Why Canadians Cannot Compete with Lower Labour Cost Countries such as India and China - Term Paper Example

Why Canadians cannot compete with lower labour cost countries such as India and China page and section name Date Introduction In the current world, competition is inevitable. The ever increasing global business environment has made several countries adopt strategies that would enable them survive the cut-throat global competition. Low-cost nations such as India, Brazil, Thailand and China offer low labour costs due to their high population. They have also adopted automation in the manufacturing sector among many other strategies to stay competitive in the global market. This has made most companies relocate to these nations. In that perspective, the paper will highlight the reasons why Canada cannot compete with lower labor cost countries such as India and China. Discussion It is very difficult for Canada to be a manufacturing powerhouse like India and China. As of 2012, the 486.6-million Indian labor force makes it the globes second largest. Besides, the telecommunication industry in India is the world’s fastest growing. After the quarter of 2013, India became the third largest market for smartphones globally after China and the United States of America (Drèze & Amartya (2013). In terms of the gross domestic produxt, by 2013 China had become the globe’s second largest economy. On the other hand, China has been the globe’s manufacturing hub, leveraging its cheap labor in order to dominate global trade, especially the nation’s exports (Sang, 2013). In order to compete in the international manufacturing stage, Canada needs to differentiate itself from its competitors by making maximum use of its strengths. This will build ensure that it gains some steps in becoming a manufacturing powerhouse. China and India do not view Canada as a competitor because they have the capability to respond rapidly to the ever changing business environment and offer customers with what they need (Sexton, 2007). Chinese and Indian manufacturers have a vital strength in providing work that is customized together with services in order to meet the market requirements more flexibly than manufacturers in other nations like Canada. To attain this crucial strength (Scianna, 2014) argues that Canadian manufacturers need to invest in innovative technologies. Compared to low-cost nations like China, India, Malaysia and Brazil, the manufacturing sector in Canada is nowhere as big as other nations. In order for the Canadian manufacturers to stay in business competitively, the machine shops not only need to have the right equipment, but also make products for cost effective unit prices. Scianna (2014) noted that the most outstanding difference between Canada and its competitors is the size of manufacturers. Canada does not have a high number of large manufacturing Tier 1 suppliers such as Linamar and Magna. An estimated 80% of the manufacturing businesses in Canada are small to medium sized manufacturers. Small to medium sized enterprises usually do not have adequate financial resources than larger companies. These enterprises need to invest in manufacturing technologies to level the playing field with global manufacturing hubs like India and China. Canada has not automated its manufacturing processes as China. China has adopted automation because the demographics in China are continuously changing, and the manufacturing costs are rising. Adopting automated solutions and having the skilled personnel to run the automation enables a nation to have a comparative advantage globally. Canadian manufacturers may not have adopted automation as quickly as countries like India and China. Canada faces an uphill task to maintain a competitive manufacturing industry. Some of the challenges it faces include high cost of regulatory compliance, high costs of labor, and the shortage of skilled labor. However, if the Canadian manufacturers adopt the right strategies, right technologies and most importantly, the right attitude about what they require to do, they will have the ability to compete in an increasingly competitive global market (Scianna, 2014). Of the numerous challenges Canada faces, the most critical issue that affects the Canadian manufacturings industry is tackling shortage of skilled labor and increasing opportunities for the young Canadians to gain meaningful employment in order to compete with low-cost nations like China and India. Skilled persons are crucial in the manufacturing industry competing in the global market. A lot of public funding in Canada is channeled towards institutional training which offers no guaranteed employment or economic benefit. Canada needs to initiate a cultural shift in the manner in which it trains its young people. Most nations that Canada is competing against such as India and China begin their youth apprenticeship training at the tender age of 16. This puts Canada at a disadvantage right from the beginning. Nations like China and India direct their public funds on educating young people between the ages of 16-18 on pre-apprenticeship activities within school or college. Besides, manufacturing companies in these nations commence their youth apprenticeship programs at an earlier age compared to Canada. With regard to competition, this put Canada a step below. Vestring, Rouse, Reinrt, and Varma (2011) argued that numerous low-cost countries provide high quality manufacturing skills at a low cost. In that respect, India offers