challenge and response: canadian ... - bdo canada

TAXATION AND REGULATORY POLICY

ABOUT CME’S MANAGEMENT ISSUES SURVEY 2016

BUSINESS AND ECONOMIC OUTLOOK

INTRODUCTION

INNOVATION, COMMERCIALIZATION AND TECHNICAL ADOPTION

LABOUR SKILLS AND WORKFORCE TRAINING

TRADE AND GLOBAL BUSINESSDEVELOPMENT

MANUFACTURING

CHALLENGE AND RESPONSE: CANADIAN MANUFACTURERS CREATING PROSPERITYBDO’s perspective on CME’s Management Issues Survey 2016




INTRODUCTION




December 2016 | 2BDO MANUFACTURING SURVEY REPORT | Challenge and Response: Canadian Manufacturers Creating Prosperity

Canada’s manufacturing sector forms a significant segment of the economy

11% OF OUTPUT

$600 B WORTH

1.7 M JOBS PROVIDED




INTRODUCTION




IntroductionThe biennial Management Issues Survey, conducted by the Canadian Manufacturers & Exporters with the active collaboration of BDO, is a unique and valuable source of information for business leaders, public policymakers and ordinary Canadians. Bringing together the opinions and experiences of a representative sample of manufacturers, the MIS Report provides insights into the current and future health of our economy.

BDO worked with CME to conduct the survey and analyze the results. That analysis reveals that, while Canadian manufacturers continue to face significant challenges, they are actively seeking solutions and strategies to address them. BDO’s Response looks closely at the nature of those challenges, and suggests viable solutions manufacturers can apply to overcome them, based on BDO’s expertise, experience and services.

These are uncertain times for Canadian manufacturers. Political, economic and financial risks surround us, as businesses are keenly aware. Yet the sector also faces long-term challenges, which have been remarkably consistent in recent years, and manufacturers know what needs to be done to surmount them. Driven as always by their focused attention to customer expectations, businesses are innovating their products and processes at an ever-increasing pace.

This is a sector with an aggressive approach to the future—clear-eyed about the challenges and obstacles ahead, yet optimistic and innovative in its plans to overcome them. 62% expect faster growth in the US, and more than 80% expect the Canadian economy to hold its own or grow stronger.

More than 60% of respondents plan to invest more in machinery and equipment over the next three years. More than half intend to invest more on R&D, and about half to increase investment in workforce training.

BDO MANUFACTURING SURVEY REPORT | Challenge and Response: Canadian Manufacturers Creating Prosperity

+ 60% PLAN TO INVEST MORE IN MACHINERY AND EQUIPMENT OVER THE NEXT THREE YEARS

+ 50% INTEND TO INVEST MORE ON R&D

50% PLAN TO INCREASE INVESTMENT IN WORKFORCE TRAINING

What does your company plan to invest more dollars in?

CANADIAN MANUFACTURERS ARE LOOKING FOR PRACTICAL, VALUE-ADDING SOLUTIONS GOING FORWARD. BDO CAN OFFER SUGGESTIONS AND SERVICES TO HELP.

December 2016 | 3

http://www.industrie2030.ca




INTRODUCTION





About CME’s Management Issues Survey 2016 manufacturers from across Canada responded to the survey, conducted in the summer of 2016. 553 Where is the global headquarters of your company?

Where in Canada does your company operate?

SMALL ENTERPRISESUNDER 100 EMPLOYEES

57% MEDIUM ENTERPRISES100 TO 499 EMPLOYEES

26%

LARGE ENTERPRISES500+ EMPLOYEES

18%

What is the size of your company’s workforce in Canada?

US 8% EU 3%

JAPAN 1%

CANADA 87%

MACHINERY & EQUIPMENT

14% FABRICATED MATERIALS

17% FOOD AND BEVERAGES

COMPUTER & ELECTRONICS

AUTOMOTIVE PARTS

PULP & PAPER

Respondents represented a wide range of manufacturing activities:

FROM CENTRAL CANADA

58%

FROM WESTERN CANADA

28% FROM ATLANTIC CANADA

14%

December 2016 | 4




INTRODUCTION





Business and Economic OutlookCanada’s economic situation offers manufacturers a mixed bag.The lower dollar was a positive development for most—49% reported it had a beneficial or very beneficial effect on their businesses, and was neither good nor bad for another 20%.

