CP Rail's purchase of U.S. rival is a bet on production moving out of China in COVID-19 aftermath

The reshoring phenomenon in global manufacturing is often exaggerated.

© Provided by Financial Post The Canadian Pacific railyard is pictured in Port Coquitlam, B.C. The proposed merger of CP and Kansas City Southern is being touted as a 'stabilizing' deal for the sector.

The Bank of Canada surveyed business leaders last fall and policy-makers heard that “having shorter supply chains with localized parts closer to Canada is an ongoing topic of discussion,” but the majority were focused on adopting digital technology to stay competitive.


“In the near term, most firms do not expect to pivot away from their existing processes and relationships,” the autumn Business Outlook Survey reported in October.

The findings were out of step with headlines about embarrassing shortages of personal protective equipment and other vital goods in Canada and other rich countries that had allowed their manufacturing bases to erode over the past few decades as production shifted to China and other low-cost jurisdictions.

Clearly, there was a disconnect between opinion writers and politicians talking about “shock-proofing” the economy and those who actually had skin in the game. It will take more than the United Kingdom leaving the European Union, four years of Donald Trump at the White House, and a global pandemic to reverse decades of rapid globalization.

Still, there might be something to all the hype. Canadian Pacific Railway Ltd.’s purchase of Kansas City Southern is a US$25-billion bet that the future of trade in North America is north-south, not east-west.

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The combined company would still be the smallest of the six big North American railways, but it alone would be able to offer a direct link from the northern reaches of British Columbia and Alberta to ports in southern Mexico, while at the same time touching the Pacific via the Port of Vancouver and the Atlantic through Saint John, N.B.

“The pandemic has taught us that global, extended supply chains involve greater risk than perhaps a lot of industrial companies are willing to take,” KCS chief executive Patrick Ottensmeyer said on a conference call with analysts on March 21. “There is a trend in supply-chain strategy to shrink and de-risk those supply chains and North America is going to continue to be a very attractive source of investment and growth, particularly in manufacturing and industrial activity.

He added: “This network is not only going to be in a position to benefit from those trends, but to help drive those trends.”

There isn’t much data evidence yet of such a shift. The United States posted a record trade deficit in goods in 2020, despite the former president’s aggressive use of tariffs and his bully pulpit.

Something similar happened in Canada. The value of goods imported from China increased to an unprecedented $76 billion in 2020, while exports to China jumped eight per cent to $25.1 billion, the second-highest on record, according to customs data collected by Statistics Canada . The tightening of the two countries’ commercial relationship occurred while they were engaged in a tense diplomatic feud over the jailing of each other’s citizens, showing that economic forces are a match for political headwinds.

Still, backward-looking data might not be the best guide of where trade is headed, given all the questions raised by the COVID-19 crisis and the unpredictable state of play between the U.S. and its allies and China, which appears ready to punish any country that does something its government dislikes.

As the pandemic drags on, the value of a resilient supply chain could be rising. CP Rail chief executive Keith Creel, who will lead the combined railway if regulators approve the purchase of KCS, told analysts last fall that his customers weren’t talking about “near-shoring.” Less than six months later, he was back on the phone with analysts, justifying a multi-billion-dollar cash outlay on the prospect of factory production returning to North America from Asia.

Mark Barrenechea, chief executive of Open Text Corp., the Waterloo, Ont.-based maker of information-management software, said a resetting of trade patterns is already showing up in his company’s order book. Open Text sells technology that helps companies keep their supply lines straight, and it seems its customers are attempting to become less reliant on a single source.

“We predicted that the pandemic, and the shortages, and the disruptions would lead to localized supply chains and we are seeing the work begin now,” Barrenchea said in an interview earlier this month. “We’re seeing work in Germany around auto. We’re seeing work in the U.S. around raw materials. We’re seeing in China, if you manufacture for China, you are staying in China, but if you manufacture in China for non-China, work is migrating out.”

All this change could be an opportunity for Canada. Policy-makers and think-tankers like to point out how trade agreements with the U.S., Europe and much of Asia could make Canada an ideal place to supply the world. A shift in emphasis from cost to stability in production would work in our favour.

But it probably won’t be as easy as that. Manufacturing has suffered a long decline and Canada may now lack the required talent and infrastructure. The country’s inability to manufacture a COVID-19 vaccine was a reminder of what happens when you ignore erosion.

“Canada has really decreased its finished-goods manufacturing and outsourced it,” Barrenechea said. “Some of those fissures have shown themselves over the last year.”

Kevin Carmichael

3/23/2021
Email: kcarmichael@postmedia.com | Twitter: carmichaelkevin