unexpectedly deep and reliable pools of educated talent. India is a home to 25 million English-speaking white-collar workers, whose number is projected to rise to 1 million people annually in the next 40 years. Those firms that comprehend “low wage” no longer translate to “low skill” usually take a granular approach to cost migration. Cost leaders, such as General Electric has built a research and development center in India and has a staff of 500. An estimated one-third of the 500 employees are PhDs holders, and are twice as likely as laggards to view the advantages of conducting knowledge intensive activities like research and development in low-cost (Vestring, et al., 2011:4) Unlike China and India, Canada has not put emphasis on research and product development and commercialization. Although there is no lack of funding for research and development by the Canadian government, the nation falters in transferring the innovative ideas created at the research and development level into viable commercial products that Canadian manufacturers can sell worldwide. As a consequence, between 2002 and 2013, an estimated 20,000 manufactures went out of business in Canada (Scianna, 2014). Low-cost sourcing is a procurement strategy wherein a firm sources materials from other nations with lower production and labor costs to reduce operational expenses. The cost of labor is huge factor when it comes to outsourcing particularly for low-end manufacturing. Most firms are relocating to either China or India due to the fact the costs of labor and materials are low. This wave of factory relocation raises the economic standards of the nation where the firm has relocated (Vestring, et al. (2011). The cost of closing down a manufacturing facility in a high-cost nation is high, approximately 200,000 Euros per laborer in a country like Canada or Germany (Vestring, et al., 2011:5). Currently, India has the lowest labor costs globally attracting a host of companies from the high-cost nations. India also provides raw materials at a lower cost. This makes them be regarded as the cheapest nations to produce goods from. Consequently, they have become more competitive compared to other countries. When the costs of labor are high, foreign firms will exit the nation, to look for a country that has low labor cost. Besides, countries such as India and China are considered ideal for sourcing not only because of low-cost labor, but also compatible legal system, relatively stable political and economic environment and modern infrastructure. These factors point out the reason why a country like Canada can not compete with nations like China and India. Canada can not compete with China because there labor shortage is not a problem. Isgut (2006) reports that there are over 320 million laborers and 20 million of them have the potential to migrate to cities and be absorbed in the modern sector. This large pool of rural labor has resulted to the availability of labor at lower cost. This has resulted to the nation being the largest exporter of low-end manufactured products globally. It is closely followed by India. Certain large companies such as Tesco, Coca Cola and Wal-mart force their competitors to relocate to regions where the cost of labor and material is low. These firms have a powerful influence of putting pressure on suppliers, many of whom have no choice, but to shift their production operations out of the country to cheaper locations like China, Thailand, India, and Brazil in order to meet the large companies’ demands for lower prices. As a consequence, Canada can not compete with low-wage countries because numerous manufacturing firms have moved to these low-cost countries such as India, Malaysia, Brazil and China raising the gross domestic product, thus rapidly improving their economy. On the other hand, when large firms such as Wal-Mart and Coca Cola move into a new community, they lower the wages of these communities. In the case of Wal-Mart, they place intense pressure on the higher wage competitors to cut the costs of labour. What is more astonishing is that they lower the overall employment level. When the smaller firms relocated, many people are rendered jobless, and when this new bigger company enters the market it only employs a few people. This results in a reduction in employment levels. As cited by Capelli (2006), this business strategy is regarded as classic market capitalism, where firms lower the wage costs and prices, but reap the benefits. Low prices have a great advantage to the consumers, particularly those who earn low wages. These low prices have been found to be similar an income subsidy. Low wages is defined by Auer (2010) as a product of economic and social infrastructure. Studies have indicated that low wages which are similar to low prices do not have long-term sustainable advantages to the community. Although China and India are striving to raise their standard of living, Canada, on the other hand, is striving to lower standard of living by means of regressing into a model of business that is practiced with significant success. Where labor makes up a great percentage of the total costs, and costs of transportation, most firms usually take the initiative of migrating to low-cost countries in order to remain competitive. The best examples include: textile industry, automobile and services such as mobile phone service providers. In China, Lu (2009) pointed out that the government deliberately discouraged the development of the