CANADIAN MANUFACTURING
THOUGHTS ON IMPROVING ITS FUTURE

 BACKGROUND

Currently, Canadian manufacturing employment represents about 12% of overall Canadian employment.  Much of this employment as well as manufacturing exports comes from the automotive sector including assembly plants and subsuppliers like Magna, Linamar, etc.  Much of Canada's manufacturing employment is currently located in Ontario.  The rapid rise of our Loonie from 60 cents to parity in the last couple of years combined with the competitive pressures from Asian imports continues to translate into declines in manufacturing employment and exports.  An interesting sidebar is that Kitchener Waterloo has bucked this trend with manufacturing employment representing about 25% of the workforce.  This,  notwithstanding the closing in the last few years of factories like NCR(700people making banking machines), MTD(500 people making snowblowers and lawnmowers), Lazy Boy Furniture(500 people making furniture), Goodrich Tire(1200 people making tires), Lear Siegler(500 people making car seat frames).  Its interesting to note that these plants were mainly owned by publicly traded U.S.companies and that the 40% rise in the loonie would have had quite an affect on their competitiveness.  With the NAFTA agreement which created a North American free trade zone, as well as a strong Canadian dollar,  the reason to have a Canadian manufacturing presence shrinks, not to mention the fact that when push comes to shove and things slow down American companies will protect their own workforces first even though their Canadian operations might be more productive.    The companies mentioned above had all been employers in K.W. for at least 25 years.  Nevertheless,  K.W.'s tech sector is booming,  while automotive employers like Toyota in Woodstock and Cambridge, and a lot of smaller companies that take advantage of the highly skilled local workforce have kept manufacturing healthy compared to elsewhere in the province.  Another factor in this is the business spinoffs that occur principally from engineering graduates from the University of Waterloo like RIM, DALSA, AND NORTHERN DIGITAL.

One can't overemphasize the fact that by and large engineers and technical and or design oriented people with a penchant for risk tend to create companies with proprietary technologies that become large employers in the communities they reside in.  Just look at people like Frank Stronach(toolmaker from Austria, Magna), Klaus Werner(Toolmaker from Austria, ATS Automation), Frank Hassenfratz(toolmaker from Europe, Linamar Machine), Mike Lazaridus(U.W. electrical engineer, parents from Greece, Research in Motion), not to mention companies like Dalsa(digital camera technology started by U.W. eng. Professor), Zenon Environmental of Burlington(Now owned by General Electric specializing in reverse osmosis water filtration), Trojan Technologies of London(U.V.water treatment technology recently purchased by a U.S. company) Teknion/Global Furniture Inc.( started by a Russian immigrant furniture upholsterer and now employs 5000 people in Toronto).

