Government aid essential as manufacturing sector faces cash crunch

08 June 2020 2 min. read

As manufacturers are impacted by the Covid-19 pandemic, federal government aid will be essential to keeping operations running until the situation improves, according to Peter Hatges, KPMG Canada partner and leader of the firm’s automotive sector.

Covid-19 has rocked the Canadian manufacturing sector, as companies contend with issues such as production shutdowns, interrupted supply chains, and demand shocks.

Hatges says that the manufacturing sector in Canada could see a drop in shipments of between 25% and 50% over the next two months – which could mean a loss of up to $60 billion in manufacturing shipment sales.

Despite more than 40 years of globalization and offshoring, manufacturing remains an important piece of the Canadian economy, especially in Eastern Canada. The sector employs 1.7 million people, with Ontario and Quebec accounting for about 70% of manufacturing GDP. Combined with transportation and warehousing, manufacturing accounts for 15% of the country’s GDP.

Manufacturing accounts for approximately 68% of Canada’s exports, with a large portion being automotive industry-related shipments to the US. The pandemic, which has entailed border closures and production shutdowns for numerous facilities, poses a significant headwind for the industry.

Canadian GDP 2019 - BillionsIt has also resulted in millions of job losses and shaken consumer confidence, as Canadians put off purchasing big ticket items such as automobiles. Canadian car sales dropped by a record 75% in April, according to figures from Desrosiers Automotive Consultants.

The economic and political challenges mean that many customers of Canadian manufacturers are reducing their cash outflows and deferring payments, leading to declining sales, according to Hatges.

Interdependent supply chains in manufacturing mean that as some suppliers pull back and conserve cash, downstream suppliers are caught in a cash drought.

As such, the injection of liquidity from government stimulus measures is of paramount importance to preserving the industry. Credit support and loan guarantees can mitigate reduced operating cash flow, Hatges said.

Fortunately, the Canadian government has pledged $10 billion in support to businesses through Export Development Canada, which introduced the Business Credit Availability Program (BCAP). BCAP allows businesses to access additional credit through their financial institutions to cover operating costs during the pandemic.

“Given the significant contribution the manufacturing sector makes to Canada’s exports, BCAP will become a key factor in Canadian manufacturers’ ability to alleviate the negative ‘chain reaction’ effects of the pandemic,” Hatges said.

Nonetheless, as sales revenues drop precipitously, many companies will test the limits of their debt covenants as they seek to maintain cash flow. Manufacturers will have to consider orderly credit and operating amendments now to prevent violating those debt covenants.

“In simple terms, many manufacturers will be faced with restructuring their debt obligations, if only on a temporary basis,” noted Hatges.