Manufacturers head into an uncertain recovery
As the economy opens up, the threat of another wave of infection is very real.
The pandemic has really knocked the wind out of Canadian manufacturing and the economy, which contracted by 20% between February and April.
Manufacturing production, which directly contributes 10% to GDP, dropped by one-third in March and April. With plants shutting down or reducing capacity, output levels were down in every industry sector.
Automotive production was hardest hit. Every Canadian assembly plant ceased operations in April, while many motor vehicle parts suppliers in North America either operated at limited capacity or closed operations completely. Parts production plummeted by 86% for the month.
Other equipment producers were affected as well. Aerospace production fell by close to 11% while production of other types of machinery and equipment was down by 17%. Impacts were felt throughout the supply chain with primary metals and plastic and rubber products both down by one-third, and fabricated metals off by 28%.
Food production fell by almost 13% thanks to the closure of meat processing facilities. Meanwhile, petroleum refining was hit by a triple whammy of global over-supply, falling prices and lower energy demand.
Of course, other sectors that either depend heavily on manufacturers for their businesses or are important domestic customers were also hit hard.
But there is a glimmer of hope. As workplaces opened up, recovery slowly began to take shape. Exports rose by 7% in May and sales to the US increased by 9%. Auto shipments jumped 16%, building permits increased by more than 20% and 290,000 more Canadians were employed during the month than in April, with 79,000 more jobs in manufacturing.
We’ll need to wait a while longer to get the full statistical read on the early summer, but early indications are looking good, and it appears manufacturing is leading the way. However, here’s a long way to go before we can say we’re firmly on track to a sustainable recovery. Our exports are still 40% lower than where they were a year ago and auto production is down significantly.
Much uncertainty remains. As the economy opens up, the threat of another wave of infection is very real. Increasing case numbers in the US threaten both demand and production activity. Manufacturers are as much if not more at risk from supply chain disruptions as they are from faltering customer demand.
As the recovery gets underway and manufacturers are focusing on ensuring safe and healthy workspaces, let’s not forget COVID-19 has aggravated threats and accelerated trends that were already apparent in manufacturing globally. These include weakening demand in key markets, increasing levels of political risk and trade protection, intense competition, oversupply, falling prices and rapid rates of technological change.
In many ways, the pandemic has been a great reckoning. Companies with the strongest cash reserves, the most transparent and resilient supply chains and the greatest agility to take advantage of new opportunities are best positioned to ride the wave to recovery.
In the short-term, many companies have turned to producing medical and personal protective equipment products critical for fighting the pandemic. With recovery underway, more opportunities are opening up as supply chain gaps become apparent and more manufacturers are looking to nearshore critical and higher value materials, components and equipment.
To take advantage of opportunities, manufacturers need to be globally competitive. Canada is a high cost country to do business, and probably will be more so as we recover from the debt hangover we’ll inherit from the pandemic.
Advanced technologies – digital systems, new materials, machine learning and smart production systems – will be important tools. Using them productively and profitably requires a focus on creating value by delivering solutions to customers, not just products.
This involves identifying critical processe, as well as bottlenecks and non-value-adding activities. Putting in place information and management systems, skill sets, supply chains and business partners that achieve business objectives is also key.
Let’s hope the economy revs up rapidly, but don’t assume it will be business as usual. Manufacturers most capable of managing change – their processes, technologies and above all, people – will lead the way.
Jayson Myers, the CEO of Next Generation Manufacturing Canada, is an award-winning business economist and advisor to private and public sector leaders. E-mail firstname.lastname@example.org. Visit www.ngen.ca.
This article appears in the September 2020 print issue of PLANT Magazine.