Path to ProsperityClick image to enlargeby Noelle Stapinsky

How the pandemic has disrupted the economy with unforeseen challenges and unexpected opportunities

Around this time last year, corporate CEOs and economists alike were throwing their arms up in the air as they watched all forecasts, economic analyses and five-year business plans become obsolete. Businesses and whole industries in Canada were grappling with how to pivot their operations to stay afloat and keep their employees safe. But throughout the massively turbulent year, with the added yo-yo effect of adjusting to the new normal, the pandemic brought about a major change in consumer behaviour, creating in turn a surprising shift in demand—a shift that has shone a light on a massive domestic and global supply chain issue, which now has industries in Canada scrambling.

“When this pandemic started, the initial reaction of businesses was to retrench. But then it became apparent fairly quickly that wasn’t going to be the case at all,” says Don Matthew, partner and national sector leader for KPMG in Canada’s industrial manufacturing group. Matthew says that when experiences formerly taken for granted, such as travel, dining, entertainment, etc., became unavailable, consumers switched their spending habits to hard goods. 

“That’s why you saw the price of lumber almost triple, and sales of other hard goods going crazy. That is why the supply chain got into such a mess, and it still is,” says Matthew. “The supply chain settled back and withdrew a bit at the start of the pandemic and then they realized there’s a huge volume of goods that needs to be moved. Manufacturers of hard goods have no trouble with sales or revenue—they can sell anything and everything they can make right now. But they currently have three big issues: the supply chain is severely backed up and they’re having trouble getting the materials to meet demand; there’s a workforce shortage; and in the urban areas, there’s a lack of industrial space at a reasonable price.”

Alan Arcand, chief economist for Canadian Manufacturers and Exporters (CME) agrees. “People shifted their spending from services to goods, which helped boost demand for manufactured products. But since late last year and early this year, the recovery of the manufacturing sector stalled quite a bit. But this has less to do with a decline in demand and more to do with supply chain issues and challenges.”

 

Taking Stock
Border closures, grounded aircraft and global lockdowns severely pinched the supply chain. Arcand says that the price of shipping containers has significantly increased. “With fewer passenger planes in the air, which also move a significant amount of cargo, people had to look for other methods to move goods and that’s caused problems too.”

In an effort to keep production flowing, North American companies have started scouring for suppliers in Canada and the US. And they’re looking for multiple suppliers to regain some sort of certainty over inventory control. 

“Businesses are now looking for supply alternatives here in North America. And if you can supply them, they want to do business with you,” says Matthew. “And when the supply chain gets sorted out again in a couple of years, they’re not going to abandon those in North America; they’re going to still want them available so they have multiple sources to better ensure they have the products they need to make their goods.”

And there certainly are already signs of recovery for hard-hit industries such as aerospace. Matthew says that domestic air travel in both the US and Canada has already returned to pre-pandemic levels. And lumber prices are starting to level out as more people head back to work and ease up on home renovations.

Matthew adds, “There is a really strong demand for goods and that is going to continue because the profile of consumer debt in Canada has never been healthier than what it is right now in the last couple of decades. People used the pandemic to pay down debt and to refinance debt at lower interest rates. There is still a lot of pent-up demand and the ability to spend more going forward as we get certainty.” 

But one of the biggest hot topics today in regards to supply chain issues is the extreme shortage of semiconductor chips. “People started buying up a lot of electronics because they’ve been stuck at home,” says Arcand. “All of the big electronics companies snapped up all the semiconductors they could get their hands on, so there aren’t enough to go around. This has really hamstrung the automotive industry. You can’t make cars without them and the big automakers are having production issues across the globe and in Canada. And that has huge supply chain implications for Canada as there are a lot of companies that supply parts to manufacturers, so there’s obviously big downstream impacts.”

“We’ve seen automakers cut production by five to 10 per cent in some cases,” says Mike Bilton, chair of the tooling and automation group for the Automotive Parts Manufacturers’ Association (APMA). “With regards to the chip shortage, I think a lot of companies and automakers are really looking to what future forecasts and volumes are really going to look like. But I think we’re going to see those production numbers keep dropping over the next 14 to 16 months because the light at the end of the tunnel is still very far away with respect to the microchip shortage.” 

