Canadian Manufacturing, Global Supply Chains and National Regulation

I spent the morning at Industry Canada’s global supply chains conference. The general tenor of the opening plenaries was as expected – Canadian corporations should slice and dice their supply chains asap to take advantage of lower costs (especially labour costs) in relation to productivity and quality if they are to survive. In a phrase, ‘make Chinese low wages work for you instead of against you.’ “We can’t compete with the Chinese, we have to learn how to use them” like the Japanese and the Koreans, said David Fung, Vice President of the Canadian Manuufacturers and Exporters. This boils down to getting out of fabricating and specializing in other areas of the manufacturing process like R and D and product development. (Fung did have a compelling example, estimating that only about 1% of the price of an i pod goes to the mainly Chinese based product fabricating end, with the lion’s share going to the product designers and retailers/distributors.) Barely a word was said about the implications for jobs of ‘getting out of fabricating’, especially given the historic weakness of investment in innovation and R and D by Canadian manufacturers.
Paul Boothe – Senior Associate Deputy Minister at Industry Canada (and former academic economist) sounded the same key notes – change is rapid and relentless, shattering current business models. Governments need to help build Canadian champions who will take advantage of global supply chains to lower costs and improve competitiveness and should actively help smaller Canadian businesses find lower cost global suppliers. Along with Michael Hart from Carleton, he saw part of the needed policy response as regulatory “reform” to break down barriers to seamless flows of intermediate inputs across borders, especially the all important Canada – US border, and lauded the Security and Prosperity Partnership.

George Yip – a consultant and former assistant Dean of the London Business School – struck a more nuanced note. He noted that the degree to which corporate supply chains can be globally dispersed varies a great deal by industry and that multiple business strategies are still often feasible. Some companies face fairly homogenous product demand and large economies of scale; others still face significantly differentiated national and even local markets, and modest economies of scale which can support local production for these markets. National regulation is one important factor still at play in differentiating markets and thus production strategies.

In an interesting aside, he noted that relatively high product standards in the EU are sticking since the EU is such an important part of the global market. That suggests that the kind of downward harmonization to US standards being promoted through deeper North American integration will be working at odds to Canadian companies selling into truly global markets.

In another aside, he also noted that national ownership of flagship global companies continues to matter in terms of where high value-added activities like R and D, marketing and logistics are located, and that the French approach of developing domestically owned champions to participate in global markets and to develop global value-chains had some merit to it.