Small and medium-sized manufacturing firms that add services to their product offerings can enjoy higher profit margins, more stable revenues and greater competitive advantage. A new report by The Conference Board of Canada and McGill University outlines the benefits that Quebec’s high-value manufacturing firms can gain from providing services to their clients.

A second report — also the result of collaboration between the Conference Board and McGill — describes the opportunities for Quebec’s small and medium-enterprises (SMEs) to become suppliers to multinational corporations (MNCs) by integrating themselves into MNC production networks.

“Small and medium-sized product manufacturers risk leaving value behind by not including services, especially to their large corporate clients, in their commercial offerings,” said Michael Bloom, Vice-President, Organizational Effectiveness and Learning. “Service offerings that complement products make SMEs valuable partners — especially when they can deliver them ‘in-house’ to their clients, eliminating the need to outsource. By developing in-house expertise to deliver services, SMEs can build stable and long-term revenues.”

“Canada’s manufacturing value-added has been declining over the past decade. SMEs, representing half of Canada’s manufacturing employment, can improve this picture by adding new services to their product portfolios, thereby greatly increasing value added,” said Vince Thomson, Werner Graupe Professor of Manufacturing Automation, McGill University.

Product manufacturers should integrate services into their core product offerings for several reasons:

• Services have higher profit margins than products.
• Services provide a more stable source of revenue, because they are more resistant to economic cycles that affect investment and equipment purchases.
• Services enable substantial revenue to be generated from an installed base of products with a long life cycle.
• Services add value and strengthen the supplier-customer relationship.

The report, SME Manufacturers in Quebec: Adding Services to Boost Competitiveness and the Bottom Line, is based on a review of domestic and international literature and the results of case studies as well as an online survey of Quebec-based manufacturing SMEs, with 113 respondents.

Ninety-five per cent of SMEs offering services gain revenue from their offerings. Of these, one-quarter obtain between 21 and 60 per cent of their revenue from their service offering; a further 67 per cent get between one and 20 per cent of revenue from selling services. As an added benefit, offering services helps SMEs to sell more of their manufactured products, and yields customer feedback that helps improve product offerings.

Adding services to a product offering comes with challenges. Forty-five per cent of respondents identified the need for them to employ highly-skilled personnel as a major challenge in making their service offering. Other substantial challenges lay in accessing client needs (12 per cent) and identifying what specific services to provide (12 per cent). The key factors that helped SMEs deliver services to their clients were in-house expertise and knowledge of their products, knowledge of foreign languages and regulations, knowledge of clients’ needs, and the ability to provide timely solutions.

Another approach that Quebec SMEs can adopt to compete globally is to integrate with the production networks of multinational corporations. The report, Integrating Quebec SMEs Into Production Networks: A Spur to Competitiveness, identifies several factors behind successful networks:

• the presence of world-class MNCs to provide access to large markets and knowledge;
• close lateral relations among SMEs to share information about markets and technology;
• forums for communication between and among MNCs and SMEs;
• forums for collaboration between and among industry and academic institutions;
• SMEs willing to foster innovation by hiring highly trained people; and
• government cooperation to ensure, for example, appropriate transportation, communications, and financial infrastructure.

Both reports were prepared with the financial support of Canada Economic Development for Quebec Regions. The reports are publicly available from the Conference Board’s e-library, www.e-library.ca, and the website of McGill University.
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A new Conference Board of Canada study released by the International Trade and Investment Centre challenges the conventional wisdom about Canada’s trade profile. Canada is less trade-dependent than previously thought, has a smaller trade relationship with the United States than commonly believed, and relies on the services sector for a much larger share of its trade.

“These findings challenge some of the core views about what Canada trades, who it trades with and how much it trades,” said Michael Burt, Director, Industrial Economic Trends. “Using value-added trade measures, the description of Canada as a ‘small, open economy’ may be less accurate than previously believed. Value-added trade may also help to explain in part why Canada was less affected by the recent global recession than other countries.”

