2.1 Overall importance of the manufacturing sector

As shown in Figure 1, employment in the manufacturing sector decreased by 26%, or 586,500 jobs, from 2004 to 2010, and then rose a slight 0.1%, or 1,700 jobs, from 2010 to 2015. This period included a global recession in 2008–09. In comparison, employment in the rest of the economy rose by 12.0% between 2004 and 2010, and by 6.4% between 2010 and 2015.

Figure 1 also shows that the manufacturing sector is far more cyclical than the rest of the economy, as was witnessed during the 1981–82 and 1990–91 recessions. Also, in 1976, employment in the Canadian manufacturing sector (1.9 million employees) was higher than in 2015 (1.7 million employees), even though employment in the total economy increased by 84% during that period. Nevertheless, employment in the manufacturing sector represented 9.5% of total Canadian employment in 2015.[1]

Figure 1 – Employment (Millions), Manufacturing Sector and the Rest of the Economy, 1976 to 2015, Canada

Source: Figure prepared using data from Statistics Canada, “Table 282-0008 – Labour force survey estimates (LFS), by North American Industry Classification System (NAICS), sex and age group, annual,” CANSIM (database), consulted 27 October 2016.

Furthermore, although total hours worked in the manufacturing sector decreased by 23% between 2004 and 2015, actual production only decreased by 10%. This is the result of a 17% increase in productivity (real output per hour of work).[2] These productivity gains are the result of increased global competition[3] and improved employee capacity and training.[4] Process automation and product sophistication were also significant contributors to this increase.[5]

Canada is not the only industrialized country to have experienced decreased manufacturing employment over the last 10 years. From 1998 to 2015, the share of manufacturing employment in total employment dropped from 15.0% to 9.5% in Canada, from 15.0% to 10.3% in the United States and from 18.5% to 9.6% in the United Kingdom.[6] Table 1 shows employment in various countries in the manufacturing sector, in 1998 and 2014.

Table 1 – Level and Variation in Manufacturing Sector Employment, By Selected Countries, in Millions, 1998 and 2014

Country	1998	2014	Difference, 1998–2014
			Level	Percentage
Brazil	8.2	12.2	4.0	48.6
Canada	2.1	1.7	-0.4	-18.7
France	4.2	3.2	-1.0	-23.4
Germany	8.6	7.8	-0.8	-8.9
Italy	4.9	4.1	-0.7	-15.2
Japan	13.8	10.4	-3.4	-24.7
Mexico	6.8	7.8	1.1	16.0
United Kingdom	5.0	3.0	-2.0	-39.9
United States	19.7	15.1	-4.6	-23.3

Source: Table prepared using data from the International Labour Organization, “Employment by Sex and Economic Activity,” consulted 7 December 2016.

The manufacturing sector is still “a very important part of the Canadian economy,” notable because it is responsible for about “half of the R and D [research and development] activity that takes place here in Canada.”[7] The manufacturing sector is also responsible for two thirds of Canadian exports.[8] Thus, the manufacturing sector is important for Canada’s trade balance, as well as for innovation.

Beyond the numbers, one witness summarized the importance of the manufacturing sector by highlighting that sector’s contribution to value added and the diversification of the Canadian economy:

Canada needs a balanced economy. We cannot sustain just by digging stuff up and selling it, nor can we just serve each other coffee and sell each other shoes in the service sector and call it a viable economy. Canada needs to make things. We need to apply our knowledge and expertise, we need to add value to our resources, and we need to continue to be world leaders in advanced technology, productivity, and innovation.[9]

Jerry Dias

Unifor

2.2 Industry characteristics

Certain manufacturing industries were better able to recover from the recession of 2008–09 than the sector as a whole. Table 2 shows the variation in employment from 2010 to 2015 for industries in the manufacturing sector. Overall, employment rose by 1.4% in the entire manufacturing sector during that period.[10]

Table 2 – Level and Variation in Manufacturing Sector Employment, By Industry, 2010 and 2015, Canada

Industry	2010	2015	Variation
			Number of jobs	%
Motor vehicle, motor vehicle body, motor vehicle parts	109,375	125,404	16,029	14.7
Other transportation equipment	16,315	18,460	2,145	13.1
Chemicals	79,290	88,757	9,467	11.9
Machinery	119,459	132,504	13,045	10.9
Aerospace products and parts	43,286	47,259	3,973	9.2
Fabricated metal products	144,783	155,358	10,575	7.3
Petroleum and coal products	17,695	18,692	997	5.6
Other industries in the manufacturing sector	56,538	59,186	2,648	4.7
Non-metallic mineral products	49,743	52,010	2,267	4.6
Plastics and rubber products	92,884	96,507	3,623	3.9
Wood products	88,949	91,781	2,832	3.2
Food and beverages	251,407	255,592	4,185	1.7
Primary metal manufacturing	61,167	57,267	-3,900	-6.4
Furniture and related products	68,832	63,926	-4,906	-7.1
Electrical equipment, appliances and components	36,818	33,787	-3,031	-8.2
Textile and textile product mills	18,941	17,209	-1,732	-9.1
Paper and printing	121,450	105,214	-16,236	-13.4
Clothing and leather products	28,556	23,145	-5,411	-18.9
Computer and electronic products	71,208	55,968	-15,240	-21.4
Manufacturing sector, total	1,476,695	1,498,027	21,332	1.4/p>

