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, it's 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. Canada’s rail sector is made up of a large number of small, diversified sellers, and a small number of large buyers givingthe buyers 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.
In North America, rail is the most capital intensive industry and manufacturers depend on consistently large annual capital investments by railways. Typically Canada’s railways make annual capital expenditures of close to $2 billion. This number can vary year to year with the bulk of investments going to track and roadway. Operating expenditures are more predictable at close to $10 billion a year. The supply community is responsible for much of this in the form of fuel and maintenance products and services.
Canada’s transit and commuter rail sector is very significant moving close to 100 million passengers a year. Annual expenditures by this group exceed $5 billion. Like all passenger transit in North America government subsidies (provincial and federal) account for a large portion of this spending. There is a strong commitment by governments, the public and the Canadian railroad supply community to ensure long term continuous growth of this sector.
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.