What lies ahead for Prairie manufacturers heading into 2021?
By Jayson Myers
It’s really hard to predict what 2021 has in store for Prairie manufacturers – or manufacturers anywhere for that matter. In themselves, sales and production data from September, the latest month for which statistics are available, tell us little about what lies ahead.
The impact of the second wave of COVID-19 is being felt immediately by every business across Canada. In some sectors, customer demand has taken a second hit. Businesses are shutting down, some permanently. Supply chain risks are rising once again. At the same time, new opportunities are opening up for manufacturers flexible enough to pivot into new product lines and supply chains. Cash remains under tremendous pressure. Yet, investments in productivity improvements are necessary to take advantage of new business opportunities, keep pace with innovation, and remain competitive, let alone grow. Those investments need to be well targeted and managed profitably in order to achieve desired business results.
The full extent of these impacts is not yet evident in economic statistics. Uncertainties around the duration of the pandemic, the prospect of future business restrictions, and the resiliency of both customers and suppliers will persist well into 2021. Yet, it is possible to point to some trends both in market conditions and in the capabilities of manufacturers themselves which suggest that the outlook over the year ahead, while fraught with risk, may be positive for some companies and industry sectors.
Retail sales, for instance, provide a good gauge of the strength of consumer demand within Canada. Spending did take a hit as the first wave of the pandemic struck last March. More activity went online. Canadian retail sales had fully recovered by June and were running almost four per cent above pre-COVID levels in September. The buoyancy of Canadian consumers, albeit aided by government wage supports, indicates that domestic demand is likely to remain resilient for manufactured goods, and will probably be much stronger than either business investment or government procurement (except when it comes to medical products in the fight against COVID-19).
International demand for Canadian resources and manufactured goods will also continue to grow. The bad news is that Canada’s export sales to the United States are likely to remain weak until the American economy gets over COVID-19. In September, they were still eight per cent below their pre-pandemic level. However, our merchandise exports to the rest of the world are proving to be much more robust. Exports to countries other than the United States had more than fully recovered by September. China is proving to be a particularly important market for Canadian merchandise exports, thanks to the rapid recovery and strong resurgence of economic and industrial growth in that country. Canada’s exports to China were running a full 26 per cent above pre-pandemic levels in September, and they are on pace to grow rapidly over the year ahead as well.
The third early indicator of manufacturing performance in 2021 is productivity – or at least the gains in productivity that have been made by Canadian manufacturers over the past year. While overall manufacturing output in Canada was still running four per cent below pre-pandemic levels in September, labour productivity measured in terms of sales per employee was back to where it was at the beginning of 2020, just over three per cent higher than in September 2019. That is one of the most rapid annual rates of growth in productivity that Canadian manufacturers have experienced in 12 years!
Manufacturing productivity has been boosted by process improvements made necessary by the pressures of the pandemic. They have also resulted from the more widespread deployment of digital technologies which have helped improve operating efficiencies and enhance flexibility allowing manufacturers to take advantage of new market opportunities. Further productivity improvements will be necessary for Canadian manufacturers to remain competitive and cash positive, and exploit emerging supply opportunities. Prospects for Canadian manufacturing are looking up for 2021, although they are not uniformly positive across the Prairie provinces.
Manitoba the strong
Manitoba is leading the entire country when it comes to the pace of its manufacturing recovery. Manufacturers in the province shipped $1.765 billion worth of product in September. That is almost 15 per cent higher than in February, just before the pandemic struck!
Manufacturing growth is being led by the chemical sector (up 49 per cent since last February), transportation equipment (41 per cent higher), machinery (up 29 per cent), food processing (12 per cent higher), and furniture (up 10 per cent). Plastics, wood products, fabricated metals, electrical equipment, and medical products have just about fully recovered. Other sectors, though, are not doing as well.
Year-to-date in September, manufactured exports from Manitoba were still running 0.8 per cent below levels recorded over the same period of time in 2019. Exports to the United States were down 3.7 percent, but exports to other countries were 13.2 per cent higher. Manitoba’s exports of manufactured goods to China were up by a full 98 per cent on a year-over-year basis.
Manitoba’s manufacturing productivity performance has been very strong over the past year as well. In September, sales per person employed were 14 per cent higher than at the beginning of 2020. Based on the potential for export growth and its record on productivity improvement, Manitoba’s manufacturing sector is well positioned for growth into 2021, even with the uncertainties of COVID‑19.