Source: Table prepared using data from Statistics Canada, “Table 281-0024 – Survey of Employment, Payrolls and Hours (SEPH), employment by type of employee and detailed North American Industry Classification System (NAICS), annual,” CANSIM (database), consulted 26 October 2016.

Different industries in the manufacturing sector have different characteristics. For example, the aerospace industry spends five times more on R&D than the manufacturing sector average, per dollar of production. Furthermore, its exports are more diverse than those of the manufacturing sector as a whole. For example, in 2015, 64% of its production was destined for the United States, versus 81% for the entire manufacturing sector.[11] Aerospace is also supply-chain oriented: 60% of its exports are parts used to manufacture airplanes elsewhere.[12]

The presence of the steel industry in a community has a significant economic impact in terms of transport, development of support technology and supply and maintenance; it also attracts other industries, such as auto parts manufacturing and specialized production of steel products. With an increase of 15% of employment in the automotive industry from 2010 to 2015, one would have expected the same in the increase in the steel industry, but it was not the case, as employment decreased by 2% over the same period.[13] The steel industry is dealing with problems of global overcapacity, largely due to policies considered to be unfair, such as dumping from China (exporting at prices that are lower than the cost of production in order to access markets).[14]

Forest products manufacturing is one of the industries in the manufacturing sector with the highest proportion of jobs in rural areas.[15] This is because that is where the resource is located. This industry is also developing new, more ecological products, such as nanoproducts derived from wood that can be used in the composition of metal alloys.[16] Similarly, the nuclear industry is manufacturing high quality components in Canada for use in the manufacture of other products.[17]

The food production industry represents 18% of the manufacturing sector’s output, but only 8% of its exports.[18] The success of small businesses in this sector often depends on having a niche product, or a terroir (specific local products).[19] This industry has enormous growth potential because of future population growth.[20] The meat industry is more dependent on exports, and consumption is very price sensitive. For that reason, this industry must constantly innovate to keep its costs down.[21]

Oil production has decreased in recent years as a result of the drop in oil prices. “As oil prices have declined, capital flight has exacerbated the challenges facing the energy sector which has, as a result, directly impacted manufacturing.”[22] From 2013 to 2015, employment in the petroleum and coal products manufacturing sector decreased by 1,185 jobs to 18,692, a decline of 6%.[23] On the other hand, low oil prices tend to decrease the production costs in other industries of the manufacturing sector. It also tends to decrease the value of the Canadian dollar, which is good for Canadian exporters.

The chemical industry employed nearly 89,000 people in 2015, an increase of 12% since 2010.[24]

The North American chemistry industry has changed dramatically in the past five years. The availability of low-cost, low-carbon feedstocks, specifically, natural gas, liquids, and shale gas, has put North American producers amongst the lowest cost chemical producers in the world. That, combined with the anticipated growth and demand, has led to significant capital investment. Today, we are tracking more than 275 chemistry projects with an impressive book value exceeding $225 billion under development in the United States alone. Sixty percent of that represents foreign direct investment into the U.S. In turn, those anchor investments have spurred an additional 600 investments in the downstream plastic sector alone.[25]

Bob Masterson

Chemistry Industry Association of Canada

Despite the decrease in employment in the manufacturing sector, the size of Canada’s defence industry has remained stable. This industry is highly dependent on the federal government procurement strategy.

Today, the opportunity of a generation stares our industry and the Government of Canada in the face. Over the next 20 years, the Canadian defence manufacturing base has the potential to grow significantly due to the planned recapitalization of the Canadian Armed Forces. Shipbuilding and the fighter jet replacement program are the two largest pieces of this puzzle, financially speaking, accounting for at least $35 billion in capital equipment.[26]

Christyn Cianfarani

Canadian Association of Defence and Security Industries

Agricultural manufacturers build machines used in the agriculture sector. In 2013, that industry was estimated to have a GDP of $1.3 billion.[27] In 2015, employment for the larger “agricultural, construction and mining machinery” industry was estimated at nearly 32,000.[28] More than half of the industry is located in rural areas.[29]

The automobile industry is one of the most important in the manufacturing sector in terms of employment. It also has a significant impact on other manufacturing industries:

[T]he auto industry accounts for roughly 115,000 direct jobs and about 500,000 direct and indirect jobs across the country. For every one assembly job, there are seven to nine other jobs created in the economy. No other manufacturing sector has such a high job multiplier.[30]