On the up side, a lower dollar means exports sell at a discount, while delivering returns at a premium. Many companies that endured the period of dollar-parity are now in a position to reap the rewards of a cheap dollar.

Yet on the down side, it raises the cost of those production inputs that must be imported. The net benefit depends on the balance between imported inputs and exported products.

Fully 29% said the lower dollar had negative implications on their business.

In assessing the effect of the exchange rate, we should note that the peso has fallen even more drastically than the dollar—Mexican competitors can sell at a deeper discount, especially to US customers.

The drop in the dollar is largely the result of lower oil prices —which itself has been positive for just a quarter of respondents. A large minority (43%) reported that low oil prices had affected their businesses negatively.

The future of these two important and interconnected factors is uncertain, and respondents’ opinions reflect this. Most expect to see some moderate increase in oil prices in the next three years, but most foresee the dollar staying about the same, or weakening further. A minority expect it to edge upward.

This long-term volatility, together with week-to-week fluctuations in the value of the dollar, can create significant currency risk for Canadian manufacturers. BDO publishes periodic articles—how to assess your exposure to currency risk, and what to do about it—available on our website. Some businesses will find it worthwhile to invest in hedging instruments to protect themselves against sudden shifts in exchange rates, particularly if their margins are tight.

In today’s environment, companies need to defend against the negatives, and take advantage of the positives. In practical terms, this means to focus on their cost structure, looking for savings in every area of their business—alternative suppliers, increased efficiency, automation, overseas outsourcing, etc. Such savings can be used to increase focus on customer expectations—investing in people, product innovation, and process modernization.

What are the effects of a lower Canadian dollar on your business?

49% REPORTED A BENEFICIAL EFFECT

20% REPORTED NEITHER GOOD OR BAD

29% REPORTED A NEGATIVE EFFECT

43% REPORTED A NEGATIVE EFFECT

How has lower oil prices affected your business?

December 2016 | 5




INTRODUCTION





Taxation & Regulatory PolicyThe key finding here was a widespread dissatisfaction with the lack of government support for manufacturers’ investment and growth efforts. Without absolving the federal government (48% dissatisfaction), criticism of provincial (58%) and local (60%) governments were even sharper. The message is clear—more support for the sector is both possible and necessary.

At the same time, governments’ overall taxation and regulation was seen as getting worse. Nearly half felt the federal government was becoming more burdensome, while a clear majority said the same about their provincial government. This increases the cost of doing business in Canada, and puts our collective economic competitiveness at risk.

BDO has considerable experience helping manufacturers achieve positive outcomes with government. Our experts on indirect and business tax can help identify tax-saving opportunities, to analyse the implications of existing company structures and proposed transactions, and to advise on more effective approaches. And since many of our clients’ business and personal taxes are intertwined, we can integrate both services to help drive further efficiencies.

The current shortfall in government incentives makes it all the more imperative to take maximum advantage of those there are. BDO helps companies identify valuable programs, and structure their operations and initiatives to meet the requirements. We can relieve management teams of much of the burden of negotiating and qualifying for incentives, and deliver the maximum benefit at the minimum cost.

We can reduce the overall cost of business paperwork through our financial outsourcing services—CFO outsourcing, and bookkeeping and payroll outsourcing—letting management concentrate on the parts of the business they know and love best.

There is also some positive news in the world of tax. The federal rate on Canadian-Controlled Private Corporations (CCPCs) has been reduced somewhat on the first $500,000 in annual taxable income. This can provide relief for smaller enterprises, or for those under pressure. And personal taxes too have been reduced on middle incomes, which may have some stimulative effect on consumer spending.

Are you satisfied with government support towards investments in, and growth of, your company?

60% No

LOCAL GOVERNMENT

58% No

PROVINCIAL GOVERNMENT

48% No

FEDERAL GOVERNMENT

BDO HAS CONSIDERABLE EXPERIENCE HELPING MANUFACTURERS ACHIEVE POSITIVE OUTCOMES WITH GOVERNMENT.

December 2016 | 6




INTRODUCTION





Innovation, Commercialization and Technical AdoptionCanada’s manufacturing sector has always been a leader in innovation. Its share of Canada’s R&D is typically the largest, standing today at 45%.

Respondents reported significant challenges to their innovation plans. Most frequently cited was the cost of developing new product prototypes (36%), followed by the shortage of skills in the labour market (30%), and the lack of government support (29%).