In the World is Flat by Thomas Friedman, he spends a whole chapter highlighting the fact that while in North America engineering graduates are declining in numbers they are rapidly increasing in countries like China, and India.  I believe the decline in Canada has been about 20% in the last 10 years.  He argues that this gives these developing economies a real competitive advantage going forward and I agree.  (  What would have happened if Pierre Omidyar(an Iranian by birth and software engineer from Tufts University in Boston by education)  had the idea that led to EBAY in Europe or Asia rather than the U.S.A.? EBay now employs 10,000 people.   Of course, this becomes a bit of a self fulfilling prophecy in the sense that as manufacturing declines in North America the perceived need for engineers reduces.  However, if North America is to reverse the declines in manufacturing it will definitely be done on the backs of bright, creative engineers.  Europe, notwithstanding the 50% rise in the Euro vis a vis the dollar in the past 5 years has managed to maintain its industrial exports because of the many high quality, unique industrial and consumer products it manufactures as well as its high degree of manufacturing plant automation that minimizes factory costs,  and supply of  a well trained technically sophisticated workforce.  Just look at the Windpower industry and companies like Vestas, Gamesa and others that together now employ over 50,000 people in Europe making everything from generators to electronic controls to towers to fibreglass blades etc.  One could list many unique products that European companies sell all over the world.   One close to my heart would be Atom cutting machines from Italy, which I sold throughout North America the past 20 years,  who through advanced machine design and electronics as well as product innovation and their worldwide distribution network, really surpassed their U.S. competition who by and large have gone out of business because they just could not compete either on technical performance, quality or price because of their lack of advanced design and manufacturing, and global reach. ( Unfortunately, in most cases, while European companies tend to market globally, Canadian manufacturers tend to look only south of the border because its simple and convenient.)    While many of the companies mentioned above are large manufacturers, there are a lot of smaller companies in Canada that make unique products with potential worldwide markets that contribute a significant amount of the new manufacturing employment going on locally and throughout  Canada.  These smaller companies I would suspect have the potential to generate increasing manufacturing employment if they have strategies in place to brand and market their products worldwide and withstand outsourcing pressures or knockoffs that arise when product volumes become large enough to appear on the Asian radar screens of distributors, retailers, and importers.  To give you a few examples:  Barbarian Sportswear(Kitchener, mfg. of high quality rugby apparel, 75 employees), Buon Vino(Cambridge, mfg. of filtering and bottle filling equipment for the make your own wine industry, 20 employees), Spinrite Yarns(Listowel, mfg. of knitting yarns, 500 people), Trulife Industries(Belleville, mfg. of mastectomy bras and elasticized medical supports, 100people), Spoolon Industries(Port Hope, mfg. of plywood and metal cable reels, 30 people),Durabla Canada(Belleville, mfg. of fluid sealing gasket material)Baycomp(Burlington, mfg. of high strength thermoplastic composites for orthotics, 20 people), Ingo Sweaters(Waterloo,high quality knitted sweaters), Salus Sportswear(Kitchener lifejackets), and Tilley Endurables(Toronto, no explanation of this brand required I suspect) All these companies, and many more like them sell their unique products all over the world and are typically first or second generation family owned, private businesses.  These businesses and many others like them have the potential to flourish internationally if they follow the right business strategies and do not get purchased by a larger public company who tend to move manufacturing facilities offshore in the interest of improving cost competitiveness.(Sic: Robeez Baby Shoes in Vancouver purchased by Stride Rite, and Arcteryx Ski Wear in Vancouver purchased by Adidas)

STRATEGIES FOR CANADIAN  MANUFACTURING SUCCESS

While reversing the downward spiral in manufacturing employment in Canada will take years, it can be done if concerted efforts are taken on many fronts.  Some of the key points are listed below:

• Canada needs to educate more science and engineering graduates and skilled trades people as well as continue to encourage immigration of these types of people.  As mentioned above, these individuals will either help grow existing operations or end up creating new ventures that will eventually employ a lot of people.
  
• Manufacturers need to invest in production machinery and processes that will reduce product cost and increase product quality.  With the strong dollar and accelerated depreciation policy of our government there hasn't been a better time to make these investments, especially purchases in the U.S.A. to offset companies currency losses on the revenue side of their business.  One of the things you really notice when you visit European factories is the high degree of automation, organization and cleanliness compared to North America due to their high wage rates and unionized workforces.  One manufacturer of carpet and linoleum, Forbro in Holland, has a giant automated finished goods warehouse that via robot can pick up and deliver to the shipping area any roll without the touch of a human hand.  A high end furniture manufacturer in Norway  is located right on a fjord and has their own shipping quay where their finished sofas are loaded into containers and shipped around the world.  They make their own urethane foam(vertically integrated), won't allow employees to lift anything over 3lbs(concern for employee environment)  and have a computerized material handling system that efficiently moves materials through the manufacturing process via barcoded overhead conveyors(Lean manufacturing).  Their well designed, high end furniture is sold all over the world.(Global Reach, Scandanavian branding and design ala IKEA).
  
• Besides capital investment in machinery and processes, Canadian companies can greatly benefit from increased use of Lean Manufacturing methods which as the term implies can strip away the fat from both their front office and plant operations by concentrating on ways to create ergonomic, orderly, low waste work environments which end up saving tons of money through better utilization of plant space, less working capital tied up in inventories, faster more flexible customer response times, better product quality, and employee empowerment.
  
