Canadian manufac-turing remains on a fairly solid financial footing despite the increase of the Canadian dollar over the past few years, according to a recent TD Economics study.

Production has still been increasing, although weakly; corporate profits remain solid, although earnings growth is muted; and return on equity has been around 8% the past two years, down from 10% in 2004 but well above the 5% or so in 2002. This is in stark contrast to the 1990s, when the sector operated at a loss, says TD economist Steve Chan.

One reason for the relatively good performance is that globalization keeps producer costs low even against record-high commodity prices. “With integrated global supply chains, manufacturers have been able to leverage efficiency gains across other nations to offset high raw materials prices,” Chan explains.

Another reason is that Canadian and U.S. growth was strong during the past few years, which kept demand for manufactured goods growing. However, Chan warns the expected slowdown in the U.S. and Canadian economies may weaken the sector.

Chan also points out that emerging markets present a real challenge. Chinese exports increased 536% in 1995-2005, far outpacing the 68% growth in Canadian exports to all countries in the same period.

TD “firmly believes manufacturing can weather this storm,” Chan says, but not without increased investment in machinery and equipment to keep China from closing the productivity gap too rapidly.

In addition, Canadian companies need to go global. “For some manufacturers, this could mean purchasing widgets from China, thingamajigs from India and whatchamacallits from the U.S., and assembling the parts in Canada — each country being more efficient at producing certain goods,” Chan says.

Canadian manufacturers also have to spend more on research and development. Chan notes that the U.S. manufacturing sector is about 11 times larger than Canada’s, but U.S. manufacturers spend about 20 times more on R&D than their Canadian peers. IE