For semiconductor chip manufacturers, expanding production would be costly, not to mention that building new facilities to increase production capabilities would take years. “There’s been investment in the US for three or four large Tier One direct chip makers,” says Bilton. “That’s fantastic. But you’re talking billions of dollars and years for the bricks and mortar. To start up, you’re looking at two to three years just for the building. That’s a solution; it’s not optimal, but it is a solution.” 

Of course, just like when manufacturers got called to the table to help Canada address the personal protective equipment (PPE) shortage at the start of the pandemic, Bilton says manufacturers are once again getting creative. “Automakers are thinking about changing the way parts are designed. And if the micro chips were more standardized, they would be more readily available,” says Bilton. “The other creative idea automakers are starting to talk about is manufacturing these chips in-house. There’s a cost benefit and cost control mechanism that would have to be in place. But the benefits are a tighter grip on inventory and the associated costs. It would help mitigate the challenges we’re seeing.”

“Personally, I’ve always believed that there is always a solution,” continues Bilton. “Two years from now, are there going to be more vehicles on the road? I doubt it. But there might be more variations of vehicles, which may or may not require different microchips. If the standardization of microchips isn’t achieved then we will be back to where we were pre-pandemic.” 

Workforce Shakeup
The labour shortage in Canada has been an ongoing issue for all industries for a long time already, and it remains as yet another hurdle businesses will need to overcome. “For the overall economy, Canada had over 805,000 vacant jobs in July, which is a huge leap from 617,000 vacant jobs last October,” says Arcand. “In the second quarter there were almost 66,000 vacant jobs in the manufacturing industry in Canada, significantly higher than pre-pandemic times. 

“But if you look at the unemployment rate, it’s quite low in manufacturing,” continues Arcand. “In August it was 3.5 per cent, which is really low. It’s the lowest it’s been since September 2019. That means there are obviously manufacturers looking for workers, but there aren’t many workers in manufacturing looking for jobs.” 

Arcand admits that the pandemic is to blame for disrupting the economy, but there is also a structural factor that must be considered. “This is something economists have been talking about for a long time—the age structure of Canada’s population. The baby boomers are in their retirement years and are leaving the workforce in waves. Canada is increasing immigration to try to make up for that, but that’s not going to be enough. We always knew that it would probably come to this and that it was going to get harder and harder to find workers, and that’s definitely coming to pass.”

Predictably, the pandemic has just exacerbated workforce shortages. “Some people are retiring earlier than planned,” says Arcand. “Also, the government is providing more generous EI benefits during the pandemic. People might not feel safe working or have family commitments, especially if children are out of school or day care. Many factors are driving current labour shortages.”

Just as automotive OEMs are getting creative to mitigate the semiconductor supply chain issue, the pandemic has also pushed manufacturers to invest and adapt new technology and automation to ease the workforce shortage. In fact, according to a KPMG survey 96 per cent of manufacturers in Canada are switching to digital operations and that’s been accelerated by the pandemic. 

A CME survey asked its members if the strategies around increasing automation will remain permanent after the pandemic is over. “The popular response was ‘Yes,’” says Arcand. “They are looking for ways to automate tasks going forward because of all of the labour issues they were confronted with during the pandemic, like increasing the number of shifts to allow for physically distancing workers. I think one of the trends that could come out of the pandemic is a stronger drive to automate, and that’s something we will probably see across the entire sector.” 

Certainly, it’s going to be a few years before Canadian industries start to see a true recovery. But Matthew says, “I’m so excited about the next few years because you have this pandemic accelerating the adoption of technology in a very positive way, you have a global economy that’s generally quite buoyant, and you have people who have the desire to spend and the capacity to spend. I’m looking long term and business is going to be really fun in the next two years. There’s going to be this continuation of not trying to sell, but rather meeting the demand.” SMT

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