Article

Canadian manufacturers in position to gain from supply chain disruptions

By 20/05/2020No Comments

Global economic disruptions place Canadian manufacturers in a position to benefit from the move of supply chain sources out of China to third markets.

Many companies today are thinking about resourcing their supply chains in 2020 due to the multiyear U.S.-China trade war as well as the societal and economic trauma of the COVID-19 pandemic.

But you might ask, what do these massive disruptive events mean for global supply chains? According to the news journal Business in Vancouver (BIV), quoting an American international affairs consultant, countries that have previously invested in Chinese suppliers are now seeking alternate places to invest, and that opens up opportunities for Canada to attract FDI.

BIV states that Japan has spent $2 billion USD to help Japanese companies move production out of China, meaning that Canada can offer itself up as a destination to do business. However, although this may pose an opportunity, Canadian market characteristics such as higher wage levels and relatively low population limit what Canada can realistically attract from Japanese firms leaving China, according to a countering article in BIV.

Designing with a local mindset

Canada does not yet have a policy on reshoring companies. The coronavirus pandemic has exposed deep flaws in the extent to which developed economies like Canada’s have outsourced their manufacturing capacity, according to Policy Options. In response to the pandemic, Canadian manufacturers have shown they can pivot production to serve the demand for personal protective equipment, hand sanitizer and ventilators, thanks to our strengths in advanced manufacturing, apparel and food and beverage production.

If industry obtained materials locally and designed and manufactured in Canada, it would optimize distribution and lead to more responsible product development, especially as almost all sectors are dependent in some way on low-lost-country offshore trading partners.

Reshoring policies have been successfully implemented among Australia and New Zealand’s manufacturing industries. There, investments in industrial robotics, 3D printing and telecommunications led to rescaling of supply chains, smaller-scale production, great work flexibility and the creation of many new jobs, according to Manufacturing Magazine.

Shifting production back home

The Los Angeles Times reported that the coronavirus pandemic accelerated U.S. producers’ exodus from China, which was already underway due to Trump’s trade and tech wars. Referencing a Bank of America survey, analysts who covered 3,000 firms reported companies in 10 out of 12 global industries, including semiconductors, autos and medical equipment, have shifted or plan to shift at least part of their supply chains from current locations. Other countries in Southeast Asia and India were the planned destination for many companies, with half of them declaring an intent to reshore, according to MIT professor David Simchi-Levi.

According to a report by A.T. Kearney, for the first time since 2011, in 2019 U.S. imports of manufactured goods from 14 Asian low-cost-country offshore trading partners decreased 7.2 per cent from 2018, to $757 billion USD from $816 billion.

This shift, Kearney states, is a consequence of the collapse in imports from China due to the U.S.-China trade war, not from a significant rise in U.S. manufacturing output. The America-first economic policy resulted in more American manufacturers choosing to source more goods domestically than offshore by an increased margin.

The move away from Chinese imports appeared to have an impact on Canadian exports to the United States. Canada’s merchandise trade surplus with the United States climbed $8.8 B to $142.1 B in 2019, the largest since 2008. Global Affairs Canada reports that Canadian merchandise exports to China fell 16 per cent in 2019, the first export contraction since 2014.

As China and the US both face contraction from the coronavirus, counterbalanced by firms looking to diversify supply chains, Canadian manufacturing has a unique dilemma on its hands – the situation is both an opportunity and a challenge. However, to break the deadlock, the pandemic can be viewed a short-term but severe disruption, but reshoring production back to Canadian suppliers can turn into robust long-term revenue generator.

 

Global Advantage is already at work with clients on reshoring their operations, production, or processes back to Canada. Check out our services to see how we can assist you or your organization discover methods for restructuring your processes to optimize opportunities and boost growth.