Despite the billions that the Quebec government has invested over the past ten years in accelerating the transition to digital technology, manufacturers still haven’t made the shift to Industry 4.0. That is the main conclusion of the latest report published by the Centre for Productivity and Prosperity – Walter J. Somers Foundation (CPP). “This finding is all the more disturbing at a time when these economic pillars are already facing major productivity issues,” laments CPP Director Robert Gagné. “Our analysis shows not only that the measures proposed, mostly in the form of income tax credits, are not reaching their targets, but also that the Quebec government’s economic development assistance system no longer meets businesses’ needs. So the current government has every reason to completely rethink its strategy, if it hopes to see the technological transition it is aiming for.”

The CPP study starts by explaining why manufacturing activity prematurely plummeted in Quebec in the early 2000s. Manufacturers here had relied mainly on the weak Canadian dollar to boost their exports to their main market, the United States, and in so doing made themselves much more vulnerable to exchange rate fluctuations, while ignoring the problem of lacklustre productivity. When the loonie rose, their competitive advantage south of the border evaporated and, because they lacked the appropriate resilience, their exports to the US fell. The manufacturing sector had already been weakened when the tech bubble burst, and now struggled even more. But companies didn’t learn from their errors, and failed to make the necessary investments to recover in the following years. It wasn’t until the Canadian dollar again sunk against the US greenback, starting in 2013, that exports began rising once more.

In view of all this, the manufacturing sector must be discouraged from relying in this way on exchange rates. Instead manufacturers must be convinced to transition to Industry 4.0, investing in intelligent automation and integrating new technologies to boost their productivity.

But it won’t be easy. “When we combined the answers to two Statistics Canada surveys on innovation, we found that small businesses in Quebec not only invest little in advanced technology because of its cost, but they also don’t think they need this technology,” notes Gagné. Moreover, human capital issues are also slowing the adoption of these new approaches, what with resistance to change, lack of training and the difficulty of recruiting skilled experts.

Some recommendations

In light of these findings, it is clear that the current government can talk all it likes about nurturing the transition to digital technology – if businesses are not on board, all its efforts will be in vain.

According to the CPP researchers, the most effective solution would be to shrink the corporate social safety net in place since the late 1990s, giving the government the leeway it needs to reduce the tax burden on all businesses. In the short term, it could take two specific steps:

  • Fully exempt small manufacturers from contributing to the Health Services Fund, also known as payroll taxes. Rather than seeking to reduce the tax burden for businesses that meet the criteria it sets for fiscal assistance, this would allow the government to give small businesses across the province the liquidity they need to invest, innovate and modernize. To offset the loss in terms of tax revenue, the government could lower the rate for the scientific research and experimental development credit, by far the most generous in Canada, and make it non-refundable.
  • Reform the tax credit for investments relating to manufacturing and processing equipment to specifically target manufacturers and investments in advanced technology, by eliminating the geographic criteria for the credit and increasing its rates. In so doing the government would give firms a real incentive, by removing one of the main obstacles to integrating advanced technology: cost. If the government still wishes to help businesses in remote regions cope with higher operating costs, it would be better to rely on direct assistance, so as to be able to periodically review its effectiveness.

“In the longer term, an in-depth examination of the many assistance measures brought in by the Quebec government should allow it to intervene more effectively by eliminating the three basic trends that currently undermine the consistency of its action plan, i.e. layers upon layers of assistance, overlapping programs and aid scattered across the industry,” concludes Gagné.

To read more : Deslauriers, Jonathan, Robert Gagné and Jonathan Paré, Manufacturier 4.0 : dynamiser l’activité manufacturière au Québec, Centre for Productivity and Prosperity (CPP) – Walter J. Somers Foundation, HEC Montréal, September 2019 (In french only)