apparel industry and its exports since they were viewed as low profit-margin and resource intensive. Due to escalating costs of production and slow demand for growth abroad, the apparel industries shut down in 2008. This rendered many people jobless. The laid off workers demonstrated, and this was considered as a threat to social stability. The government came to realize that this industry was a significant player in the national economy and stability in the society. When many people are unemployed social vices such as robberies usually increase. However, China took a shorter time to upgrade and transform its clothing industry from being labour intensive to one that rests on technology and capital intensive subsectors. Wyld (2011) found that Canada has been engaging itself in the capital and markets business for long, although India and China will catch up with them if they really want to build a sustainable economy. According to a report in 2005, some Chinese and Indian manufacturers are being paid 33 cents an hour. In several countries around the globe, this cents-an-hour pay has caused numerous companies to relocate to such low-wage nations (Scott, 2011). This has resulted to China’s and India’s economic revival posing competitive problems to numerous nations globally. Another reason why Canada does not have competitive advantage is the firm’s policies towards health care. Most firms in Canada offer relatively little access to health benefits. Freeman (2006) asserts that numerous states that offer healthcare subsidies to the low income people and families have reported a disproportionate number of people employees in large-scale firms such as Tesco, Coca Cola and Wal-Mart. This business strategy lowers the competitive advantage of Canada. The Canadians need start coming up with new creative economic policies that will ensure workers fare well with increased wages and improved working conditions. There is need to provide adequate apprenticeship training instead of the much favoured institutional training. The manufacturing sector needs to transform their research and development ideas into viable commercial products. For the less skilled and poorly paid Canadians, there is a need to restructure the labor market in order to accommodate their services so that they do not fall further behind in economic development. Some of the policies that may assist Canada gain global competitive advantage include strengthening employees’ rights at work permitting them to gain a share of the company’s profits in non-traded goods markets via trade unions; increasing the minimum wages; expanding the tax credit on earned income; and providing work-life balance such as overtime, holidays, better compensation packages, and health insurance. Conclusion In order to compete with low cost nations such as India, Brazil, Thailand, and China, Canada needs to shift the way it trains its people, invest in new technologies to stay in order to stay business, embrace automation in manufacturing industries, and continue to invest in capital markets. Since competition is inevitable in the global market, it is quite crucial that Canadian companies continue investing since they cannot compete on cost and volume. This is because low-cost nations like China and India compete on low labour costs, wider market share, combination of good customer service, design and quick product development. Summarily, Canada needs to collaborate on a global scale by adopting best practices and education beginning with individual financial literacy that will be fundamental economically driving the nation forward to gain worldwide competitive advantage. The federal and provincial governments have the obligation of tackling the productivity-killing protectionism that has created the "competitiveness problem" in Canada (Wyld, 2011). References Auer, R. a. (2010). The effect of low-wage import competition on U.S.inflationary pressure. Journal of Monetary Economics , 491, 503. Capellli, P. (2006, March). Wal-Mart and the obligations of business. Retrieved March 2014, from Human Resource Executive Online: http://www.hreonline.com/HRE/story.jsp?storyId=4615496 Drèze, Jean, & Sen, Amartya (2013), An Uncertain Glory: India and Its Contradictions, New Delhi: Allen Lane. Freeman, R. (2006). The great doubling: the challenge of the new global labor market. University of Berkeley. Isgut, A. (2006). The Effect of Imports from china on canada’slabour markets: your wages are not set in beijing . Toronto: University of Toronto. Lu, S. D. (2009). The outlook for U.S. – China textile and apparel trade in 2009: from the trade policy perspective. University of Deleware. Sang Ye (2006). China Candid: The People on the Peoples Republic. California: University of California Press. Scianna, M. (2014). Retrieved March 20, 2014, from Making it in Canada: http://shopmetaltech.com/shop-technology/making-it-in-canada.html Scott. (2011, March 29). Retrieved March 19, 2014, from Can America Compete with Cheap Labor Countries? : http://lincicome.blogspot.com/2011/03/can-america-compete-with-cheap-labor.html Sexton, R. &. (2007). Exploring economics (first canadian edition ed.). Toronto: Nelson Thompson Canada Ltd. Vestring, T., Rouse, T., Reinrt, U., & Varma, S. (2011). Making the Move to Low-cost countries. Dartmouth Street, Boston: Bian & Company Inc. Wyld, A. (2011). Strong loonie, low productivity restraining recovery. Strong loonie, low productivity restraining recovery. Ottawa: The Canadian Press. Read More