Yet respondents were pressing on with their plans in this area, with new investments in machinery and equipment, and investment in R&D and skills training for their workforce.

Public R&D provides important support for the sector, but it needs to be more application-focused—researchers must be more conscious of the need to bring their results to market.

Partnerships and collaboration is a growing solution to the high costs of innovation, particularly in high-tech companies—often among our most successful manufacturers. Indeed, the converse is also true, given the increasing importance of automation and investment in manufacturing processes, as with Industry 4.0. Today’s most successful manufacturers are often the most high-tech.

BDO’s recent article on Industry 4.0, provides a clear introduction to this revolution and the impact it will have on manufacturing in Canada and around the world.

Reaping the benefits of Industry 4.0 will require investment—in software, processors, automated equipment and information and communications technologies. Seeking out partnerships with colleges and universities, and with other businesses, can help spread risk and deliver cost savings, while sharing in economies of scale and the resulting benefits in profitability and market share.

Respondents recognized the need for increasing technological and automation solutions in their businesses, but were concerned about implementation. Nearly a third (31%) expressed concern about how to fit new technologies into their existing business, and the same number identified a real risk from products with uncertain results.

BDO Solutions group helps businesses to implement an Enterprise Resource Planning system, to line up available new technologies with a company’s existing products, processes, and labour organization. There is no off-the-shelf solution to automation—but with the right help and advice, companies can benefit from the solution that is right for them.

36% RESPONDENTS REPORTED COST OF DEVELOPING NEW PRODUCT PROTOTYPES

30% RESPONDENTS REPORTED THE SHORTAGE OF SKILLS IN THE LABOUR MARKET

29% RESPONDENTS REPORTED THE LACK OF GOVERNMENT SUPPORT

31% EXPRESSED CONCERN ABOUT HOW TO FIT NEW TECHNOLOGIES INTO THEIR EXISTING BUSINESS

What are the most significant challenges facing your company when bringing new products or services to market?

December 2016 | 7

http://www.bdo.ca/en-ca/insights/industries/manufacturing-distribution/industry-4-0-welcome-to-the-revolution/




INTRODUCTION





Labour Skills and Workforce TrainingThe shortage of labour skills is a crucial challenge to the sector—40% of respondents reported that it had affected them directly. This is down significantly from the 2014 survey, when 56% said the same. There are no grounds for complacency, however—59% of this year’s respondents expected to feel those effects within five years.

Businesses are responding energetically, offering higher wages for higher skills, and investing in internal training programs. This is yet another area where government programs and incentives are necessary. A large majority (82%) called for direct government funding of internal training of new hires and existing employees.

Fortunately, governments have been active here, with post-secondary and apprenticeship programs—but more is needed. Post-secondary education needs to be more closely integrated with business needs and operations.

Nearly a third of respondents (29%) thought that industrial trades had an image problem among young people today. In Germany, the average age of a young person entering apprenticeship is 16—here it’s 28, typically someone disappointed with their original career choice and going back to train for something different. In response, some companies are working with high schools and colleges to offer student prizes in robotics and other STEM areas, in an effort to raise their “coolness” factor.

It appears, though, that the sector will remain, or even be increasingly, reliant on new Canadians for its skills supply for the foreseeable future. The federal government has responded with a new list of 347 job categories that qualify for “express entry” into Canada. Many of these (engineers, technologists, technicians, industrial trades, etc.) are of interest to manufacturers. BDO’s immigration practice helps many companies overcome the challenges of sourcing and expediting the arrival of workers with the skills they’re looking for.

Manufacturers should seek closer relations with local educational institutions, speaking with teachers and curriculum developers, sitting on industry advisory boards, participating in co-ops and internship programs, and using their influence to tailor young people’s education to the real needs of the sector, now and into the future.

THE SHORTAGE OF LABOUR SKILLS IS A CRUCIAL CHALLENGE TO THE SECTOR—40% OF RESPONDENTS REPORTED THAT IT HAD AFFECTED THEM DIRECTLY. THIS IS DOWN SIGNIFICANTLY FROM THE 2014 SURVEY, WHEN 56% SAID THE SAME.

December 2016 | 8




INTRODUCTION




Trade & Global Business Development Canadian manufacturers know the value of export markets. More than 4 out of 5 respondents (81%) sell at least part of their output abroad, and more than 1 in 5 (21%) export over 75%.

