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B.C. Manufacturing Sector Expanding…But Faces Headwinds

By Ken Peacock

Manufacturing is an important and sometimes underemphasized part of the British Columbia economy. In relative terms, the manufacturing sector in B.C. is somewhat smaller than in other provinces, but it is also resilient and diverse.  Manufacturing activity, particularly in the resource space, is cyclical, but output in the broad sector continues to trend higher.  Over the long-term, the number of people working in manufacturing has fallen, a pattern seen in most advanced economies.  However, in recent years employment in B.C.’s manufacturing sector has actually risen (Figure 1).

Figure 1
Number of people working in manufacturing has increased recently

 
Source:  Statistics Canada, Labour Force Survey.

 

A look back: solid growth in B.C.’s manufacturing sales

B.C.’s manufacturing sales have risen by more than 30% over the past five years, outpacing the manufacturing recovery in both Ontario and Quebec.  In the other provinces, including Newfoundland and Alberta where the oil price collapse had a large impact on the value of refined petroleum products, the value of manufacturing output in 2017 remained below the levels recorded in 2012 (Figure 2). 

Figure 2
Solid growth for B.C. manufacturing sales

 
Source:  Statistics Canada, CANSIM table 16-10-0048-01.

 

In contrast, B.C.’s manufacturing sales reached a new milestone in 2017, surpassing the $50 billion mark for the first time (Figure 3).

 

Figure 3
B.C. manufacturing sales surpass $50 billion

 
Source:  Statistics Canada, CANSIM table 16-10-0048-01.

 

Manufacturing plays an important role in B.C. economy

While there is nothing intrinsically better about producing manufactured goods compared to services or other productive activities, the sector deserves more attention.  This is primarily because of the outsized role it continues to play in the province’s international export mix.  B.C.’s leading exports are shown in Figure 4.  Lumber remains the number one export sector, followed by food products, pulp and paper, and primary metals manufacturing; all four of these sectors involve manufacturing.

Manufacturing is also a high productivity sector, which means most industries in the sector pay comparatively high wages.  Above average employee pays also serves to give manufacturing a bigger economic footprint. 

Another relevant consideration is that, apart from the employment and income generated directly in the sector, manufacturing creates demand for a wide array of goods and services produced by local firms in other industries, such as transportation, communications, business and professional services, and various suppliers of intermediate goods and other business inputs.  Manufacturing firms procure tens of billion of dollars of services and other inputs from other B.C. companies every year. 

Figure 4
Lumber remains B.C.'s largest export product

 
Source:  Statistics Canada, CANSIM table 16-10-0048-01.   * 2016 data    ** 2015 data

 

Manufacturing faces headwinds

While B.C.’s manufacturing sector has a modestly upbeat story to tell, it faces mounting competitiveness challenges linked to escalating costs, the greater attractiveness of the United States as a location to undertake manufacturing, skills shortages, the impact of aggressive carbon policies in B.C./Canada on energy and related input costs, and recently imposed U.S. tariffs on steel and aluminum imports from Canada. In addition, manufacturing activity linked to the downstream processing of B.C. resources – e.g., lumber mills -- must contend with increasingly cumbersome and costly permitting processes, other environmental concerns, and risks associated with unresolved Aboriginal land and title claims. 

Manufacturing’s success is something that policy makers should take note of and encourage.  There are opportunities to expand and scale manufacturing in B.C., especially medium-sized firms wanting to export more in foreign markets.  However, doing so requires local manufacturers to invest in new facilities, equipment and technology; it also requires access to an appropriately qualified workforce. 

In the Canadian context, investment spending in manufacturing in B.C. is higher than some may have anticipated.  However, measured on a per employee basis and contrasted against the US, the levels of manufacturing investment in both Canada and B.C. are much less impressive (Figure 5).

Figure 5
B.C. manufacturing investment per worker lower than the U.S.

 
Source:  Statistics Canada, CANSIM tables 34-10-0035-01 and 14-10-0202-01 (Survey of Employment, Payroll and Hours used to calculate investment per worker) and US Census Bureau, Annual Capital Expenditures Survey and Bureau of Labour Statistics for number of US manufacturing employees.  US investment converted to Canadian dollars using average market exchange rates for each year.

 

The reality is that both federal and provincial government policies are making it more expensive to operate and invest in businesses in B.C., including in export-oriented industries.  While manufacturing has done reasonably well in the post-recession era, this is backward-looking.  Especially in resource-related industries, B.C. manufacturers face significant headwinds in what has become an increasingly competitive world.  If policy-makers are looking to expand B.C.’s exports and nurture more high-paying jobs in the province, they should focus more attention on the manufacturing sector and identify ways to address the obstacles to its continued growth.