February 26, 2014
Rethinking Manufacturing in the 21st Century
This paper analyzes the economic factors behind the recent struggles of Ontario’s manufacturing sector, and offers recommendations as to what Ontario can do to cultivate this sector.
Ontario’s manufacturing sector was once the bedrock of the province’s economy. But over the past decade the sector has lost some 300,000 jobs and its share of GDP has declined sharply. Whereas in 2002 the sector accounted for 8.9 per cent of Canada’s GDP and 21.7 per cent of Ontario’s, it now accounts for just 4.9 per cent and 12.7 per cent respectively. Many communities across the province have felt the hardship of factory doors closing for good.
Ontario is not alone among developed economies in having a manufacturing sector that faces significant challenges. Compared to peer jurisdictions in the US, the decline in employment has been similar, while the decline in output in Ontario over the past 15 years has been steeper (Figures 1 and 2 below depict the drop in employment share and total output, respectively).
Even though there has been modest recovery in some American states in recent years, these gains are too small to signify a ‘renaissance’ in US manufacturing employment (see Figure 3).
Some of the decline in employment and output is to be expected and merely reflects the ongoing shift from goods-producing to service industries being experienced across OECD countries. But there are other explanations for the challenges in the Ontario manufacturing sector.
The composition of Canada’s exports has changed dramatically. We were once net exporters of manufactured goods. Today, our exports are more likely to be natural resources and Canada’s overall balance of trade tells a striking story (see Figure 4).
Ontario’s “terms of trade” are no longer favourable. The rapid increase in the value of the Canadian dollar over the past decade has represented an enormous challenge to many Ontario manufacturers, as their goods became more expensive to foreign customers. The rise in global competition means that maintaining a competitive cost structure is crucial to attracting new investments and retaining current plants. Although the recent drop in the value of the Canadian dollar will help somewhat, there are other forces that need to be addressed.
Manufacturing is going through an enormous global transformation. Many industries in Ontario have not kept up. Unless governments and the private sector understand and appreciate the forces at play and act quickly, it is likely that Ontario’s manufacturing sector will continue to suffer.
This summary report provides an overview of a longer, one-year research effort on the future of the manufacturing sector in Ontario (see Ontario Made: Rethinking Manufacturing in the 21st Century-Full Report). The purpose of this summary brief is to describe the current state of the manufacturing sector in Ontario, to explain why it has been experiencing challenges and to outline out a strategy for renewal. To do so, we need a clear understanding of why Ontario has experienced job losses and where manufacturing is headed globally.
While the Ontario manufacturing sector is at a crossroads, many of the crucial elements for success are already present in Ontario. It should be pointed out that even referring to the “manufacturing sector,” while necessary, is in part a misnomer because the sector is very diverse with different sub-sectors experiencing different opportunities and challenges. Part of the choice facing Ontario will be what kind of manufacturing sector we seek to cultivate. This paper will outline strategies and policy instruments for building a healthy sector based on Ontario’s comparative advantages.