Supply chains deliver everything from food and household goods to the raw materials for factories, but until COVID-19 few of us realized how fragile they are.

In this six-part series, The Logic examines the weaknesses in Canada’s supply chains, the solutions some companies are trying to apply, and how a shift from “just in time” to “just in case” thinking brings challenges of its own.

The drive to fix the automotive industry’s supply chain could be a boon for Canadian suppliers—but it won’t be easy. The push for zero-emission electric vehicles means automakers will have to source new kinds of parts at a rate never before seen. At the same time, they have to fix the vast automotive supply chain broken by a global pandemic that exposed just how vulnerable it is to events beyond their control. 

These two forces are pushing the industry toward a single goal: More oversight and control of who makes their parts. In practice, this means automakers will be expected to build supply chains closer to home, or to effectively create alternate supply networks.

“The latest jargon is ‘glocalization’,” said Jayson Myers, CEO of Next Generation Manufacturing Canada (NGen). Myers helps lead the advanced manufacturing innovation cluster, one of five groups created by the Liberal government to support “made in Canada” projects with co-investments from industry.

“What they’re doing is ensuring that they have the capability to either produce these critical parts, or to look to local suppliers …  in case you’ve got problems in your global supply chain. They’re looking to back things up.”

As one of Canada’s top exporters, the $72-billion motor-vehicle sector’s problems over the past two-and-a-half years have become emblematic of the fundamental challenge posed by the country’s supply chain: it’s hard to build Canada’s future if you can’t even get the parts you need to meet present shortages.  

Building a new supply chain for EVs while repairing the issues with the existing system will require companies to think differently, focusing more on stockpiling, renegotiating contracts and making more parts in-house. But if they can do it, advocates say it could be a big opportunity for Canada.

Patrick Gervais, vice president of marketing and communications at Lion Electric, said the company is hoping current trends will favour investments in North American auto suppliers, including within Canada. 

“We build where we sell,” said Gervais. “What we want to do is build the supply chain to make sure that we are becoming more and more competitive, and reduce prices as much as we can.” 

The Quebec electric bus-and-truck maker has expanded its supplier base by more than 15 per cent over the past year, and managed to boost its vehicle deliveries 72 per cent last quarter despite an ongoing shortage of microchips, disruptions to wire harness exports coming out of Ukraine and a run on battery grade nickel.

Lion has been working with Quebec harness supplier ProEV for five years, helping support the company’s ascent as one of the first to work on EVs. The business spun out of Promark Electronics, which was founded in 1987 as a family business and recently announced a $10 million investment in a new Montreal plant, which it estimates could become the largest electric vehicle wiring plant in North America. 

“Now they’re the leader in North America in harnesses. So it’s a great story on economic development, but also on how we can locally distinguish ourselves across North America,” he said.

Gervais hopes these types of investments will put Canada on the map as a supply hub amid the re-shoring trend, while helping manufacturers like Lion better control their supply chains.

“Traditionally what businesses do [is] stock more on demand—you don’t actually stock inventory, parts. You just do partnerships with your different suppliers to make sure that you get, in a short period of time, the parts that you need,” said Gervais. “But we wanted to make sure that we have enough components to build our vehicles, so we overstocked on the critical components.” 

For decades, automakers have run on the “just in time” manufacturing model, which categorized excess inventory stockpiles as wasteful and inefficient. When Toyota first brought the method to Canada in 1988, it was heralded by automakers as “a whole new concept of work.” 

But the downside has always been vulnerability to unexpected disasters. Eleven years ago, the 2011 Tōhoku earthquake and tsunami hit Japan and made it nearly impossible for any major automaker to get red or black paint. Emergency events of the past two years—not just COVID-19 but a fire at a major chipmaker, Russia’s invasion of Ukraine, a megaship getting stuck in the Suez Canal; a trucker blockade at the border—have each exposed potential blockages in a low-inventory, globalized manufacturing strategy. 

When the pandemic hit, automotive supply chains were thrown into chaos. Shortages of everything, particularly semiconductors, meant vehicle production plummeted in 2020 and has yet to fully recover. AutoForecast Solutions data tracked by CIBC estimates nearly 3.7 million fewer vehicles will be produced by automakers this year due to the chip shortage alone. 

“They need ‘just in time’—and they have to also respond to ‘just in case,’” said Myers.

The disasters of 2020 and 2021 prompted Canadian auto supplier Martinrea to work with manufacturing group NGen and tech companies Palantir and ThinkData Works to create a software system that would track its suppliers’ suppliers, exposing parts that could be hard to source in a shortage.

Myers said it’s a strategy other auto companies will need to employ to see further up and downstream in their supply chains going forward.  

