The decline of manufacturing

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By Guest Blogger Ryan Lewenza

In my last blog post I mentioned how I was looking forward to the holidays as I needed some festive cheer following the recent stock market rout. Well, there’s more than 2,500 families in Oshawa (and thousands more in the Canadian energy patch) that are going to have a pretty crappy holidays after hearing the terrible news that General Motors is going to shut down its Oshawa plant as part of a global restructuring (interesting that they call it a “global restructuring” when just US and Canadian plants are being closed!). Timing, as they say, is a bitch!

Having grown up in Windsor ON, the automotive capital of Canada, I’ve seen this story many times before with the US car companies scaling back operations and moving production and jobs to Mexico where the labour costs are a fraction of the costs here. Fortunately, President Trump is trying to address this in the new NAFTA agreement requiring that 40-45% of car parts be made by workers earning US$16/hr, which will help to narrow the wage gap between North American and Mexican autoworkers. This is a great step in the right direction for our workers but unfortunately comes a little too late for Oshawa. In fact, our manufacturing sector, and our government policies (or lack thereof) supporting the sector, has been one step behind for years now.

The manufacturing sector in Canada has been in a steady decline for years, if not decades. As seen below, manufacturing jobs have declined from roughly 2 million (peak of 2.3 million in the early 2000s) in the 1970s to just 1.7 million today, with most of these job losses being concentrated in Ontario. But as a percentage of our population, the declines in manufacturing jobs are even more glaring with manufacturing jobs declining from 8% in the 1970s to just 4.7% today. What caused this dramatic change in our Canadian manufacturing the sector?

Canadian Manufacturing Jobs

Source: Stats Can, Turner Investments

It’s never one thing that causes these dramatic shifts in an economy or sector. I see a number of factors all coming together for this perfect storm in the manufacturing sector. They include:

1. Productivity gains and automation: Without a doubt, productivity gains, through things like computers, supply chain management, robotics and automation, have had a transformative impact on the auto and manufacturing sector. For example, according to the International Federation of Robotics, the US car industry had 127,000 industrial robots installed in 2016, up 70% from 2006. Over this period, US jobs in the car industry declined from 1.1 million to 960,000 today. Productivity gains benefit an economy by increasing output per worker, however, it can be disruptive and lead to job losses. My mother works as a cashier at Zehrs and her job is under pressure from the self-checkout machines, which is why I never use these when buying my groceries!

2. Globalization and offshoring: Globalization, which the IMF defines as “the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, free international capital flows, and more rapid and widespread diffusion of technology”, has had a profound impact on the global economy and manufacturing sector. Add in NAFTA and these factors have greatly contributed to the major offshoring of auto and manufacturing jobs in Canada. Jeff Rubin, the ex-CIBC Chief Economist, wrote a great report on this topic and found that Canada has seen a decline of 45,000 jobs in the auto sector since 2000 with many of these jobs going to Mexico. Below is an interesting chart from the report and it clearly shows Mexican auto job gains have been at the expense of Canadian auto jobs losses. Jeff noted in the report that as of 2008, Canada and Mexico had roughly the same number of auto sector jobs between the two countries, but since then Mexican auto jobs have more than quadrupled to almost 900,000 jobs, versus Canada at 171,000 jobs. This is why I commend President Trump for demanding Mexico auto plants pay their workers a higher wage in the latest NAFTA negotiations.

3. Transformation to a service-based economy: Another major factor for the decline in manufacturing is the ongoing shift in North America to a more service-based economy. Canadian service-industry jobs have increased from 10 million to 14.5 million over the last 20 years. As a percentage of our population this equates to an increase of 34% to 40% today. This includes areas like finance, real estate, education, etc. Our consumption patterns are changing, which is in part driving these dramatic changes in our labour force.

Auto Sector Jobs for Canada and Mexico

Source: Stats Canada, Center of International Governance Innovation

The world is changing rapidly, which is having demonstrative effects on our economy and labour force. These changes in part explain why GM decided to shut down its Oshawa plant this month. So what are we to do to combat these changes? First, our government needs to support and foster growth in the manufacturing sector by making Canada more competitive and attractive to manufacturers. This includes things like offering tax incentives, allowing for faster capital investment depreciation expensing, and cutting red tape. For example, the OECD recently published a report highlighting that Canada ranks second last of 35 countries in the average time required for regulatory approval for construction projects. Our government should be all over this and look for ways to streamline regulatory approvals to reduce this lead time.

Second, we need to focus on skills retraining programs and ensure our kids and young adults are concentrating in the areas of high job growth in Canada. Below is a list of the top 15 careers in demand in Canada. It includes areas of skill trades, health care, technology, education, finance and engineering. To all the GM workers (and the young kids heading off to university) take a long, hard look at this list and determine what peaks your interest, since unfortunately we’re likely to see a continued decline in the manufacturing sector given these tectonic changes in the global economy.

Top 15 Careers Most in Demand

Source: Trade School, Turner Investments

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.