The publication, Adding Value to Trade Measures: An Introduction to Value-Added Trade, argues that conventional trade data—namely measures of imports and exports—can distort the “real” trade picture. Conventional trade measures have not been adapted to gauge transactions accurately when more than one country is involved in the production of a single good. This analysis utilizes a new methodology to estimate value added in the context of trade.

Value-added trade refers to the increase in worth of a good or service due to a specific step in the production process. For example, if a chair is worth $10 before being painted and $12 after, the value added by painting is $2. The first major outcome of the value added trade method is to eliminate double counting, which occurs when inputs cross borders multiple times before becoming a finished product. The second is to allocate the value embedded in a traded product back to its source. For example, an exported car contains a variety of inputs including raw materials, engineering services and even electricity.

From the analysis, the three key findings are:

• Canada is less trade-dependent – Using value-added trade measures, Canada’s share of global trade falls from 3.1 per cent to 2.9 per cent. These results may help to explain why declining global trade during the recession had less of a net effect on Canada’s economy than it did in other countries.
• Canada’s trade mix is different – using value-added trade, the services sector becomes more important relative to goods-producing sectors. When measured in value added terms, services account for about 40 per cent of Canada’s trade, compared to 16 per cent using conventional statistics. Gaining increased prominence are business and financial services, as well as trade, transportation and communications services.
• Canada’s trade relationships change – the largest adjustment occurs in Canada’s relationship with the United States. Using value-added measures, the U.S. share of Canada’s overall trade falls from 69 per cent to less than 62 per cent. Other regions of the world increase their share of Canada’s overall trade, particularly Europe (up more than two percentage points) and Japan (which gains more than one percentage point).

This is the first of three Conference Board publications on value-added trade. The next briefing will examine in more detail how the Canadian industrial trade mix changes when estimated in value-added terms and how our trade relationships with the rest of the world change. It will also shed more light on Canada’s role in global value chains. The final briefing in the series will reveal Canada’s comparative advantage and competitiveness in a world of value-added trade.

The analysis is supported by the International Trade and Investment Centre, which helps Canadian leaders better understand what global economic dynamics —such as global and regional supply chains, barriers to trade, U.S. policies, or tighter border security—could mean for public policies and business strategies.
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It will be the middle of this decade – at the earliest – before several major Canadian industries return to pre-recession levels of production.

Published by the Conference Board of Canada in association with the Business Development Bank of Canada (BDC), the Canadian Industrial Profile-Summer 2011 says only motor vehicle parts manufacturing and aerospace will achieve production levels by 2015 that exceed their 2007-08 output.

“Uncertainty is the watchword for all of these industries,” said Michael Burt, associate director, industrial economic trends at the Conference Board of Canada. “The current global economic turbulence increases the general risk to these industry outlooks. As well, industry specific factors are adding layers of concern.”

Aerospace Products
Canadian aerospace production is expected to reach its low point in 2011, before output begins to rise next year. The industry will exceed its previous 2008 peak in 2015. Global passenger and freight air traffic has recovered from the effects of the recession, boosting demand for new orders in the civil segment of the industry. On the other hand, the defence segment of the industry will be negatively affected by the looming budget cuts in Western Europe and the United States, but the effects will not be large. In the coming years, demand for more fuel-efficient aircraft and the growing importance of emerging markets will generate more business opportunities.

Motor Vehicle Parts
After a 17 per cent increase in production last year, supply disruptions brought on by the Japanese earthquake and tsunami continue to limit auto production and demand for auto parts in 2011. But auto sales will surge over the next couple of years as market conditions in the U.S. gradually improve. Thus, both industry production and profits will grow from 2012 through 2015. The industry faces mounting competition from countries with lower labour costs, and the strong Canadian dollar will negatively affect its cost-competitiveness.

Wood Products Manufacturing Industry
The outlook for the wood products industry is tied closely to residential construction in North America. Therefore, the struggles in the U.S. housing market and slowdown in the Canadian market will reduce growth in the industry this year. Stronger annual growth is expected beginning in 2012, as North American markets rebound and the industry continues to make inroads into new export markets such as China. Still, industry production is unlikely to surpass its 2005 peak before the end of the forecast period in 2015.

