6th July 2020

OPINION: FINDING THE NEW NORMAL

Everyone has had to change and cope with the COVID-19 pandemic, including businesses. Firms adapting to deal with the virus have become a reality. As a way to still contact customers, many have moved to meeting via ZOOM or SKYPE. We are all, however, also looking forward to the day that we can welcome people in person and greet a client with a handshake. It’s more that we miss the actual community and relationships with our customers in person.

After many were shuttered due to the pandemic, some have slowly begun to reopen their business. As well, some have had to deal with finding enough resources to do the work. There are many stresses ahead and uncertainties about what the future holds for your job, your business and your family. There is most assuredly going to be significant change before things finally return to normal. The manufacturing world will likely be a much different place when this all happens… the new normal.

A clear indication of this was the reaction of Ontario Premier Doug Ford after learning that U.S. President Donald Trump had been intercepting shipments of N95 facemasks destined for hospitals in Ontario. Not to mention the one million N95 face masks exported to Canada from China that failed to meet proper standards. As well, a Chinese-made mask approved by Health Canada is currently the subject of a counterfeit warning issued by the Centers for Disease Control and Prevention (CDC) in the U.S. The Associated Press has reported that counterfeit masks, intended to mimic medical-grade N95 masks made by the Shanghai Dasheng company and approved for use in Canada were distributed to front-line medical staff at some U.S. hospitals. Another Chinese mask-maker, also licensed by Health Canada, has seen its approval pulled by the Food and Drug Administration in the United States. The Guangdong Golden Leaves Technology Development Co. Ltd. was one of 65 Chinese manufacturers whose authorization to sell in the U.S. was withdrawn following tests by the CDC. The manufacturer remains approved in Canada, but its product has not been distributed to health care workers here.

Both cases illustrate the difficulties faced by governments in trying to procure reliable masks.

“Never again in the history of Canada should we ever be beholden to countries around the world for the safety and well-being of the people of Canada,” exclaimed Doug Ford. “We can’t be going over to other sources because we’re going to save a nickel. “As long as I am Premier, I will never, ever let this happen again to the people of our province or our country.”

It sounds like Ford is willing to listen to options on a reshoring and manufacturing support policy and he isn’t alone in this thinking.

Dave McKay, President and CEO of RBC, says the investment world is also expecting a shake-up in manufacturing policy. “Global trade migration is not likely to go back to the old model. International movement won’t press a ‘resume’ button any time soon,” said McKay. “These are significant challenges to grasp for a world that has largely benefited from globalization,” McKay continued. “We shouldn’t give up on it, but, for a country like Canada, we need to think about how to be more self-reliant in the areas that matter most to our competitiveness and prosperity. This includes creating more resilient Canadian supply chains, using technology to work and connect differently with stakeholders and transforming the way we learn and train, so our companies and communities are better equipped for a new paradigm of disruption.”

It appears the banking sector is openly anticipating a shift in the supply chain to make Canada more independent. There exists an excellent chance this shift would mean more products made close to home and more mandates for manufacturing in those value chains. It could also mean more financing options, which could be a silver lining once the misery of the global pandemic lockdown is behind us.

As countries around the globe begin encouraging companies to move their manufacturing out of China, industry experts in Canada say it is possible that some goods manufactured there by Canadian companies could be shifted back home. They also said such a shift wouldn’t be easy or on as large a scale as some may want.

The COVID-19 pandemic has led to questions about whether the world is relying too heavily on mainland China as a producer of goods, particularly on essential products during the pandemic.

In Canada, at the request of the federal and provincial governments, companies retooled their production lines to begin manufacturing some of the items in short supply. This shift shouldn’t be just for the duration of the pandemic; we should be encouraging manufacturing in Canada once again.

“In the longer run, we will be much better served if we can re-develop much more manufacturing,” says Mark Rowlinson of the United Steel Workers Union. “We could become an exporter of those manufactured goods and be less exposed to unfair trading practices of other countries.” Such initiatives are being taken abroad.

Canada’s trade deficit with China was about $44 billion in 2017, according to a report last year from the Macdonald-Laurier Institute. China accounted for five per cent of Canada’s exports and 13 per cent of its imports according to the study, Moving Beyond Rhetoric, which focused on trade between the two nations.

“But Canada has not had any federal government plans to build up domestic manufacturing in years,” says Rowlinson. “Helping manufacturing to grow will be important for a robust economic recovery after the COVID-19 pandemic,” he said.

“Though some of the products Canada consumes could be repatriated to the country for manufacturing, it isn’t as simple as it sounds,” said Jean-Francois Letarte, a partner at KPMG.

Letarte said, “Traditionally, Canadian industry has done well when clusters of manufacturing in some subsectors, for example the automotive industry, allow companies and suppliers to supply and feed off each other. Today there are some clusters in the automotive, aerospace and food processing sectors, but otherwise these would take time to develop elsewhere.

“Let’s say you have a manufacturing plant. You’re going to have a lot of different types of suppliers required very close to that plant,” he said. “Generally, the success we’ve had as a country, in particular sectors, were revolving around that industrial cluster concept. So, building such clusters that aren’t already existing in Canada, would be a challenge in the near term.”

Labor is another issue, he said. “Canada has had historically high employment rates in recent years, making it harder for manufacturers to find the labor needed to scale up.

