Canadian companies facing stiff competition from better-capitalized, more efficient facilities stateside

TORONTO, Feb. 26 /CNW/ - The economic recovery will add more manufacturing jobs in Canada relative to the U.S., but the gains may be shortlived amid stiffening competition south of the border, notes a new report from CIBC World Markets Inc.

"Manufacturing sectors on both sides of the 49th parallel are showing signs of life. But the improvement in the U.S. is not only stronger, but also much more capital intensive - a trend that will hinder Canada's competitive position in the post recession economy," says Benjamin Tal, senior economist at CIBC, in the latest Economic Insights report.

Greater reliance on capital intensive manufacturing in the U.S. is creating a "radical restructuring" of industry, Mr. Tal says, where "much more is being produced with less labour." This shift has helped put U.S. industrial output on a strong, upward trajectory since the middle of last year without a corresponding rise in employment.

"Almost all of the growth in the American manufacturing sector over the past year has been concentrated in capital intensive sectors while heavy, labour intensive sectors are still losing ground," says Mr. Tal.

In Canada, where overall industrial production has stabilized in recent quarters, manufacturing activity in capital intensive sectors has also outpaced activity in labour intensive sectors, though to a lesser degree than in the U.S., says Mr. Tal.

But more important to note, he says, is that the average capital intensity of Canada's manufacturing sector is 40 per cent lower than in the U.S. "That reflects not only the natural composition of Canada's manufacturing base, but also the fact that high capital-intensive sectors in Canada are not as capital intensive as their U.S. counterparts," says Mr. Tal.

Examples include Canada's chemical, electronics and computer manufacturing sectors that still utilize a much lower capital-to-labour ratio than in the U.S., notes Mr. Tal.

The high labour intensity of Canadian manufacturing means that jobs growth here will be relatively stronger during the economic recovery to meet demand, even with a strong Canadian dollar. "However, given the increased prevalence of better-capitalized and more efficient production facilities stateside, Canadian manufacturers will find it even more difficult to compete when the dust settles."

Mr. Tal also notes in the report that the shift from labour-intensive to capital-intensive production is nothing new in the U.S., but the trauma of the recession is working to accelerate this process. "During the past 12 months, the (U.S.) ratio of production in high capital intensive sectors to production in low capital intensive sectors rose by more than 10 points. Historically it took no less than four full years to achieve an equivalent rise in this ratio," he says.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/sfeb10.pdf

CIBC's wholesale banking business provides a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.