•  Manufacturers need to become more nimble and flexible in the way they respond to the marketplace and changing demands.  One of the constant remarks you hear about Asian companies is how willing they are to turn on a dime and develop a product idea, make a prototype or sample order, or simply turn around a production order in order to capture customers and market share.  Nothing is too much trouble for these factories as long as they see a payoff at the end of the day.(They look LONG TERM)  The example of going to a tailor in Hong Kong, Seoul or Beijing and having a custom made suit in a day or two is a trite but telling example of a national drive to succeed.  In many cases its no longer good enough to take 4-5 weeks to deliver an order when customers can email a design to Asia and ship back to North America via Fedex overnight and have the product in a few days.  In fact, many Canadian companies(one who makes outdoor mats and one who makes baby shoes that I know of personally) can buy their cutting dies in the Far East at a fraction of the cost with the same delivery time as they would get in Canada.  On the other hand, I know a company in Mississauga who makes car mats that competes very successfully  against cheap imports by offering generous product warranties and providing tremendous service on small or large order of mats in terms of delivery time.  They also keep their administrative costs to a minimum and run a highly productive plant while sourcing all their raw materials in North America.  So it can be done.  In fact, minimizing administrative front office costs is becoming an increasing trend for many manufacturers.  One company that comes to mind, a Toronto manufacturer of Safety Clothing, literally has no office; the owner preferring to hold his business meetings either via his Blackberry or at his favourite Asian restaurant where he has a reserved table. His small factories located in the Toronto area utilize home sewers rather than pay rent for manufacturing space.  A bit of an extreme example perhaps but an example of how frugality can pay off.
  
• This brings up 2 more points about effective strategies to compete.  First, when you buy from Asia you typically must pay for the entire shipment up front which gives you very little leverage if you receive damaged goods.  Secondly, you often have to purchase in larger quantities than you really need in order to get the pricing you want so you end up with expensive warehouse space here in North America to store product as well as an increased risk of product obsolescence should market trends obsolete your product inventories that then need to be discounted and sold off at a loss to a liquidator like Winners, T.J. Maxx and many others.  Third, Asian manufacturers offer no product warranties that I am aware of so its strictly buyer beware in terms of product quality.  A company who makes fridge magnets buys their material from overseas material and routinely finds bits of knives etc. in the material; another company who makes automotive  shipping bags from reinforced vinyl manufactured by Vintex in Mount Forest Ontario has competitors who  purchase cheaper grade  offshore vinyl that can be filled with so much toxic filler which offgasses  that forklift operators in an automotive plant have collapsed on the job; another Ontario company who makes safety harnesses and buys their hardware from Asia have people inspect every piece to ensure they are up to spec.(this adds cost and additional product liability. (i.e. Menu Foods pet food scare where for a 20%difference in the price of a product additive they effectively have put their company out of business) .
  
