What is the Future of the Manufacturing Sector?
Public Policy Forum


Good morning. 

In Canada, as elsewhere, we are in the middle of the most rapid economic contraction since the Great Depression, and according to the IMF, this year will be the first in 60 that the global economy will shrink. We all see the numbers rolling across our television screens each evening. 

The Government of Canada reacted swiftly to the crisis. Through Canada’s Economic Action Plan, we will provide about $40 billion over the next two years in stimulus to the economy. When combined with funds from provincial governments, the total stimulus will be nearly $52 billion over the next two years, or 3.2% of GDP. 

But today is a chance for us to take a step back from the immediacy of this economic crisis and look at the future of the manufacturing sector. Is there a future in the manufacturing sector? 

I believe manufacturing does have a future in our economy. 

I believe that there are three building blocks crucial to the future of Canadian manufacturing. 

The first building block is where the need and demand will be for manufactured goods and products in 10 or 20 years. 

The second building block is where the export markets will be, because our domestic market alone is too small. 

The third building block is to leverage an already developed Canadian expertise.

So, looking at our first building block, where will the need and demand be in 10 or 20 years? 

I believe that will come in two areas. 

First, there will be demand in new markets created for environmental goods that are currently free. Political pressure and scientific evidence are forcing governments to create these new markets, such as those for the pricing of carbon or those for the full cost recovery of municipal water systems. 

The need to halt habitat loss for species at risk of extinction, the need to better protect fresh water resources, the need to stop the loss of farmland to feed a growing world population and the need to reduce GHGs will all drive the creation of these new markets. 

The second area of demand will come from the need for governments and consumers to reduce energy costs in the existing energy market. 

Let me elaborate about the need to reduce energy costs. 

Last summer’s rising energy costs to a record $147 a barrel had a great deal to do with derailing growth in North America and in Europe. With gas at $1.50 a litre and over $4 a gallon stateside, consumers in subdivisions across North America stopped spending at the mall so they could fill up their tanks with gas. 

Predictions of much higher energy prices continue to be made. And I’ll illustrate this point by showing some data about where Canadian households spend their money. This is not apocalyptic nonsense from a group of fringe players. They come from the respected IEA in Paris, from bank analysts and from oil companies like Total, the fourth-largest, publicly traded oil company in the world. 

The reality, though, is that for too long, governments of all stripes have discouraged energy conservation by building an energy consuming infrastructure system of sprawling communities and highways. 

We must face the harsh economic reality. We cannot afford to maintain – either as governments responsible for roads, bridges and sewers or as citizens responsible for mortgage and car lease payments – this sprawling and high-energy system of highways and communities we have built over the last 50 years in North America. 

Even with record government revenues from one of the greatest economic growth periods of the last 15 years, there is simply not enough money to maintain this entire infrastructure. There have been major bridge collapses in Montreal and Minneapolis. Throughout Canada, the infrastructure deficit has been detailed in dozens of reports. As a result, governments of all stripes pour tax dollars into maintenance, but cannot keep up. 

And for not much longer. Over the next few years, the federal government will accumulate significant deficits and debt. Provincial governments face similar shortfalls. Severak years from now, all governments, including municipal, will be struggling to balance the books. 

Even more than governments, citizens cannot afford to pay for what we have built. Families struggle to pay their mortgages and maintain a two car family, because they have to, because they have no access to public transit and because they have no alternatives.  

So, looking at our second building block, what export markets can we take advantage of? 

We need to look to the growing markets of India and China, Brazil and Eastern Europe.
 
What is the biggest trend that ties all of these export markets together? They have large and growing populations where hundreds of millions of people are moving from rural areas into cities. 

According to a McKinsey report of March 2008, by 2025, China will have 219 cities with more than one million inhabitants—compared with 35 in Europe today—and 24 cities with more than five million people. 

According to City Mayors, an on-line urban affairs think tank, by 2025, India will add 220 million to its cities. To accommodate this growth, India will have to add the equivalent of 25 New York Cities! 

So clearly, in light of the galloping urbanization of the developing world, there will be a huge need to move people and goods efficiently from A to B. 

And looking at our third building block, that of leveraging an already developed Canadian manufacturing expertise, what part of the manufacturing sector can we build on and create global excellence and dominance? 

What sector fits the criteria of all three building blocks? 

What fits the first building block of environmental sustainability and the need for energy conservation? 

What fits the second building block of growing export markets in the developing world? 

What fits the third building block of leveraging already Canadian-based and headquartered firms that are globally dominant in their area of the manufacturing? 

The sector that fits all three is the sector that designs and manufactures public transit systems. 

Public transit systems are one of the most environmentally and economically sustainable modes of transport, meeting the criteria of our first building block. 

There is, and will be, huge demand in places like China and India for public transit systems. This meets the criteria of our second building block. 

And, in Canada, we have companies that are globally dominant in this field. This meets the criteria of our third building block. In fact, the largest manufacturer of rapid transit systems in the world is a Canadian company: Bombardier Transportation. Ironically almost all of its business is outside of Canada.
 
And, I believe that governments in Canada have can contribute in two ways to developing this manufacturing sector.
First, we need to overhaul urban and transit planning. In other words, we need to ensure that the vast majority of any additional population growth is absorbed within the existing built up urban areas of our nation, while building much more public transit. 

Greater intensification of cities like Toronto, Montreal and Vancouver are needed, while undertaking massive expansions of public transit systems. Some of this is underway, but we must go much further and much faster. 