Twenty years ago, the Canadian manufacturing sector accounted for 20 per cent of the federal GDP, he said, but even with that cut in half now, (it currently employs just over nine per cent of the country’s workforce), it is still more productive than it was two decades ago.”

“But, he said, due to an ongoing trade war between the U.S. and China, moving manufacturing out of China is not an ‘unusual’ conversation to have with clients.”

Many of them are starting to place a greater importance on balancing the risks in their supply chains and not focusing just on cost effectiveness, he said, adding trade arbitrage – minimizing the customs tariff and duties – is still an important factor.

“A lot of companies that were adapting to globalization and had been for 20 years and had developed supply chains that are global and integrated,“ he said. “They are placing more weight on business continuity, agility and nimbleness, all characteristics of the concept of micro supply chains, which have been quickly gaining interest.”

Former Prime Minister Pierre Elliott Trudeau, first engaged China in 1970, pre-dating even Richard Nixon and the Americans to make Canada one of the first Western countries to establish formal diplomatic relations with China. Trudeau took great care to establish strong bilateral relations with China based on mutual respect, understanding and goodwill. This year marks the 50th Anniversary of Canada-China Diplomatic Relations in 2020. When Pierre Trudeau met China’s Mao Zedong in 1973 to re-ignite relations, few predicted the value of Chinese trade. At the end of the disastrous Cultural Revolution movement, China’s economy was miniscule.

Four years earlier, Trudeau told an American audience his famous “sleeping with an elephant” quote about the United States: “one is affected by every twitch and grunt.”

Trudeau likely did not expect that China would grow to become an elephant as well – a different sort, for unlike the geographically bound United States, it was an elephant that Canada chose. And now, it’s become hard to live without.

Shift back to 2020 and China has detained two Canadians and sentenced a third to death after Meng Wanzhou, chief financial officer of Huawei Technologies and daughter of its founder, was arrested in Vancouver on a warrant from the U.S. where she is facing multiple criminal charges.

In apparent retaliation, China has also blocked Canadian canola seed imports and thrown obstacles at soybeans. In another attack, it halted all meat imports from this country, citing falsified paperwork. Since then, Chinese fighter jets reportedly buzzed a Canadian warship in the East China Sea.

Canada should use this crisis to restructure its relationship with China, adding that other countries have previously felt the pain of Chinese economic coercion and responded not by capitulating, but instead, by shifting trade away. 

There was a time – not long ago – when Canada was pushing for “more, more, more” ties with China, as Canada’s former ambassador to that country, John McCallum, put it.

This COVID-19 pandemic could end up being the final curtain on China’s nearly 30-year role as the world’s leading manufacturer. That China is losing its prowess as the only game in town for whatever widget one wants to make was already underway. It was moving at a panda bear’s pace though, and mostly because companies were doing what they always did… search the world for the lowest costs of production. Maybe that meant labor costs. Maybe it meant regulations of some kind or another. They were already doing that as China inched up the ladder in terms of wages and environmental regulations. So, is everyone now forced to reconsider their decades-long dependence on China? The coronavirus may just be China’s swan song. There is no way it can continue to be the low-cost, world manufacturer anymore. Those days, it would appear, are coming to an end.

Picking a new country, or countries, is not easy though. No country has the logistic set up like China. Few big countries have the tax rates that China has. Brazil surely doesn’t. India does, but it has terrible logistics.

For those considering moving operations, 80 percent said they will do so within the next two years. They are “doubling down on Mexico”, according to a report.

Finally, climate-change pressure will soon have to hit business dealings with China as well. It is the world’s largest emitter of greenhouse gases and its emissions are increasing faster than Canada, the United States and Europe can decrease theirs. But Western developed nations are to blame for much of this increase, as they are the driving forces behind investment in Chinese factories that then export goods back to the West. That gives climate-change activists a powerful lever to use if they decide to get serious about reducing emissions: tariffs.

Most serious climate-change plans already recognize this. They aren’t called tariffs per se; advocates label them as “border tax adjustments.” But they are tariffs, nonetheless and they would increase the price of goods imported from countries with heavy greenhouse gas emissions. That will devastate a country such as China, whose industrial rise is fueled by coal-fueled electricity. Indeed, they are still is building hundreds of coal-fueled plants despite global pressure to reduce emissions. That will have to stop if we have any chance of beating climate change, but that means plants in China will see its energy costs rise dramatically.

Combined, these factors will increasingly make it cost-effective to bring manufacturing back to the developed world or countries in those nations’ sphere of influence. The United States and Canada, for example, hadn’t previously run the risk of plants shutting down because of pandemics and they increasingly rely on clean fuels for their energy.

Nearby Mexico can offer cheaper labor and Mexico’s economic dependence on those two giants means it is more amenable to climate-change-induced pressure. European firms have the same incentives and have the low-cost countries of Eastern Europe to invest in, too.

None of this will happen overnight, but any rational company has to see the writing on the wall. Slow but steady disengagement will cost money in the short term but will likely pay off big in the long term.

The new trade war is yet to be decided, but the damage that has already been done, will not be undone. Room for a new key commercial ally is open.

How will business have to adapt, returning in the post pandemic? What will the new normal look like?

Stewart Tymchuk, Dynamix Inc.