Deloitte study calls for the growth of a redefined manufacturing sector

In early February, the Quebec offices of Deloitte released a new study discussing the challenges of Quebec’s manufacturers. It is a no-holds-barred look at how manufacturing is struggling in the province, and how it can reinvigorate itself with the right approach. It’s also a document manufacturers from across Canada can benefit from.

Deloitte is on the road right now, introducing manufacturers to the study (called Le point sur le Quebec manufacturier: Des solutions pour l’avenir) and working hard to boost the energy among the important players in the sector. According to senior consultant Charles-Etienne Daoust, the report and road show are making an impression.

“Everyone coming to our events is saying ‘wow, we needed that,'” says Daoust.

It’s the combination of insight and practical advice that is making the document something more than just another review of a challenged sector.

Manufacturing: an R&D hub

The impetus for the report came from Deloitte’s Louis Duhamel, who has worked with manufacturers in the province for more than 20 years.

“M. Duhamel realized that not only is this sector undervalued, it is misunderstood,” says Daoust.

Although the sector has been declining for 10 years now, Duhamel and Daoust determined that it was still an important industry.

“The challenges with the manufacturing sector are more than an economic problem for manufacturing companies; it is a societal concern for the whole province, because it touches so many sectors, so many aspects of Quebec’s economic well being,” Daoust explains.

The problem is that no one wants to talk about manufacturing, because it isn’t considered “sexy”. But, as Daoust points out, the vast majority of the R&D that is done in Quebec is done within the manufacturing industry.

One of the first points that Daoust makes about the industry is that we have to redefine it.

“People use expressions like ‘old economy’, ‘declining sector’ [and] ‘no future’ when talking about manufacturing,” he explains. “If you are representing the industry, it means using different expressions. At the same time, we have to redefine what we consider manufacturing. It used to be that you would bring a product into a factory, modify it and then resell it – for instance, turning a tree into wood posts and floorboards. But now, consider Apple. Does a company that thinks and innovates but has someone else make the product a manufacturer? We think it is. They contract out their part making, but without them, manufacturing wouldn’t exist.”

While Deloitte wants to expand the basic definition of what constitutes a manufacturer, they also want to use this redefinition to encourage companies to build their products closer to home, and closer to their R&D source. As the report notes, if a company is sending their manufacturing overseas, that company will eventually lose their R&D because R&D needs to be close to the factory for it to be effective.

“Manufacturing closer to the destination market is something we are going to see more as shipping costs and other hidden costs (currency costs, returns, inventory costs, etc.) go up, but it is not happening as quickly here as it is in the United States,” Daoust notes. “A lot of companies in the U.S., like Coleman and Electrolux, are realizing that it is not worth outsourcing manufacturing overseas, and that shift will continue.”

Levers of growth

However, the U.S. has the advantage of low-cost production centres in its southern states, something Quebec cannot replicate. The keys to future success in Quebec, according to the study, are innovation, client intimacy and good distribution.

“Those are the levers that will continue to make a difference for us,” says Daoust. “We are near our customers. It is our culture to partner with them and work with them to make sure the products they produce will answer their clients’ needs.”

In other words, it will be higher-end, value-added, niche products where Quebec manufacturers will be able to shine and compete most effectively.

Of course, that doesn’t mean that manufacturers can hold back on investing capital in productivity as well. Automation and other efficiency improvements are important to keep companies competitive, and Quebec has lagged in machinery investments in the past 10 years also.

However, the Deloitte report is straight about this as well. There are many reasons why companies have not invested in more equipment. With the downturn in the economy, manufacturers have been naturally hesitant, and since then, access to capital has been a challenge.

Daoust suggests this lack of investment also has its psychological reasons.

“When you hear everyone talking about how you’re not the priority, you’re not working in a sector that is part of our future, it brings a whole atmosphere of negativity, and it becomes difficult for senior executives to see a future in what they are doing,” he explains. “So this hesitation in investing is a bit factual, but also a bit cultural. That is why we’re touring right now, to give back that pride of being a manufacturer and making things. After our discussions, executives are coming up to us, rolling up their sleeves and saying, ‘okay, what can we do now, where do we start?'”

Deloitte has started the ball rolling by setting up a partnership with the Federation des chambres de commerce du Quebec – a neutral organization it can work with to develop some of its ideas. With the FCCQ and the Manufacturiers et exportateurs du Quebec, Deloitte is developing programs to provide young students with a better connection to the manufacturing sector.

“We already have companies that are interested in taking more students on board, and right now we’re working on a platform to make that happen,” says Daoust. “Without young, talented people joining the sector, it can’t survive, so this is essential.”

Beyond that, Deloitte and its partners are going to review the federal government’s action plan for manufacturing – a plan that was originally launched in 2007 and is up for renewal this year.

“We want to let government know what has worked, what has not, and make some recommendations for the future,” Daoust explains.

For more information on the study, and how your company can increase its competitiveness in this changing manufacturing landscape, contact Louis Duhamel at lduhamel@deloitte.ca.