The big picture: Investing in innovation during economic downturns

As manufacturers are aware, the cost of doing business is increasing. Volatile market conditions have created a squeeze on companies that are stuck between the rock of increasing raw materials prices and the hard place of customers who are not ready to shoulder new costs. Along with the cost squeeze is the issue of excess production capacity.  Canadian manufacturers have headroom to produce more and while there has been recovery over the last two years, production levels are still at a similar level to five years ago. 

Cost-cutting is a natural response to decreasing margins in this context, but it does not need to be the only response.  Flipping the concept of excess capacity on its head, we can see it as an opportunity for investment and growth. There is room to play within that excess capacity.  The magic here is in the time horizon. Short-term cost cuts can help a company through the downturn, but a long-term investment to stepwise improve the company’s cost structure will pay off in the long run.  

Shifting to a positive focus

Focusing only on cost-cutting can undermine the longevity of a business.  It commodifies products and becomes a race to compete on price which feeds into a cycle of cost-cutting that becomes hard to win. More interestingly, we’ve seen Canadian companies with strategic priorities working to differentiate their products and services using technology.  This could be a better customer experience, customized products, value-added services and platforms, or even a new revenue stream or business model.  Solving customer problems as part of your strategy can open new avenues to invest for long-term growth and create more margin for your company.  An example of this is the women’s fashion company, Carmina De Young (London, Ont.), which began recycling hospital PPE early in the pandemic and now offers contract manufacturing services for other clothing companies.

Cost-cutting is a natural response to decreasing margins in this context, but it does not need to be the only response.

It can seem counterintuitive to talk about investing in a downturn. However, savvy investors know that investing when things are down can reap rewards if you’re patient. It takes discipline and a little courage to double down when times are tough and money is tight. Consider that a similar approach can be beneficial for companies regarding innovation and investment in technology.  Canadian manufacturers are investing less in equipment purchases today than they were two years ago, and it is worth revisiting this trend.

On one hand, a downturn means fewer sales and less cash flow.  This can make technology investments less attractive to companies that are looking to keep the lights on and the factory running. However, if you have a long-term strategy that requires the integration of new technology, a downturn can be the right time to make those investments. There may be more idle time on the production line to complete technology upgrades. There may be more time available for technical and maintenance staff to devote to training to support those upgrades. The excess in manufacturing capacity is an opportunity.

Firm strategies for growth

Investments in innovation and new technology should be aligned with your business strategy. Otherwise, a company runs the risk of spreading its resources too thin without a clear benefit to business goals.  Manufacturing strategy has shown up in industry trends and if there are technologies that can fast-track or enable strategy, that is a place to risk investment with little regret.  An example of a trend and complementary strategies is the recent investment in electrification for automotive and aerospace by several levels of government in Canada.  The trend in electrification investment is coordinated throughout the value chain – from critical minerals to OEMs to recycling.  Government, industry, and academia have rallied to the electrification of mobility and there are exciting projects underway across the country that will enhance Canada’s position and leadership in this sector.

If you are a manufacturer – in any sector – there are avenues to get support for technology investments. Governments in Canada want to support manufacturing businesses in their technology adoption journey, including employee upskilling, project support for adoption as well as technology development.  Manufacturers can also partner with companies to bring their technology to life as well as improve the bottom line. Collaboration is a successful strategy for nimble businesses to unlock new value for their companies and customers.  You don’t have to go it alone!

Stephanie Holko is the director of project development at Next Generation Manufacturing Canada (NGen). She loves connecting emerging technologies with existing manufacturing problems and believes the future of manufacturing is in the adoption of new ways of working. Stephanie is a licensed Professional Engineer in Ontario.

This article was first published in the May/June 2022 issue of Manufacturing AUTOMATION.