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