High Costs Pushing Western Canada Companies Eastward

In addition to saving money, moving east allows companies access to a deeper labor pool.

CALGARY (CP) - If you can't stand the heat, get out of the kitchen—and some companies in Western Canada's blistering economy are doing just that, moving manufacturing to Ontario as part of cost-cutting initiatives.

Calgary-based Resin Systems Inc.  figures it will save about $600,000 a month with its new business plan which has contracted out manufacturing of its signature composite transmission poles to a company in Tilbury, Ont.

The move allows Resin Systems to focus on product development and Global Composite Manufacturing to add its expertise, the company said.

It also grants access to the deeper labour pool out east, ''reducing RS's dependency on the Alberta labour market,'' Resin System told shareholders recently.

But problems finding steady employees isn't limited to the prairie province; British Columbia also is facing labour crunches due to its surging oil and gas industry.

Kelowna, B.C.-based Pacific Safety Products Inc. is moving all production to Arnprior, Ont. in part because it can't find entry-level sewing machine operators for its body armour plant.

The company pushed its starting wages up by $2 to $11.50 per hour just to compete with coffee king outlet Tim Horton's, but still has at least 12 vacancies to fill.

So the company, which has a $27 million market cap, is moving manufacturing to Ontario where it has a second factory, and where most of its suppliers are based from.

''The decision to move manufacturing from Kelowna to Arnprior wasn't solely based on the problem we were having with recruiting in Kelowna, which is definitely an issue,'' Valerie Dougans, chief financial officer, said.

''Labour rates are higher than they are in Arnprior, but what we're seeing is we were having our raw material shipped to Kelowna, and then we would be shipping the finished goods back east. So having everything centralized in Ontario is helping us to reduce some of our costs.''

Economists with major financial institutions admitted to being slightly surprised by the companies' stories, a reversal of the trend to ''Go West, Young Man,'' but could see the logic for some businesses.

Ontario's unemployment rate during the second quarter was 6.5 percent, compared to a national average of 6.1 percent and Canada's job central, Alberta's 3.7 percent.

The split between western and eastern Canada is a once in a generation gap between the two regions,''said a fascinated Doug Porter, chief economist with BMO Nesbit Burns.

''I haven't seen this kind of divergence since the 1970s and early 1980s when Central Canada was in a recession,'' Porter said from Toronto.

Toronto's 6.9 percent unemployment rate is above 6.5 percent in Montreal, and 6.7 percent in St. John's, Nfld., he noted.

''That could begin to open up this type of trend where companies decide to shift operations to Ontario just because of labour availability,'' Porter said.

However, don't expect a big shift to Ontario, Brett Gartner, economist with Canada West Foundation said.

''It's such and expensive and drastic step that it's not something that all firms would be able to do,'' Gartner said.

''It really does speak to how acute the shortage of labour is, because that's a big decision, and one that comes with a lot of costs, moving costs. It helps if you do have a prior operation, then it's much easier to move and consolidate operations into one plant, for instance.''

Dougans agreed: ''If we didn't have that (Arnprior) location, I don't that we would have pulled up stakes and moved, and started up from scratch,'' she said, from Kelowna.

The decision to relocate comes down to is what type of manufacture companies are in, analysts said.

If they are specifically aimed at the oil services or oil and gas industry, maybe it doesn't make sense to relocate. But where they are serving a global market or a wider North American market, it makes sense to ship operations to Ontario or other provinces in eastern Canada.

''The labour market in Alberta is just insane,'' Toronto Dominion's deputy chief economist Craig Alexander said. ''The highest single cost that most business have is their wage bill.''

However, the cost to relocate would be prohibitive for most companies, and unrealistic for those with their client base in the West. The commodity industry won't move, nor will its supporting services, or companies targeting Alberta consumers.

''It's one of those things where the pendulum swings back and forth,'' Alexander said.

''A couple of years ago, the trend was to move into Alberta to take advantage of the economic boom, and now with labour markets really tight, the pendulum is swinging the other way because they're looking at the reality of lower costs doing business elsewhere.''

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