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Nearly two million Canadians work in manufacturing. They transform raw materials into the finished products that line our store shelves and are exported for consumers around the world. Traditionally one of Canada’s strongest industries, manufacturing is still a cornerstone of hundreds of communities large and small.

But our economy has been changing quickly. In the face of lower-priced global competition, a stronger Canadian dollar, and the robust growth of the services sector, the manufacturing sector is in a period of decline.

Factories thinning out

Employment in manufacturing has been shrinking. According to the Annual Survey of Manufacturers, there were 1.3 million manufacturing production workers in 2005, a drop from 1.4 million in 2003. Many of these jobs were lost in Ontario and Quebec.

During the mid- to late-1990s, manufacturing was a major source of new jobs. By 2001, however, the high-tech sector began to collapse and many production workers were laid off. By the end of 2002, employees were being swept from factory floors in droves. Another challenge hit manufacturers when the Canadian dollar rose to a 14-year high in the fourth quarter of 2005. The higher exchange rate made Canadian products more expensive abroad and slowed sales.

The decline in manufacturing jobs that followed is the sharpest since the recession of the early 1990s, when factory jobs vanished at twice the current rate. Quebec and Ontario have seen 90% of the manufacturing job losses nationwide since 2002.

Shipping it out

Nevertheless, manufacturing remains a significant economic driving force in this country. The sector accounts for about 16% of Canada’s gross domestic product and is the economic lifeblood of many communities and provinces.

Canada’s largest manufacturing industry is transportation equipment. Automobile and automobile parts manufacturing play a major role in this sector and account for about one-third of Ontario’s manufacturing output. Transportation equipment generated 21% of the $591 billion worth of goods manufactured in 2005. Food manufacturing was the second largest component of this total, accounting for 11% of the value of all shipped goods.

As the hub of Canada’s manufacturing activity, Ontario and Quebec are responsible for close to three-quarters of the country’s manufacturing shipments. However, of these two manufacturing powerhouses, Ontario has been losing strength relative to the country as a whole. In Ontario, industries such as petroleum and coal product manufacturing have done well, but a downturn in auto making has pulled down the overall level and value of the province’s shipments. Quebec, however, has strengthened in recent years, with petroleum refining, aerospace and chemical products buoying the sector there. In fact, the transportation equipment industry has become Quebec’s second-largest source of manufacturing shipments, after primary metals.

Growth in the manufacturing sector made a noticeable shift westward in 2005. Shipments in British Columbia, Alberta and Saskatchewan have been increasing at a faster pace than in Central Canada. In particular, manufacturers in Alberta and Saskatchewan have made dramatic gains, mostly because of resource-based production of petroleum products and primary metals. The four Western provinces accounted for 21% of all Canadian manufacturing shipments in 2005, compared with 18% in 2000.

Atlantic Canada has a strong food manufacturing industry and accounts for almost 5% of the country’s manufacturing shipments.

Overall, though, Canada’s manufacturers have maintained consistent shipment volumes over the past couple of years. Yet they are becoming more concerned about their ability to boost production in the face of a few developments: the stronger loonie, particularly against the U.S. dollar—the United States is their principal trading partner; higher costs for raw materials; competition from cheaper foreign imports, notably from Asia; and shortages of skilled labour, especially in Western Canada. Labour shortages affected one-fifth of manufacturers in Alberta in 2005.

Profits drop in some industries

These pressures on the sector have translated into substantially lower operating profits for manufacturing companies. Their total profits had reached $49 billion in 2004, after an exceptional gain of 34% over 2003. However, by the end of 2005, their total operating profits fell to $42 billion.

Ten of the 13 manufacturing industries lost ground in 2005, and in 2006 profits remained essentially flat. Most notably, declining North American demand, rising fuel prices, foreign competition and high marketing and restructuring costs all combined to hit the auto and auto parts manufacturers hard—their profits plunged 83% from $9.0 billion in 2000 to $1.5 billion in 2006.

Change is also giving rise to new challenges for other manufacturers. For instance, the shift to electronic media and shrinking newsprint markets have contributed to a 58% drop in operating profits for wood and paper producers in the past six years, from a high of $7.8 billion in 2000 to $3.3 billion in 2006.

Elsewhere, greater demand for petroleum and coal is helping operating profits in those industries to surge—profits climbed to $11.7 billion in 2005 from less than half that in 2000. Also over the past few years, computers and electronics manufacturers—a group which includes communications, audio and video equipment—have been profiting from high consumer demand for their products. Though they have not yet reached the high-tech boom levels of 2000, these manufacturers have been enjoying growth in their operating profits since 2003.