• Manufacturers must resist the trend to "Race to the Bottom" and instead compete on Product Quality, Durability, Design,  Innovation and Global Marketing.  An economist, Herman Daly, advocates a new economic model based on "stead state or balanced" economies where quality becomes more important than quantity.  The "big box" syndrome of high volume and low prices has in many ways forced this race to the bottom by North American manufacturers.  However, I believe that businesses and consumers are reaching a limit in terms of the poor product quality durability and safety,  and are looking for longer lasting well made alternatives.(See Mattell recalls and many others you never read about)  Good Canadian examples of this high quality strategy abound; The Blackberry, of which they still assembly 5.5 million a year in Waterloo is not only an innovative product but very sturdy, reliable, and well made because of its Canadian engineering,design and assembly.  Chariot Strollers of Calgary, who employ 150 people making high end 3 wheeled strollers they invented several years ago, make a high quality product that supports a premium price point and margins that allow for continued Canadian manufacturing.  Chariot and Blackberry as well as Arcteyx Ski Wear of Vancouver and Crocs of Quebec are all examples of well branded, well made, innovative products that are globally marketed and recognized for product quality at the high end of the price spectrum.  If you want, go to the Barbarian Rugby website and click on product quality features you can see the durability they put in every garment that gives it their "Realone" seal of approval and authenticity.  Companies must promote in great detail as Barbarian does, the design and construction features of their product that creates long lasting value for the customer. Better to spend $50.00 once for a Ruby Shirt than $25.00 4 times.  I remember going to a furniture store in Vermont that featured "Made in Vermont" solid wood rockers or gliders as they call them.  Each glider had a very elaborate drawing on a large tag that illustrated all the design features(sealed bearings, tongue and grooved joints, water based laquers etc.) that validated their lifetime guarantees.  Emphasing the quality features of one's product can be a powerful tool in creating customer demand for well made, long lasting products that not only save money in the long term but will also use less of our world's finite resources,  which is a real selling point in the trend towards consumer concerns about being "Green". 
  
• A substantial side benefit of resisting the flight to offshore sourcing is the  product protection it can provide from copying or knockoff; especially on more technically sophisticated products where the North American Manufacturer  has developed proprietary processes that are the secret to their success.  Think of the benefit Rim has of protecting its intellectual property by maintaining its design and a significant portion of its manufacturing and assembly North American based and outsourcing only to approved sources for subassemblies and components and the balance of its finished product assembly.  Conversely, think of all the time, money and lost revenue companies like Calloway and Taylor Made, who make golf clubs, spend defending against copyright and patent infringement by illegal knockoff  producers in Asia.  More and more, the apparent savings from Asian sourcing are being eroded by the negatives related to skyrocketing freight, product obsolescence, warehousing, increased inspection and overseeing of foreign sources, not to mention  product liability and negative branding issues resulting from warranty recalls and faulty quality or safety concerns.  As Canadian manufacturers, we need to do a better  job at selling both the positives of local sourcing and the negatives related to overseas.
  
• Manufactures must eliminate or absorb layers of distribution that add unnecessary costs and markups, or at the very least begin using multiple selling channels by becoming more comfortable dealing directly with the end consumer; whether on an industrial or retail product.  Too many manufacturers are not market saavy in the new sense of direct selling to their target market but rather fall into the conventional pattern of multilevel distribution because it is an easier more traditional way of building market volume.    Thomas Friedman in the World is Flat talks about the 3 steps to radical changes in business as follows:

