After cutting costs and introducing efficiencies during the global crisis, Canadian manufacturing is poised to grow again because of some key changes in the way business is being done worldwide, according to a report from KPMG.

In its annual outlook on the Canadian manufacturing sector, the consulting firm says there is a shift coming from making goods in low-cost countries to making them “on-shore” in North America because of rising energy costs and a lack of quality and consistency from China and India.

Shrinking lead times in developing and manufacturing new products will also encourage more on-shore manufacturing, authors Laurent Giguère and Don Matthew say.

"I think we found, somewhat surprisingly, the number of manufacturers who are thinking about offshoring production has significantly decreased," Giguère, who is national industry leader of industrial markets for KPMG, said in an interview with CBC's The Lang & O'Leary Exchange.  

In 2014, only 14 per cent of manufacturers planned to source from China, compared with 31 per cent in 2013 and three per cent were looking to India compared to 12 per cent last year.

Canadian manufacturers will be able to take advantage of these trends because of their proximity to the U.S. and their reputation for making higher quality goods, the report Canadian Manufacturing Outlook 2014 says.

Favorable winds

“Canadian companies have the opportunity to respond to the growing demand among their customer base for more and better products delivered faster, and gain competitive advantage by investing in R&D and increasing speed to market,” the report says.

"Those manufacturers who are still around are resilient – they have some tailwinds because we have a stronger U.S. dollar that is favouring our exports and Canadian manufacturers, 78 per cent of those exports are to the U.S.," Giguère said.

'Canadian manufacturers are the busiest they’ve been in many years, and it is essential for these companies to remain focused on future success, thinking ahead rather than simply fighting to survive' -  KPMG's Laurent Giguère

"We have an economy that is a little more stable, we continue to have low interest rates, we have strong balance sheets and manufacturers that are concentrating on innovation." 

The report points to Canada’s highly educated workforce as an advantage because of the need for professionals who understand supply-chain management and workers who can handle robotics.

The authors urge manufacturers to develop relationships with post-secondary institutions so they can build a workforce with the right skills.

Their findings, based on a survey of 154 manufacturing executives, provides a more optimistic assessment of the future of manufacturing than the Bank of Canada, which is worried about export growth, or the C.D. Howe Institute, which reported last week that Canadian businesses are not investing.

“The strongest companies having withstood tough times are well positioned to compete locally and globally. Canadian manufacturers are the busiest they’ve been in many years, and it is essential for these companies to remain focused on future success, thinking ahead rather than simply fighting to survive,” said Giguère,

The move to sourcing closer to home is a big change from previous surveys, with the strengthening U.S. economy and lower Canadian dollar playing into the trend, the report said.

R&D spending could be stronger

Among survey participants, 81 per cent said they were focusing on revenue growth and  most are concentrating on opportunities in Canada and the U.S.

The report found the main challenges for the industry include price pressures, the need for innovation and understanding customer needs. 

Giguère said R&D spending in Canada is not as strong as it could be, but he was heartened by an improvement in innovative thinking.

"Fifteen per cent of respondents said they are investing in what they call disruptive R&D – so not just improving existing products, refining existing technology, but working on breakthrough technology," he said.

"If you think of Canadian manufacturing, we won't be competitive on costs, on wages....We need to differentiate ourselves on innovation with new market-leading products – if we build that, they will come."