Saskatchewan hammered on multiple fronts
Overall, the situation is not as strong in Saskatchewan. In September, manufacturing sales in that province totaled $1.084 billion but were still running 12 per cent below pre-pandemic levels.
Although sales data are not as comprehensive as for other provinces, available statistics point to a very strong recovery in some sectors. Wood products were up 78 per cent from last February, machinery by almost eight percent, and chemicals by slightly over four per cent. Other sectors had still not recovered from the downturn earlier in the year.
The pandemic was only one of the factors that have hammered Saskatchewan manufacturers in 2020. The decline in oil prices and the impact that has had on the oil and gas sector in western Canada are also important constraints to growth that will continue into 2021.
Exports will continue to be a key determinant of manufacturing growth in the province over the year ahead, especially sales outside North America. On a year-over-year basis, the total value of manufactured goods exported from the province declined by 4.2 per cent during the first three quarters of 2020. Exports to the United States fell by 7.9 per cent, but exports to the rest of the world were up by almost six percent. Exports to China increased by 9.6 percent, while sales to Chile, Australia, and Hong Kong jumped by double digit rates.
However, lagging productivity performance may be a factor in holding Saskatchewan’s manufacturing sector back from its full potential. In September, manufacturing labour productivity in the province was running 2.5 per cent below pre-pandemic levels.
Alberta needs serious productivity boost
The outlook for manufacturing in Alberta is not as strong as in Saskatchewan. Alberta manufacturers sold $5.434 billion worth of goods in September, down 12.6 per cent from pre-pandemic levels.
Here too, some manufacturing sectors have been more resilient than others. Shipments of electrical equipment were 45 per cent, wood products 32 per cent, paper products and medical devices both 14 per cent, and food products two per cent higher than in February. Production of chemicals and plastics had just about recovered, but the entire petroleum sector and its extended supply chain remain depressed. In September, petroleum products were running 35 per cent lower than before the pandemic struck, fabricated metal products and machinery were down by 30 per cent, and sales of primary metals and computer equipment were both off by about 20 per cent.
Export performance has also been weak. Year to date in September, Alberta’s exports of manufactured goods were still 13 percent lower than during the first three quarters of 2019. Exports to the United States were down 13.7 percent while those to the rest of the world had fallen by 12 per cent. Alberta’s high dependence on petroleum exports accounts for the lack of resiliency in markets outside the USA.
Manufacturing productivity has also taken a major hit in Alberta since the beginning of the year. In September, sales per person employed was a full 10 per cent lower than pre-pandemic levels. Productivity will have to increase dramatically if Alberta’s manufacturing sector is to overcome its dependence on a weak oil market in 2021.
The digital outlook: deploying Industry 4.0 technologies
A recent survey undertaken by RK Insights of how Canadian manufacturers intend to deploy Industry 4.0 technologies in 2021 points to a more rapid adoption of digital technologies which will be critical for both driving productivity improvements and opening more opportunities for business growth.
The survey found that 62 per cent of manufacturers across the country are now deploying digital technologies, up from just over 50 per cent in 2019. The outlook for digital deployment is also very positive. By mid-2020, just about half of manufacturers already had automation and robotics systems in place. Another 24 per cent are intending to deploy automation systems in 2021.
Approximately 46 per cent of Canadian manufacturers were using digital technologies to capture data and monitor operations at the time of the survey; 41 per cent were connecting production processes through digital networks; and 40 percent were using data analytics to improve operating efficiencies or enhance value for customers.
In 2021, the survey shows that technology deployment rates are expected to increase. Just over 79 per cent of manufacturers intend to use digital technologies to capture data and monitor performance, 76 per cent say they will have robotics and automation systems in place, 63 per cent will be deploying digital networks to connect production processes, and 59 per cent say they will be using data analytics in their business.
These rates of technology adoption may be aspirational – a great deal depends on the business case for investment and the ability of companies to manage these technologies in a productive and profitable way. Nevertheless, the outlook for future productivity growth across Canada’s manufacturing sector is very positive.
If the past year is any indication
and the outlook for technology deployment is at least half correct, improvements in productivity will be the most important factor behind the business success of Canadian and Prairie manufacturers in 2021.
Jayson Myers is CEO of Next Generation Manufacturing Canada – the country’s advanced manufacturing supercluster. An award-winning business economist and leading authority on technological change, Myers has counselled Canadian prime ministers and premiers, as well as senior corporate executives and policymakers around the world.