To date, the service sector has been dominated by engineering and consulting, and we will see these areas continue to grow in the future as railways remain focused on their core transportation activities. In today´s service oriented economy, its interesting to note that two-thirds of our rail supplier firms still provide products. This speaks to both the historical and traditional nature of our industry, and also to the capital-intensive nature of railroading.
Railway and transit supply companies employ more than 60,000 Canadians.
We have a significant economical footprint in the Canadian economy, with domestic sales of $4 billion per year. In addition, 80% of these companies also generate export sales totalling $5 billion making the total output of our sector more than $9 billion per year. It is widely accepted that in 2009 and 2010, this figure will decrease. We also know that in a market where there are a large number of small, diversified sellers, and a small number of large buyers, the buyers retain significant leverage. But in many ways, this is deemed positive forcing the market to be innovative and efficient. Ultimately this is reflected in our strong reputation in this field around the world for top quality products and services.
The global economic downturn has hit the Canadian manufacturing sector very hard, resulting in significant work reduction and job losses. The Canadian rail manufacturing sector is also experiencing current job losses and production downturn. Medium term growth for rail manufacturing in Canada is expected – but for that growth to occur the industry must survive the next two fiscal years.
In North America, rail is the most capital intensive industry and manufacturers depend on consistently large annual capital investments by railways. Due to the current economic situation, North America´s railways are retracting and delaying capital expenditures and the impact on Canadian rail manufacturers has been devastating. Over the short term, CN and CP alone have reduced their planned purchases of new locomotives and rolling stock by over to $400 million. This has had a negative effect in Canada´s rail manufacturing plants and the component and sub-component supply chain.
On the transit side it´s a much different story. Commuter and passenger rail are experiencing strong ridership growth. With regards to Intercity Rail, the number of passengers are up 10% since 2003 to 4.5 million in 2007. VIA ridership grew approximately another 9% in 2008. In 2007, VIA received $600 million. The 2009 Federal Budget allocated another $407 million to VIA for infrastructure and other capital improvements.
With regards to Commuter Rail, ridership is up by 17% to 63.4 million since 2003. GO Transit ridership grew approximately another 7% in 2008. We are experiencing rapid growth and expansion. Over $1Billion has been committed to expanding GO, AMT, and Translink networks and services.
One of the most important factors influencing the Canadian rail industry's future is the access to markets large enough to allow for economies of scale in both production and development activities. 80% of rail suppliers are exporting. Because Canada's market is generally too small to meet these requirements, the industry has to rely on international projects to achieve the required critical mass. In order to successfully export, Canadian companies continue to develop and maintain a combination of system design capabilities, technological expertise, competitive prices and the financial strength to remain competitive in large projects.
With our relatively high Canadian dollar and labour costs, the majority of firms are involved with a combination of domestic and imported input materials. Over the years, Canadian suppliers have had to become flexible, technologically driven, automated and lean manufacturers to remain in the game. Consequently, this has given us an advantage internationally.
The majority of Canadian suppliers are not supplying a parent or affiliate company. And we sell primarily to other manufacturers followed closely by direct sales to railways, transit operators and foreign governments.
As in most industries in Canada, the US is the most important export market. Only 6% have no output destined for the US. But increasingly, that market has become much more difficult with the high Canadian dollar and restrictive “Buy America” clauses, especially in publicly-funded transit projects.
Steady and in many cases growing demand is foreseen as the North American railway industry continues to play a major role in providing transportation in a globalizing trading environment. According to Roland Berger Strategy Consultants´ study entitled ‘Worldwide Rail Market Study´ commissioned by the Association of the European Rail Industry, from 2005 to 2007, the rail manufacturing industry witnessed a growth rate of 9%. The total accessible world market rose from CDN $114.8 billion in 2005 to CDN $137.6 billion in 2007. We will continue to see the rail supply industry perform well in the coming years with 2.5% to 3% growth per year. Many of the international stimulus infrastructure projects involve rail investments in nationalized systems. Canadian rail manufacturers and suppliers could benefit from these international projects.
The rail supply industry today is a large, dynamic and a growing community in Canada, and an important part of our economy. In order to successfully export, Canadian companies need to continue to develop and maintain a combination of system design capabilities, technological expertise, competitive prices and the financial strength to remain competitive in large projects.
The good news is that Canadian companies continue to maintain a strong international reputation for quality products and excellent after market service. We play a vital role in national wealth creation by contributing to innovation, rationalization, design and development of both public and private transportation components and systems.