Musing about manufacturing

We have talked a lot on this blog at various times about the potential (or lack thereof) of the manufacturing sector as an economic growth engine.  There’s a story this morning about the Nova Scotia NDP proposing a manufacturing tax credit.

I am not sure that a small 10% credit will do much to spur investment.  I think that both New Brunswick and Nova Scotia need to figure out if they want to be in the manufacturing game at all and if so where do they want to put their focus. 

If you analyze (as I have) the last few hundred new manufacturing plant announcements in North America  you will see a number of commonalities.  This doesn’t mean that all the deals have these commonalities but most do.

1. A big government incentive package.  These are usually still only around 20%-30% of the total capital investment of the project (meaning the government leverages 70%-80%) but they can be substantial.  But even a smaller project in the $200 million range in capital costs can expect to receive a package from Quebec or Ontario or dozens of U.S. states of at least $40 million.  It’s important to note, however, that these packages are almost never ‘cash’.  They tend to be free land, infrastructure upgrades, training dollars and tax breaks.  New Brunswick is just about the only jursidiction in North America that offers ‘forgiveable’ loans.  There is probably a reason for that.  New Brunswick has never played in this game – with the exception of bailing out firms that are already here and going under.  Then you can get the big coin.  But to pay to attract a Fortune 1000 manufacturing company?  Nope.

2. A semi-rural setting.  If you look, for example, at the auto plants set up in Alabama, Kentucky, etc. they tend to be sited well outside the urban centres (typically because they need 500-1,000 acres).  This means an hour to an hour and a half drive outside a metro.

3. Cheap power rates.  This depends on the industry – some are more energy intensive than others but it is safe to say that regions with higher than average power rates tend to attract less manufacturing investment.

 

Things that aren’t correlated with successful manufacturing investment (common myths):

1. They have to be sited near large urban populations.  Recently, Nestle put a massive food manufacturing plant about as far away from the major U.S. population as they could.

2.  They locate where other similar firms have already located.  This is not necessarily true.  If they are locating in a market to supply another firm (s) – that would be the case but many of these are truly greenfield locations.

Tips if New Brunswick wants to attract manufacturing:

1.  Develop competitive tax-based incentive programs.  I don’t think giving cash to companies makes much sense anymore with the exception of covering some training costs.

2. Find a way to keep industrial energy rates low.

3. Pick a few niche areas within manufacturing and focus.  Ideally, the community colleges and training infrastructure, the R&D programs and other cluster activities would be aligned to boost the value proposition.

4. Get serious about selling.  Pick markets that have good potential and set up offices there.  Build relationships. Smooze.

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4 Responses to Musing about manufacturing

  1. Anonymous says:

    Excellent ideas. One varriation on the power rate. Perhaps offer a competitive power rate today but make a commitment on rates for the next 10 years. With nuclear this is feasible as it is isolated from the market fluctuations of fossil fuels.

    Now, take the above points and add a decade of certainty with one of your major business costs (assuming we target power intensive businesses) and I think that could be a pretty attractive proposal.

  2. Rob says:

    More important than electricity is natural gas. Medicine Hat landed a Goodyear tire plant by giving the manufacturer a dedicated gas well at rock bottom prices. This is something Sussex could be looking at right now.

  3. Anonymous says:

    Employees at Medicine Hat’s Goodyear plant found out this week the company will be slashing 35 full-time jobs effective March 28.

  4. Anonymous says:

    Probably other reasons they built there 50 years ago, ya think. Or do you?
    Goodyear Canada Operations
    Offices:
    Corporate Headquarters – Toronto, ON
    450 Kipling, M8Z 5E1 (416) 201-4300

    Central Region Office – Toronto, ON
    450 Kipling, M8Z 5E1 (416) 201-4300

    Eastern Region Office – Montreal, PQ
    7575, Transcanada Highway, suite 305,
    Saint-Laurent, QC H4T 1V6
    (514) 334-1112

    Western Region Office – St. Albert, AB
    220 Carnigie Dr, T8N 5A7, (780) 460-7262

    Plants:
    Valleyfield, Quebec
    2600 Boul, Monseigneur Langlois, J6S 5G6 (450) 377-6800

    Napanee, Ontario
    P.O Box #370, K7R 3P5 (613) 354-7411

    Medicine Hat, Alberta
    1271 12th St. N.W. T1A 7E9 (403) 527-3353

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