Nevertheless, Canadian companies are under-represented in overseas markets, in both sales and production. And there is a need to diversify the markets they are currently in. Among those that export, fully 96% sell to the USA.

That said, the sector does serve other foreign markets. One-third (33%) sell to the EU, 23% to China, 20% to Mexico, and almost every region of the world ultimately provides customers to Canadian manufacturers.

Pending major trade deals—TPP for Asia, CETA for Europe—have recently hit snags, and the change of government in the US has added uncertainty. Respondents had some mixed feelings about the value of these deals. About a third (34%) anticipated a positive impact from CETA, while almost the same number (32%) thought it would be minimal, and 3% expected a negative impact. While 29% expected a positive impact from TPP, a significant minority (14%) felt the impact would be negative. Nearly half of respondents (43%) wanted to see greater trade links with China—a country which, perhaps significantly, is not a TPP participant.

The task of winning markets overseas is seen as a difficult one. More than a third (36%) cited the costs of seeking new opportunities abroad as their greatest export challenge, while nearly as many (33%) pointed to a lack of information about foreign markets.


US 96% EU 33%CHINA 23%

MEXICO 20%

What are the primary markets to which your company exports?

Approximately what share of your total Canadian production is exported?

SELL PART OF THEIR OUTPUT ABROAD

81%

EXPORT MORE THAN 75% ABROAD

21%

December 2016 | 9




INTRODUCTION





Trade & Global Business Development BDO—with more than 60,000 employees and 1400 offices, in 154 countries around the world—provides help to many companies seeking opportunities for sales or investment in foreign markets. Our information is extensive and detailed, and can help clients build valuable relationships with local banks, partners, customers and suppliers.

BDO also maintains relationships with highly competent Canadian government officers in foreign countries, and can help identify and develop the assistance clients need, both overseas and here at home. This MIS Report for the first time asked how much manufacturers had taken advantage of government export assistance—including Export Development Canada, the Business Development Bank of Canada, federal and provincial trade ministries and more.

Clearly, manufacturers have under-utilized this potentially valuable suite of services for expanding their markets abroad. BDO helps companies leverage investment and contain sales-development costs, building up Canada’s manufacturing presence worldwide.

Another area where government was not seen to be providing sufficient support is that of carbon pricing. Opinions were mixed on the issue—22% felt it was a positive step, 35% felt it was negative, and 32% said it depends on the details (which are still forthcoming). But there was strong support for tax and other incentives for manufacturers, to ensure that our desire to do good doesn’t end up causing harm, particularly to our international competitiveness.

Local governments and organizations can also help businesses find new partners, suppliers and customers closer to home. Each locality is different, but in most there are business-led associations or services that have deep sources of information and are ready to help. Local BDO offices can be a good place to start looking.

Canadians take pride in the quality of their manufactured goods. The CME’s 2016 MIS Report clearly shows we should also take pride in the quality of leadership in the sector, the growing level of skills in its workforce, and the determination with which it is facing the challenges of today, and innovating and investing in a stronger tomorrow.

THERE ARE BUSINESS-LED ASSOCIATIONS OR SERVICES THAT HAVE DEEP SOURCES OF INFORMATION AND ARE READY TO HELP. LOCAL BDO OFFICES CAN BE A GOOD PLACE TO START LOOKING.

December 2016 | 10

To learn about how BDO can help your company with these and other challenges, contact your local BDO office.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name of the BDO network and for each of the BDO Member Firms.

About BDO’s Manufacturing & Distribution PracticeBDO has extensive experience providing services to a broad range of clients in the traditional and emerging areas of manufacturing and distribution. With unique insights into your industry and access to firsthand knowledge of trends and insights, we understand your business. Our international network of industry professionals has a wide range of financial and advisory expertise to provide global problem-solving capabilities and support your changing needs.

About BDOOne of the nation’s leading accounting firms, BDO provides assurance, accounting, tax, and advisory services. With strengths firmly rooted in the communities we serve, our professionals deliver highly individualized services informed by deep industry knowledge and nearly 100 years of experience serving Canada’s local markets. As a member of the BDO international network, which spans more than 150 countries and 1,400 offices, BDO provides seamless and consistent cross-border services to clients with international needs.

www.bdo.ca/manufacturing

http://www.bdo.ca/en/contactus/pages/default.aspx

www.bdo.ca/manufacturing

challenge and response: canadian ... - bdo canada

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