Vehicle manufacturers are facing challenges as diverse as labor shortages and soaring costs in the face of several economic headwinds that leave Canada on the brink of a recession.
It’s a “pretty weak outlook,” admitted Canadian Manufacturers and Exporters chief economist Alan Arcand.
And it wasn’t the only piece of bad news he offered during the annual meeting of the Canadian Transportation Equipment Association (CTEA).
While labor and skills shortages have been a problem for some time, challenges intensified during the pandemic, he noted. In 2021, 82% of surveyed Canadian manufacturers said they faced immediate labor and skills shortages, up sharply from 60% in 2020 and 39% in 2016. He expects to see a similar trend in the 2022 survey.
Those on the job are aging, too. While one in five Canadian workers are 55 years or older, one in four people who work in manufacturing are in that age group. “If you do the math, that means in the next 10 years 25% of the manufacturing workforce should be retiring,” Arcand said.
His news wasn’t all bad.
“Demand has been strong, too,” he said, noting the economy bounced back quickly from a pandemic-induced downturn. Rising sales of motor vehicles and parts can be taken as a sign that semiconductor shortages are easing as well.
But then there’s the inescapable reality of rising costs. The Global Container Freight Index set the price of 40-foot intermodal containers at $4,000 in July. That’s down about 60% from a peak but still double the prices charged before the pandemic.
It’s not the only example of price pressures on manufacturers. The Raw Materials Price Index and Industrial Product Price Index were down a respective 3.2% and 1.2% in August, largely due to declining energy prices. But year over year they were up a respective 17.6% and 10.6%.
“We’re in a world we haven’t seen since the 1980s,” he said, referring to inflation. “It’s going to take a lot of work to get it down to 2%.”
The Bank of Canada has been hiking rates further and faster than any other time, increasing rates by 300 basis points in a span of six months. Many analysts think the central bank will increase rates another 50 to 75 basis points this year before pausing, he said.
Meanwhile, job vacancies in Canada’s manufacturing sector are at record highs, and annual wage growth is up 5%.
While Canada’s manufacturing activity has been recovering, it’s lagged behind the U.S. As of July, U.S. manufacturing production was 3.4% above pre-pandemic levels. In Canada the output was 0.7% below this threshold, he said. “The recovery from the pandemic has been gradual and uneven for Canada’s manufacturing sector.”
Real growth will be modest over the next two years amid weaker global economic conditions, he predicted. Output is expected to shrink in the first half of 2023, meeting the technical definition of a recession. The 3.2% growth in gross domestic product for 2022 is expected to dip to 0.2% for 2023, and bump up just 1.6% in 2024.
In the midst of it all, however, there are opportunities for Canadian vehicle manufacturers under the Canada-U.S.-Mexico Agreement (CUSMA).
The U.S. continues to apply Section 301 tariffs as high as 25% on products from China, said James Kim, an associate with Arentfox Schiff.
“Trump was a big fan of tariffs,” he added, noting the U.S. announced Sept. 8 that these trade penalties would continue.
That can still be a challenge for Canadian vehicle manufacturers and upfitters, depending on where they source any underlying components.
“If you are buying Chinese-origin products and then selling them in the U.S., then you are most likely affected by these tariffs,” he said. “It does look like they’re going to stick around for the time being.”
“U.S. trade tensions with China are not going away under this administration,” agreed Birgit Matthiesen, Arentfox Schiff’s director – North American manufacturing.
Challenge becomes opportunity
But the challenge becomes an opportunity for those that can demonstrate domestic manufacturing content.
“The USMCA is a huge competitive opportunity for everyone in the room,” Matthiesen said of North America’s free trade umbrella, referring to the way compliant products can avoid tariffs. “It also allows you to retain and even come up with new customers in the United States.”
“The USMCA is this hidden competitive advantage if it’s understood and it’s properly applied.”
One of the challenges is that those who produce final products don’t always have full visibility into the origin of individual components, Kim said. “That happens a lot in the vehicle manufacturing industry.”
While it’s not always possible to stop buying components from China, some companies have adopted parallel sourcing strategies – looking for components in other markets when the final goods are destined for the U.S., he said.
Ultimately, decisions on the tariffs are based on the substantial transformation test – whether the manufacturer is doing enough to change the name, character or use of a product.
Such rulings are admittedly subjective, he said, noting that no single factor will answer the question. But qualifying a product can make it more attractive to downstream customers including OEMs. “They need to get as much North American content as they can into their product.”
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