Craig McIntosh, CEO of Winnipeg-based Acrylon Plastics Inc., watches as workers make a rotation moulded plastic drivetrain coverJOHN WOODS
Canadian businesses are wary of boosting spending on state-of-the-art machinery to bolster productivity because many of them are doubtful about the potency of the U.S. economic recovery.
Small and medium-sized businesses say Bank of Canada Governor Mark Carney is asking them to take a gamble by urging them to improve output since there are no guarantees that demand, particularly from U.S. customers, won't fade over the next two years. Mr. Carney became more forceful on the issue last week, warning businesses to produce goods more efficiently or risk losing market share abroad.
While the high dollar and nominally low interest rates have spurred some companies to start importing the needed machinery, others worry about making such big-ticket purchases.
Much of those misgivings lie with small and medium-sized companies – a potentially serious stumbling block given that those businesses generate about 50 per cent of gross domestic product.
Craig Alexander, chief economist at Toronto-Dominion Bank, said Canada has been losing ground to the U.S. for decades.
"All of the stars are aligned for businesses to invest," he said. In addition to the high dollar and low interest rates, business balance sheets are strong, earnings are projected to grow, while corporate tax rates are falling.
Meanwhile, the prospects for the U.S. economy have improved. "You can't wait for all the economic risks to disappear before you make business decisions," Mr. Alexander said.
Craig McIntosh, chief executive officer of Winnipeg-based Acrylon Plastics Inc., a manufacturer of plastic parts for farm machinery, buses and windows, is concerned about the sustainability of demand for his products.
"For me to buy more equipment – I need to have a reason to do that," Mr. McIntosh said. "And if I can make do with what I have, why go and invest? Because I am not seeing that my business is going to be up 10 or 20 per cent down the road."
The central bank's latest Business Outlook Survey found that the balance of opinion on investment in machinery and equipment "remains elevated" but has moderated somewhat since last fall. Still, a separate survey from the Canadian Federation of Independent Business shows a slight decline in capital spending plans for process machinery and equipment over the next three to four months.
"[Mr. Carney]is saying 'Have a leap of faith. The demand will be there, go invest.' And it is tough to get that leap of faith today," Mr. McIntosh said.
And while the Bank of Canada's key interest rate may be low, commercial banks have raised their margins on business loans and are demanding more collateral, said Rob Hilborn, president of Darcor Casters and Wheels, a Toronto-based manufacturer.
The high loonie, meanwhile, is also encouraging many manufacturers to expand production through acquisitions of U.S. plants, said Jayson Myers, president and chief executive officer of Canadian Manufacturers & Exporters.
For some companies, however, the positive outlook for the economy, stable interest rates and the high dollar has spurred them to make investments.
Harvie Andre, chief executive officer of Wenzel Downhole Tools Ltd., a Calgary company that makes drilling machinery, said his company is doing just that. "We've just placed an order for some additional machine tools," he said, adding: "These are the newer, fancier ones that computers run."
For others, the high Canadian dollar is putting a damper on expansion, even though the global economy is expanding.
"The outlook is very promising," particularly in the BRIC countries (Brazil, Russia, India China), said Éric Favreau, chief financial officer of Montreal-based Noveko International Inc. The company, which sells air filters and medical equipment around the world, saw 30-per-cent growth in revenue in 2010 and "this year is going to be as good if not better," he said.
Still, that growth is tempered by the effects of the high dollar, which eats sharply into Noveko's export revenue, he said.
As the economy improves, and business gets back to more normal levels of investment, some sectors are still looking for support from government – especially in the lead-up to the federal budget.
Manufacturers, for example, want Ottawa to extend the two-year writeoff for investments in manufacturing and processing technologies to the end of 2016, while making Canada's Scientific Research and Experimental Development tax credit "refundable."
Biotechnology companies, meanwhile, are asking for support from Ottawa as they get back on their feet after the recession. Their key request: That life science firms qualify for the flow-through share tax breaks already enjoyed by resource exploration companies.
This kind of support is crucial for the biotech sector, where almost a third of the companies are considering quitting Canada and moving to countries where tax support is more favourable, said Peter Brenders, president of the industry association BioteCanada.