Canadian Manufacturers At Turning Point

The Canadian manufacturing sector has had a rough ride in recent years. Buffeted by offshore competition, a strong Canadian dollar and the lingering effects of the global recession, many manufacturers have found it necessary to relocate to more low-cost jurisdictions, have gone out of business altogether.

For manufacturers who managed to weather the storm, however, things appear to be looking up. According to KPMG's third annual survey of Canadian manufacturers, 85% of those surveyed said that they feel optimistic about the future of their business over the next two years, up from 74% who said they felt optimistic at the same time last year. Canadian manufacturers are also more hopeful than their global counterparts, 75% of whom said they feel optimistic about their prospects in the next two years.

"Our survey tells us that Canadian manufacturers are confident in their business strategies, but investing in innovation, increasing efficiencies and managing risk are top-of-mind moving forward," says Laurent Giguere, national industry leader, industrial markets, KPMG in Canada. The survey, entitled Canadian Manufacturing Outlook 2012: Push and Pull—Reducing Costs and Investing in Innovation, was conducted with executives from 150 companies across Canada, 62% of which have annual revenues of less than $100 million.

Read: Opportunity Guide: Manufacturing and find out why this sector is ripe for development

Market growth

Due mostly to competition from low-cost offshore producers, Canadian manufacturers have been forced to adjust their business models to focus on producing unique, high-value products for local and regional markets, as opposed to low-value commoditized products for the global market. Given that fact, it is not surprising that a majority of the companies surveyed said that they expect the U.S. to account for most of their top- (67%) and bottom-line (60%) growth in the next two years. The Canadian market was next (55% and 57% respectively), followed by China (17% and 13%). The KPMG researchers found that emerging markets were ranked far lower as a source of growth for the respondents than they were for global companies.

Competitive edge

When asked how they plan to stay competitive in the next two years, 50% of the manufacturers surveyed placed increasing productivity and efficiency within their existing operation as their top priority. Other priorities included developing new product lines (23%) and extending existing product lines (19%).

Investment priorities

In terms of key areas for investment for Canadian manufacturers in the next two years, 45% cited Innovation/R&D as the top priority, compared to only 36% of global manufacturers. "As smaller, niche players operating with a strong dollar, Canadian companies realize they need to innovate in order to compete with lower-cost global producers," says Giguere.

Read: Innovation Made Easier to encourage innovation in your company

Transformation underway

The optimism among Canadian manufacturers may be due, in part, to the fact that 60% of those surveyed believe the next wave of transformational innovation is already underway, or will be within the next 12 to 24 months. And while only 49% of the respondents believe new product innovation made a significant contribution to their overall profitability in the last one to two years, 57% believe new product innovation will have a significant impact in the next one to two years. And while 39% of the respondents believe that process innovation had a significant impact on their company's profitability within the last one to two years, 50% believe process innovation will have an impact on their bottom line in the next one to two years.

When asked how they plan to change the level of activity in various areas of innovation in the next 12 to 24 months, 76% of respondents said they plan to increase their focus on process innovation in an effort to improve efficiencies. Sixty-eight of respondents said they plan to increase their level of incremental innovation, such as the expansion percent of existing product lines. Other key areas of innovation in the next two years cited by the respondents included joint ventures/strategic alliances (53%), collaboration with external organizations or individuals (50%), and the development of new product lines (47%).