1. OLD TECHNOLOGY OLD HABITS

2. NEW TECHNOLOGY OLD HABIT

3. NEW TECHNOLOGY NEW HABITS

• Online selling via ones own website or a commercial website like Amazon, Godzilla, etc.  is a good example of a technology that can give a manufacturer worldwide access to customers.  There is a bridal shop in Port Perry Ontario that has sold custom made brides dresses to customers in England, New Zealand etc. all via the web.  An industrial felt company in the Toronto area has had great success utilizing the Amazon website to sell its winter boot liners and floor protector products direct to consumers after their prices were being squeezed by customers who repackaged and sold their goods to the Big Box retailers.  Amazon looks after the financial aspects of the sale and payment, takes a 15% commission, and the Felt Company ships to the customer from its order fulfillment operation in 1-3 days.  This "Disintermediation" strategy is working great for them by giving them direct links to the end consumer who values the quality wool felt products they can buy rather than the cheaper, less durable synthetic alternatives that are available at traditional retailers.  They also have developed their own Buy-On-Line website where customers can purchase direct.  It's a win-win for the consumer and the manufacturer.  All manufacturers need to do is spend more time on the marketing end of their operations, think outside the box, and hire some young, tech and marketing saavy kids who understand how their generation likes to purchase.  Unfortunately,   many manufacturers are afraid of upsetting the apple cart with their distribution network by going direct but some, as described above,  are realizing that they have to be more proactive or they will lose out.  Distributors are often not that loyal and if given the opportunity to source a cheaper Asian line that will glean them more profit, will often drop their existing Canadian Made line in a heart beat.  So why not take the bull by the horns and begin to direct market your product in a way where you can passionately promote the value that your product can provide the end customer.  Distributors often don't do that good a job at this passionate promotion of quality and Canadian made because they usually have multiple lines and are continually gravitating to those lines that have the right price points and maximum margins rather than the product offerings that might provide the maximum "Total Lifecycle Benefits" to the end user.  In other words, distributors can very often buffer the consumer from acquiring the quality products they are really looking for.  Examples abound.  One local tooling manufacturer for example was buying nuts and bolts for his Plastics Moulding Tools from  a large well known industrial distributor, that unbeknownst to them had gone to an Asian source;  with no price reductions by the way.   After experiencing many warranty issues in the field with tool failures because of bolt breakages this company switched to American made nuts and bolts and their problems ceased.  Another rubber products manufacturer from Winnipeg makes rubber tie down straps for the cargo industry called "Snappy Hookers" that compete with offshore products from the Far East. This company makes their strap out of high grade EPDM rubber that withstands the elements and last up to 10 times longer than the cheaper imports that apply a thin chemical coating over cheap rubber.  Unfortunately, the distributors who have the customer connections would in many cases rather sell the cheaper imports since margins are better, and revenues higher because their customer base will have to buy these items more often.  If this manufacturer were to spend  marketing dollars via trade shows, internet, and sales calls to brand and position their Snappy Hookers direct to the end consumer it might pay off handsomely in the long run.
  
• Other innovative examples of novel distribution methods abound.  Apple now has almost 200 of their own stores in North America that generated about 25% of their total revenue in the last quarter and was the fastest growing segment of their revenue stream.  Besides the fact that by vertically integrating they gain the retail markup normally lost to the BestBuys and Future Shops of the world, they also gain market share by having their own well trained people "passionately promoting" only their products in a unique retail environment.  Roots is a great Canadian example of using retail integration, not to mention their branding strategy and global promotion, to gain market share and additional margin.  Margin absorption by the manufacturer through Disintermediation Strategies is a real key to enabling North American manufacturers to compete in the global economy.  Direct selling companies  like Tupperware, Avon, and Cutco Knives use a different distribution method to engage the consumer directly, Home based or Party selling, that pays off handsomely in terms of market share and profitability.  Its interesting that Cutco Kitchen Knives are still made exclusively in the U.S.A because their branding, distribution methods, product quality, lifetime warranty etc. create a complete marketing package that allows them to continue to manufacture competitively in North America.  They sell on quality, performance and service not on price.  I urge you look them up on their website,  www.cutco.com and see how they do it.  It's a model to emulate.  Another excellent example of branding is New Era Cap of Buffalo.  They are a 100 million dollar a year, family owned business, that supplies all of Major League baseball with their authentic, sized, wool caps.  They have 3 plants, all in North America, employing about 1500 people making high quality products.  Besides the fact that Major League Baseball wants a Made in America product for America's game, New Era has done an excellent job at withstanding Nike's attempts to take away this contract by spending heavily on advertising and promotion to brand their name and logo in the minds of the consumer.  They make a quality, branded, hand sewn product and pay their people $12.00 an hour right in the U.S.A. in an era(no pun intended) when most caps are imported from offshore.
  
• Manufacturers must source the world for ideas that relate to their products and thereby create joint ventures,  technology licencing agreements, and partnerships that allow them to bypass the costly and time consuming R&D and product development phase.  In many cases, there are European and Asian products that can be manufactured cost competitively in Canada.  One example of this "Import Substitution" strategy is AAER of Bromont Quebec who is beginning to manufacture windmills in Canada by licencing the technology from a German based company.  Another company in the Toronto area has been successfully manufacturing diecutting presses for the worldwide automotive leather industry after improving upon a product design they first saw in Europe 10 years ago.  

I hope to continue blogging on the Manufacturers Innovation Network site and would value any feedback you have on my comments above.