Reshoring for the Rebound
- June 15, 2020
No one is sure how supply chains will change after coronavirus, but change will come
Calls for policy changes to encourage more companies to manufacture and source locally are nothing new and have resulted in little more than lip service in successive federal and provincial budgets.
That may have changed on a cold day in early April, when Ontario Premier Doug Ford famously exclaimed he would never allow the province to be “beholden to countries around the world for the safety and well-being for the people of Canada.” Ford added: “We have the technology, the ingenuity, the engineering might, the manufacturing might. There’s nothing we can’t build right here in Ontario.”
While that was an honest, off-the-cuff reaction to the U.S. blocking exports of certain personal protective equipment during the height of pandemic panic, it also signalled potential for policy change that could improve conditions for Canadian-owned manufacturers.
“We all want to see us building new things here in Ontario, and things we used to build that we let go overseas, we want it all back,” said Vic Fedeli, Ontario’s Minister of Economic Development, Job Creation and Trade. “We are going to lean heavily on the advanced manufacturing sector to lead us out of where we are and into the wider economy. I think when you look at manufacturing and machining, that’s going to play an absolutely critical role.”
With political and public sentiment aligned in this regard, the real question is what can be done to encourage this “reconcentration” of manufacturing, and how can we use it to lead a recovery from the economic drubbing unleashed by COVID-19’s public health measures?
“Red tape and regulation reduction, that’s where we will truly assist the business community,” he says, adding that before the onset of a global pandemic, Ontario was well on its way to reducing the costs and complexities associated with operating here.
“When you think about, for instance, the life sciences sector and pharmaceuticals manufacturing here in Ontario, a lot of it shifted overseas and it was not because it’s a penny or two cheaper to make things in Asia, it was the cost of red tape and regulations that were hurting that business community.”
Fedeli says this regulatory buffet was a main driver in companies choosing to invest elsewhere, reducing Ontario’s share of foreign direct investment and the jobs and product mandates that come with it.
Reshoring is a loaded word, carrying many political and social implications along with the pure economics. Of course, it’s desirable to make everything we need locally, but Dennis Darby, president and CEO of Canadian Manufacturers and Exporters, reminds us that Canada is a trading nation with numerous global partners who may have something to say if we enact policies that cut them out of the mix.
“Canada is an export market, so at the end of the day we have to be in the business of trading because our population is too small for the size of our industry, so we export about 32 per cent of everything we produce,” says Darby.
The vast majority of that production goes to the U.S., with a smaller amount to China and Mexico. Darby says that while Canada will never exit the global supply chain, there is an opportunity now for business to lead the way in increasing local production without the need for sweeping policy changes.
First, Darby says it will be beneficial for companies to look for alternative suppliers in their value chain. As we’ve learned in the last few months, that’s easier than initially thought. “In the world of just-in-time delivery, everybody streamlined their supply chains. But what this crisis taught us was how to find other alternatives. That’s something we shouldn’t lose and it’s something manufacturers are now well aware of.”
Certainly, manufacturers will now have plans in place for this kind of disruption. But policy makers aren’t off the hook.
“We have been underinvesting in the sector for years, so we need to again look at how we make Canada a more attractive place for companies to invest capacity and how we get companies here to adopt new technologies. We don’t really have a government procurement strategy here in Canada, how do we take advantage of this and develop a local supply?”
Every advanced economy does this, and our neighbour to the south is one of the best at it. But Canada has never truly had a purpose-built procurement plan that engaged Canadian companies first. In fact, budget priorities have often encouraged the opposite reaction—search for the best bang for the buck, regardless of jurisdiction.
“It’s going to require government to play a role. It’s important for us to make sure we are doing our bit as a country to invest in our own ability to make stuff,” he says.
Another way is to reduce the complexity of opening a new business or certifying a new product, processes that Canada accomplished
at a tortoise’s pace before the pandemic. However, in the race to produce medical supplies, many of these processes were fast-tracked from taking months to taking days. Finding a way to continue that success would be hugely beneficial, according to Darby.
“Give full credit to the federal and provincial governments on this. Processes that would usually take a long time were streamlined. Canada has a reputation in the industrial world as being a complex place to do business with many regulations at every level. Maybe we can do these things more efficiently all the time?”
Embrace the market
Not everyone is lining up behind a vast manufacturing reshoring initiative. The C.D. Howe Institute, an independent not-for-profit economic research institute in Toronto, says we should shy away from exactly this kind of policymaking, instead relying on the “discipline and dynamism of market forces” to ensure competitiveness.
In a press release, the institute warns against legislating any “ministerial public interest waiver for anti-competitive collaborations.”
The organization commended governments for the direct economic management and support to sectors and specific companies during the crisis, agreeing with the “near-term” intervention to backstop the economy. However, it warns political decision-makers facing the inevitable failure of major businesses to balance competing policy priorities.
“In the medium term as the global economy emerges from this crisis, vigorous competition will remain critical to the recovery and the long-run dynamism of Canada’s economy.”
With so much at stake, it’s difficult to predict which philosophy will lead to a lasting recovery. But, as the CME’s Darby said, manufacturing is unique in that the sector has options, whether or not we see any policy change to boost Canadian firms. SMT