Mark Nantais

Canadian Vehicle Manufacturers’ Association

2.3 Causes of job losses in the manufacturing sector

Part of the decrease in employment in the manufacturing sector is due to a decline in demand for certain Canadian products:

The paper industry is a very clear example of this. The industry is 30% smaller today than it was 10 to 15 years ago, and that's just tied to the fact that demand for paper products has shrunk dramatically over that period of time, due to what's been going on with the digitization of media.[31]

Michael Burt

Conference Board of Canada

Another reason for the decline in the Canadian manufacturing sector is increased international competition, with unit costs that are often much lower abroad. This competition is coming from China, but also other emerging economies like Mexico. Canada has witnessed the displacement of production and employment to these countries, including in the auto parts, apparel, furniture and electronic products industries.[32]

Increased energy costs are also partially responsible for the challenges facing the manufacturing sector. The problem lies with the high cost of new energy production and distribution infrastructure, whether it be traditional or renewable energies.[33] There are two key solutions: increased energy efficiency; and co-generation, by which businesses produce their own energy and can even sell back the surplus they do not use.[34] Other solutions may include new provincial energy plans.

The appreciation in the Canadian dollar in 2007 and 2008, which was caused by the increase in commodity prices, and which made Canadian exports more expensive abroad, also contributed to job losses in the manufacturing sector during that period.[35] Since then, there was depreciation in the Canadian dollar, which may have helped Canadian exporters: we could have witnessed a continued decline in manufacturing employment instead of a small increase.

2.4 The state of Canadian industrial innovation

Innovation is the key to competitiveness.[36] It can take the form of developing new products, improving existing products, or improving the manufacturing processes for existing products.

Innovation is the art of using inventions in new ways. Wealth is created by owing the intellectual property and by making things. Instead of always thinking about how to make better things, we should probably consider sometimes thinking about a better way to make things.[37]

Scott Smith

Canadian Chamber of Commerce

The World Economic Forum has ranked Canada 22^nd in the world for innovation in 2014.[38] The World Intellectual Property Organization ranked Canada 15^th in the world for innovation in 2016.[39] In terms of business expenditures in R&D, Canada fell from 18^th place to 26^th between 2006 and 2013.[40]

2.5 Future of the sector

According to one witness, it is difficult to say which manufacturing industries will grow most in the future, but it would be important to focus on those that are export-oriented, “because the Canadian market is fairly small.”[41] Some witnesses, meanwhile, stress that the federal government should not pick “winners and losers” when developing its policies,[42] while others believe the opposite.[43]

During its travel and at meetings in Ottawa, the Committee heard that several countries that compete with Canada are developing new technologies, and it is important for the Canadian manufacturing sector to be among the first to commercialize the resulting products.[44] These disruptive technologies, such as robotics, additive manufacturing (or 3‑D printing), the Internet of Things, and artificial intelligence, are in full expansion.[45] Additive manufacturing is almost non-existent in Canada compared with China, and requires significant investments.[46]

Most manufacturing industries face similar problems, although there are some differences.[47] A comprehensive manufacturing strategy should therefore be developed quickly, or opportunities for growth will be lost. According to some witnesses, “[t]ime lines are running out and investments should be done in the next 2 years.”[48]

In October 2016, Canadian Manufacturers and Exporters (CME), in cooperation with the Canadian Manufacturing Coalition, completed a business consultation process called Industrie 2030. This process was intended to create a road map for doubling Canadian manufacturing activity by 2030. CME is also working with the Department of Innovation, Science and Economic Development (ISED) to align this strategy with the federal government’s innovation strategy. The four core pillars of Industrie 2030 are: investing in plant capacity; developing and commercializing new products; adopting new technologies; and finding new customers.[49] The recommendations from Industrie 2030 were published in October 2016.[50]

RECOMMENDATION 1

The Committee recommends that the federal government develop a strategy for the Canadian manufacturing sector based on the recommendations in this report. This strategy should include clear objectives and timelines for the Canadian manufacturing sector in terms of production, employment and exports. Regular progress reports should be published to identify achievements to date, as well as any corrections that may be required.

Additionally, according to other witnesses, policies could subsequently be developed for specific industries.[51] For example, the automotive, aerospace and telecommunications industries would be good candidates for sectoral initiatives.[52] The dairy processors would also like to see a strategy developed for their sector.[53]

We think we need a broad-based, sweeping manufacturing policy. We are fully supportive of the sectoral policies that have been created—aerospace and automotive, for example—but if you start lining that up with the food one, the equipment processing one, and all the other sectors that are out there, you will find that 90% of the issues are the same. Rather than create a whole bunch of individual sector ones, we think it is better to start at the big picture, define a national strategy, and see how the sectors fit within that afterwards.[54]

Matthew Wilson

Canadian Manufacturers and Exporters