The resulting higher densities will provide the transit ridership needed to justify the operational costs of major public transit systems. These transit systems do not come without a price. 

Tens of billions are required to build the kind of public transit systems needed to move people and goods around these denser cities. This level of investment is beyond municipal means and requires commitments from federal and provincial governments. But the alternative – more sprawl and the energy-intensive car commuting that this entails – comes with an even higher price, both environmentally and economically.

And that’s why we need to do a second thing and that is to pass a National Public Transit Act. 

The Act would create and capitalize a National Public Transit Fund. It would also set the broad criteria for the release of those monies from the fund. For example, the fund could commit $30 billion of federal money over the next 15 years for public transit – a rate of $2 billion a year, less than 1% of the federal budget – only to be released if matched by provincial funds. This would create a national fund of $60 billion dollars to build public transit. 

If the future of the global economy lies in its cities, then this is the sure-fire way to build the Canadian city-economies of the 21st century. 

It can cost up to $200 million a kilometre to build a subway system, and up to $80 million to build an LRT system. So a $60 billion fund could build up to 1000 kilometres of subways and rapid transit in Canada’s large urban areas. 

This would help meet the demand for the environmental goods I talked about earlier, like the need to halt habitat loss to protect species at risk, the need to protect fresh water resources, the need preserve farmland for food and the need to reduce GHGs. It would also help Canadian families and businesses meet the need to reduce energy costs. 

It would also leverage public funds in an already developed Canadian expertise in building public transit systems, thereby helping to develop export markets in India and China.

There would be other benefits as well. 

The intensification of our cities and the construction of mass transit systems would also allow us to absorb the millions of new Canadians expected in Toronto, Montreal and Vancouver. In the Toronto area alone, the population is expected to grow by 50% in the next two decades, from 8 to 12 million citizens. 

A denser population does not necessarily require turning these cities into Le Corbusier’s canyons of towering skyscrapers. These increases in population can be accommodated by building five to eight story densities along major transit corridors, like Yonge and Bloor Streets in Toronto, or Eglinton and Hurontario in Mississauga, or St. Denis and St. Laurent in Montreal. Either way – 40 story condos or five-to-eight story structures throughout the city – these cities would be the better for it. 

Perhaps, most importantly, I believe it would spur productivity growth. Let me show you some slides that make my point about how we could really spur productivity growth in Canada. 

In a sprawling city, an average household will pay up to $13,000 a year for transportation. In more compact Canadian city, with access to public transit, that number drops to $6,000 a year. In global cities with world-class public transit systems that number can be as low as $3,000 a year. That extra $7,000 to $10,000 a year in extra after-tax income provides those families with more disposable income and a higher quality of life. 

In Hong Kong, average household expenditure on transportation is about $3,000 Canadian a year, about half of that of a Montrealer and about a quarter that of a Calgarian. And Hong Kong’s gross domestic product (GDP) at purchasing power parity (PPP) per capita is higher than Canada’s. I think that there is a link between these two statistics. 

So, the statistics would lead to the conclusion that if governments want to improve productivity, two things should be done. First, intensify urban areas and, second, build a lot more public transit. 

By providing people with alternatives to the car, by getting commuters out of their cars and into public transit, we can reduce the annual expenditure on transportation that each household incurs. This, in turn, will allow households to redeploy capital away from depreciable assets like the car toward better productive uses like education, books or savings. And this in turn, will lead to real, long-term productivity growth and prosperity.  

Does this all sound too ambitious? I don’t think so. 

During WW2, in a few short years, we re-tooled our auto sector to build Spitfires, bombs and guns. Now would be a good time to “re-tool” our manufacturing sector away from building cars to building public transit systems. 

Further back, some 142 years ago, John A. Macdonald forged Confederation by building a rail network of 6400 kilometres across a virgin wilderness, in a country with only 4 million citizens, about 1/10 the population we have today – and a far poorer one at that. 

Surely we, in a much richer, much more populous Canada, can build 1000 kilometres of public transit systems to forge the Canada of the 21st century. 

Surely we have that kind of ambition within us, that kind of collective purpose. 

To conclude, the solution to rebuilding our manufacturing industry lies in meeting the demand of new markets for environmental goods and the need for energy conservation. Canadian governments have a role to play in this transformation, in a way that could leverage public investments in an already developed Canadian expertise in public transit systems, so that we can further develop export markets, while at the same time delivering world-class public transit systems in Canada’s largest cities. 

This approach would also improve the quality of life of millions of Canadians by allowing them to commute more easily across Canada’s largest metropolitan regions. It would also improve productivity by significantly reducing household expenditures on transportation, thereby allowing a better deployment of capital away from the depreciable asset of a car into more productive uses, like savings or education. 

This would benefit all Canadians, both in the small town and rural areas that would build these public transit systems and in the big cities that would use them. Building public transit for urban Canada would help rural Canada. The manufacture of public transit systems takes place in small town and rural Canada. New York’s subway cars are built in La Pocatiere, Quebec, while Toronto’s subway cars are built in Thunder Bay, Ontario. 

In some ways, this could be the reincarnation of the grand alliance between urban and rural Canada. I like to think of it as Sir John A. Macdonald’s 21st century version of the National Policy. Call it the “New National Policy”. 

Let us build a new ribbon of steel for our largest urban areas to forge world-class Canadian cities, as well as the rural and small town manufacturing economy, of the 21st century. 

Thank you.


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