2019, Volume 4, Issue 3 - Winter 2019

The Changing Face of Western Manufacturing

By Jayson Myers

It’s been a turbulent time for prairie manufacturers. Low oil prices and the contraction of capital investment activity in the energy sector, trade problems with the United States and China, difficulties in getting pipelines built – all these factors have acted as a drag on manufacturing activity in Western Canada. The turning point was in 2012. Since then, manufacturing sales across the Prairies have lagged behind those in the rest of Canada.

The value of goods produced and shipped by prairie manufacturers increased by 11.8 per cent from $101.9 billion in 2012 to an annualized $113.9 billion in 2019. In contrast, manufacturing sales in the rest of Canada rose by 19.4 per cent over that same period of time. Manufacturing activity has been especially strong in Ontario and Quebec. As a result, manufacturing sales across the country are on track to exceed $691 billion this year.

With sales growth slowing, prairie manufacturers now account for 16.5 per cent of Canada’s manufacturing output, down from 17.4 per cent seven years ago. It doesn’t sound like much, but if the Prairies had kept pace with the rest of the country, manufacturing sales in Western Canada would be $8 billion higher this year. That means there would likely be about 20,000 more people employed in prairie manufacturing.

Manufacturers across Canada face some daunting challenges these days – slowing consumer demand and weaker rates of capital investment, higher risk and new obstacles when it comes to accessing international markets, difficulties finding skilled and experienced workers, increasing costs of doing business to name a few. However, there are some lessons that can be learned from the differences in sales performance experienced over the past several years.

The first is the importance of diversification, both in terms of industrial concentration and market penetration. Provinces with a more diversified manufacturing sector and with companies selling into a variety of different domestic and export markets have tended to outperform others where, as in Saskatchewan and Alberta in particular, manufacturing has been closely tied to domestic energy-based supply chains. Manitoba proves the point. Among the prairie provinces, Manitoba has the most diversified industry base and has posted the strongest manufacturing sales growth since 2012.

The second lesson is the importance of innovation. Sales growth has been strongest in those manufacturing sectors where rates of investment in machinery, equipment, and new technology have been the highest. The development of new products and services and the deployment of new, more efficient processes have been significant factors in sustaining manufacturing growth in the face of intense competition and challenging operating conditions.

Diversification and innovation have also been at play in reshaping prairie manufacturing. As a result, we’ve seen significant structural shifts when it comes to the relative importance of key manufacturing sectors across Western Canada.

Manitoba

Manitoba boasts the strongest manufacturing performance of any of the prairie provinces. Sales have increased by 19.1 per cent since 2012, almost on par with the rest of the country. Food processing is the largest manufacturing industry in Manitoba. With sales growth of 19 per cent over the past seven years, food manufacturers account for 26 per cent of the province’s manufacturing output.

By far, the strongest growth in Manitoba manufacturing has come in the transportation equipment sector, most notably in aerospace and heavy vehicles. Transportation equipment production has expanded by 50 per cent over the past seven years. The industry now accounts for 18 per cent of total manufacturing sales in the province. Sales of other types of machinery and equipment, including agricultural equipment, have increased by about 10 per cent – an OK performance but lagging behind the manufacturing sector as a whole.

With $19.5 billion in sales expected in 2019, Manitoba accounts for about three per cent of Canada’s total manufacturing output, and 17 per cent of total manufacturing activity across the Prairies.

Saskatchewan

Saskatchewan is on track to record $16.5 billion in manufacturing sales in 2019, which means the province will account for 15 per cent of total prairie manufacturing activity and just under three per cent of Canada’s overall manufacturing sales this year.

Manufacturing sales have increased by 15.8 per cent in Saskatchewan since 2012, but performance has been uneven over industry sectors. Food production has surged by 50 per cent over the past seven years, and now accounts for almost 30 per cent of total manufacturing sales in the province. On the other hand, sales of petroleum and chemical products have declined by almost 20 per cent. Tied into energy supply chains, the province’s machinery and equipment sector has also seen sales fall by 22 per cent.

Alberta

The most notable structural changes in prairie manufacturing have taken place in Alberta. Manufacturers in the province are on track to record $77.9 billion in sales this year, up only 9.3 per cent since 2012. Alberta will account for 11 per cent of total manufacturing sales in Canada and for 68 per cent of prairie manufacturing output in 2019.

As in Saskatchewan, food processing has outperformed the rest of Alberta’s manufacturing sector. Sales of food products manufactured in the province have increased by 25 per cent since 2012. The industry now accounts for 19 per cent of Alberta’s total manufacturing output – up from 16 per cent seven years ago. Chemical production is another sector that has enjoyed strong sales growth over the past seven years. Chemical sales have increased by 18 per cent, and the industry now accounts for 16 per cent of Alberta’s total manufacturing output. Sales of petroleum products have slowed but held their own with respect to their share of total manufacturing output in Alberta. They have risen just over 10 per cent since 2012 and still account for about 28 per cent of manufacturing sales in the province.

Other important manufacturing industries have not fared as well. Sales in the metal fabricating business have fallen by 16 per cent since 2012. Machinery production is down by 18 percent, and transportation equipment sales have declined by 15 per cent over the same period of time. Together, manufacturers in those industries, focused largely on supporting energy and predominantly oil sands producers, are on track to realize $12.2 billion in sales this year. That’s about 16 per cent of Alberta’s total manufacturing output. Seven years ago, they represented the second largest segment of manufacturing in the province, collectively accounting for just over 20 per cent of total sales activity and surpassed only by the petroleum products sector in terms of their contribution to Alberta’s manufacturing economy.

Outlook

What lies ahead for prairie manufacturers? The latest forecast from the International Monetary Fund is pointing to a global slowdown in trade and overall economic activity. Other indicators are pointing to a possible recession in the United States. Canada, as highly indebted as we are, will not be left unscathed and, manufacturers are likely to be the first to bear the brunt of weaker economic growth.

Europe is already in a manufacturing recession. Growth rates have slowed dramatically in the US and China – the world’s two manufacturing superpowers. This year, manufacturing sales in Canada have risen by less than one per cent. Next year, be on the lookout for a decline.

It will be a challenging time for prairie manufacturers: Slowing economic growth will place further downward pressure on oil prices. Capital spending is likely to fall further. Pipeline construction does not appear imminent. And, governments are not in a position to offer much in the way of stimulus as they follow through with their deficit-cutting measures.

We’ll likely see further structural change in prairie manufacturing as well. Machinery and equipment sectors are most at risk. Petrochemicals are likely to hold their own. Food products, aerospace, and more technology-intensive manufacturing sectors may actually see sales increase.

But, let the lessons of the past several years speak for themselves. It will be those manufacturers that have a more diversified customer base, that have invested in new technologies, that have invested in the skills sets and made the operational changes to manage their technologies profitably, and above all, that regard their business as one of providing solutions to customers rather than just getting product out the door, that are positioned best to withstand a turndown in market conditions.

Jayson Myers is the CEO of Next Generation Manufacturing Canada – the country’s advanced manufacturing supercluster. An award-winning business economist and leading authority on technological change, Myers has counselled Canadian prime ministers and premiers, as well as senior corporate executives and policymakers around the world.