Surviving firms are stronger, leaner and more productive

TORONTO, April 1, 2014 /CNW/ - After a difficult decade that saw the number of Canadian manufacturing firms fall by 20 per cent and the sector's share of GDP drop to 12 per cent, a new report from CIBC World Markets finds that many industries are ready to reverse that trend and outperform in the coming years.

"A different manufacturing sector is rising from the ashes," says Benjamin Tal, Deputy Chief Economist at CIBC. "Though some failed to survive, many who did are stronger, leaner and more productive. The long and painful adjustment is starting to pay off, with many industries better positioned to take advantage of the weaker dollar to regain positions in U.S. markets and to better integrate into global supply chain opportunities."

The report, co-authored by Mr. Tal and CIBC Economist, Nick Exarhos, notes that Canadian manufacturing has seen dramatic ups and downs over the past 25 years. In the 1990s, when a tumbling loonie lost over 20 per cent of its value, Canada's manufacturing share of GDP rose dramatically, counter to the trend in other western nations that increasingly saw manufacturing shift to emerging-market countries.

"Only when the Canadian dollar started its march back to, and through, parity at the turn of the new millennium, did the adjustment arrive in Canada," says Mr. Tal. "Canadian manufacturing saw a nose-dive—capped off by the Great Recession—from the relatively elevated levels it had seen in the previous two decades."

With currency and market conditions improving, the two economists analyzed the sector in order to rank which industries, based on their market characteristics and actions taken during the dark days of the last decade, have best adapted and are poised to outperform in the coming years.

Industries Ranked By Brightest Prospects

• Wood Product
• Primary Metal
• Machinery
• Aerospace
• Computer and Electronic
• Miscellaneous
• Plastics and Rubber
• Paper

Their research found the wood products industry is the best positioned for success. They cite strong productivity growth since the beginning of the recovery and the benefits of a lower Canadian dollar, which should see the wood products industry continue to be a leader in exports to the U.S. The only negative is a relatively high level of capacity utilization. However, with continued growth the industry will likely see a strong pace of investment to meet demand.

Primary metals ranked second in growth prospects having had the best productivity growth since 2009. It is also well positioned to take advantage of the decline in the loonie thanks to its favourable net exports position. "Also helping here is the fact that over half of the domestic market is supplied by foreign sources, suggesting a weaker currency will—at the margin—benefit domestic suppliers," says Mr. Tal.

"The industry is also well positioned to take advantage of a stronger U.S. economy, accounting for more than 25 per cent of total U.S. imports. At only 2 per cent below its long-term average, however, growth might be limited by capacity constraints, a fact that also suggests a stronger path of capital spending in the coming years."

Ranked third is machinery manufacturing, which has the strongest net export position in all of the manufacturing sub-industry groups. "With the majority of the current market belonging to foreign imports of machinery, it is best positioned to capitalize on a swooning loonie driving up the price of imported competition," he adds. "Despite having registered less than stellar productivity gains since 2009, capacity constraints, here too, may mean more capital investment in the near future."

The report notes that the aerospace sub-industry group is another that will benefit from a weaker loonie due to its advantageous net exports and import penetration positions. These factors led to it being ranked higher than its transportation industry group parent, even though the parent sector has shown more productivity growth (25 per cent vs. 10 per cent). However, productivity gains in the broad industry group have been driven by plant closures and capacity downsizing which have hampered its net exports position, leaving it behind that of aerospace.

"A name surprisingly absent from the top of our rankings is the food manufacturing industry," notes Mr. Tal. "In recent years that industry has been a winner, primarily in the domestic market sense, but has had a less impressive net export ranking. Furthermore, because it has fared better than most of its peers, it has not had to increase its productivity as fast as others, marking a slight two per cent gain since 2009. Because domestic manufacturing already takes up so much of the Canadian market, it will have to nurture its export markets in search of growth."

He says that while talks regarding large scale repatriation of manufacturing activity to North America are pre-mature, the post-recession leaner and smarter North American manufacturing sector is better positioned to stop the bleeding.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/if_2014-0401.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.

SOURCE CIBC World Markets