Paper Products Manufacturing
An increase in new orders, combined with lower inventories, suggests that production of paper products will rise—at least in the short term. As a result, the industry is expected to post its first yearly profit since 2002. Yet, the industry has too much capacity, which limits the potential for price increases. As well, the increase in the popularity of digital communications and media will detract from paper demand. Therefore, any future production growth will have to come from non-traditional markets or products.

Printing Services
Printing is another industry negatively affected by the transition of advertising and information from printed to digital formats. Production and profits are expected to remain flat through 2015. Smaller print jobs using lower-cost technologies, such as digital printing, are the only growth areas.

Furniture Products Manufacturing
Exports have declined, as their share of industry sales has fallen from one-half to one-third of total sales in recent years. The U.S. housing market bust and intense international competition have contributed to the decline. With the U.S. housing sector proving slow to rebound, the growing middle-class in countries such as China, India and Mexico offer new markets for high-end furnishings. The industry can therefore expect modest growth over the next four years, but production will not return to its former peak levels within that timeframe.

The Canadian Industrial Profile Service is part of the Conference Board of Canada’s Industrial Economic Trends research. In all, outlooks for 23 industries are completed each year. The publications are available at www.e-library.ca. BDC clients who wish to receive a copy of the profiles free of charge can contact their BDC account manager.
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Despite slower production growth in 2011, Canada’s wood product industry will record a second consecutive year of profitability, according to The Conference Board of Canada’s Spring 2011 outlook for the industry.

The economic impact of food in Canada extends far beyond the contribution of just those industries that grow, process and distribute it, according to Valuing Food: The Economic Contribution of Canada’s Food Sector, released by the Conference Board of Canada. The food sector is directly responsible for generating more than nine per cent of Canadian gross domestic product (GDP).

In all, 2.3 million jobs in Canada — approximately 13 per cent of employment — are dependent on the food sector, incorporating businesses as diverse as restaurants, grocery stores, retail shops, distribution services, food manufacturing and primary producers. Most industries in Canada are, to some extent, involved in the process of growing, processing, transporting and distributing food.

Valuing Food: The Economic Contribution of Canada’s Food Sector is the first publication of the Centre for Food in Canada, a three-year Conference Board program of research and dialogue that will develop a framework for a Canadian Food Strategy.

“We have the opportunity today to create the conditions that will support the food sector’s growth as an economic engine, while also contributing to safe and healthy food choices, sustaining our environment, and providing greater access to food in Canada and around the globe,” said Anne Golden, President and CEO, The Conference Board of Canada. “A more modern and effective food sector could become an even greater force for economic and social good than it is today.”

The full economic impact — or “footprint” — of the food sector assesses the supply chains used to support domestic consumption, and those used for exports of food and food products. Using Statistics Canada’s detailed model of the industrial structure of Canada’s economy, the analysis quantifies the economy-wide impact of food produced in Canada for domestic consumption. The same exercise is used to estimate the impact of food destined for export.

In 2010, 16.4 per cent of total Canadian consumption spending was on food — defined as expenditures on food and non-alcoholic beverages, alcohol consumption, and spending at restaurants, the equivalent of $4,538 annually for every man, woman and child in Canada. Food for domestic consumption is responsible for 7.4 per cent of GDP, and 1.95 million jobs.

Canada is among a privileged group of 24 countries that are major net exporters of food. Exports contributed about $39 billion in revenue to Canada in 2010 and about 350,000 jobs. At the same time, the food sector is highly globalized and food imports make a vital contribution to the Canadian diet.

The study examines trends affecting Canada’s food sector, including two key factors shaping demand: population aging and increasing diversity. The study also notes that food awareness in Canada is on the rise. At the same time, global changes are creating strong demand for food. The report — the first of approximately 20 to be published over the next three years — identifies a number of questions that will help to inform the Centre for Food in Canada’s research.

The Centre for Food in Canada is supported by approximately 30 companies and organizations, who have invested in the project to develop a framework for a Canadian Food Strategy.
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