Chinese company CATL is the top manufacturer of EV batteries, while Taiwan Semiconductor Manufacturing Company dominates the semiconductor industry, leaving both supply chains particularly vulnerable to trade conflict with China, said University of California Los Angeles distinguished professor Christopher Tang, who studies the topic. That was made clear when U.S. House of Representatives Speaker Nancy Pelosi visited Taiwan, prompting reports that  CATL delayed announcing plans for a North American plant as a result. 

These companies are so dominant and have so many potential customers, it was hard for automakers to negotiate new contracts once they were broken during COVID, because chip-makers could easily switch to making computer or appliance parts, Tang said. The trade tensions, plus the semiconductor shortage, are likely to lead automakers to both localize supply chains and hang on to more contracts with suppliers, as well as simply reduce volumes when needed, instead of cancelling contracts when production wanes, he said.

“[Taiwan Semiconductor Manufacturing Company] produced 90 per cent of the advanced chips for the world. Ninety per cent,” said Tang. “That is scary, actually. I think the key lesson we learned through COVID, the tension between the U.S. and China, I think, is a wake up call for us to diversify the supply chain.” 

In addition to improving supplier visibility and negotiating better contracts, the auto industry may also see increased vertical integration as companies try to seize control of their supply chains. For instance, auto companies are increasingly investing directly in mining projects for critical minerals like lithium and cobalt that could feed into their EV battery plants. Lion Electric has said its decision to build its own batteries in Quebec in a new $285 million Mirabel, Que., plant, was meant to ensure control over the critical component as part of a vertical integration strategy.

Clean Energy Canada, a program at Simon Fraser University, identified batteries in particular as a key opportunity for Canada’s manufacturing sector and urged the country to “act fast” to become a major player as automakers look to make local investments. 

Joanna Kyriazis, senior policy advisor at Clean Energy Canada, said because Canada is a smaller market with limited resources, it needs to be strategic in how it invests in its supply chain to avoid being spread too thin.  

“​​There’s been a lot of talk about building an end-to-end battery supply chain, trying to do it all,” said Kyriazis. 

She noted that the U.S. government has developed a national strategy around EV batteries. Its recent blueprint specifies that some parts of the supply chain, like accessing critical minerals, will require the help of allies, while others will be highly prioritized to grow domestically. Canada could benefit from something similar, she said. 

“Many believe that Canada can punch above its weight on lithium….. In contrast, cobalt is an area where opportunities are far less available in Canada, they’re more limited,” she said.  “Maybe cobalt is not our best bet. Those are the types of decisions that a national battery blueprint could lay out, for government and the private sector.”  

Canada’s federal government has wooed a wide variety of multinationals, from auto assemblers like Ford to battery makers like LG. It has also helped Quebec, which has been particularly successful in focusing on batteries and battery materials like copper and lithium, with Investissement Québec putting $95 million into pulling local miner Nemaska Lithium from bankruptcy.

The province has attracted new plants from General Motors and POSCO, BASF and StromVolt, and the two levels of government combined to pour nearly $100 million into Lion’s battery plant. But Quebec officials have openly said they will be realistic and avoid chasing big auto-assembly plants to concentrate on building the essential battery supply chain. 

Kyriazis believes it’s the right strategy to pick “winners” in the supply chain, rather than focus broadly on all battery metals.

University of Windsor professor Peter Frise said the business case for automakers to invest in Canadian manufacturing has been strengthened not only by the country’s mineral wealth of battery metals, but by having a highly trained workforce and a reputation as a reliable trade partner.

“The heartburn and disruption in your business of having something take, [say,] 12 weeks to get here instead of 12 days is not worth the potential savings. A lot of people and companies are finding that right now,” said Frise. “So that onshoring and reshoring back to our countries is a good thing for Canada.” 

Ontario auto-parts supplier Axiom Group is the type of Canadian company hoping to benefit from the “glocalization” of the EV supply chain, after beginning its work in the EV market in 2013 and spinning that successful program into new work with companies like Rivian and a new EV-part plant in Mexico.

The shift has impacted their small business in unexpected ways, said Maxwell Preston, the company’s marketing manager.

Take something as minor as the humble wheel-well liner. Preston notes that traditional internal-combustion engines make a steady hum that masks sounds from the wheels on the road. Since EVs are quiet, EV-makers have started demanding more sound-proofed wheel-well liners to make sure the sounds of the road don’t distract drivers.

It’s one of many small changes parts-makers may encounter if they try to rejig their supply chains to participate in the EV shift, said Preston. 

“We were one of the very, very first suppliers to take on business from a new EV [automaker brand] that didn’t have a huge amount of history behind them: financial history, deliveries, vehicle manufacturing history. And so when a new manufacturer takes on a program like that, there’s a huge amount of risk,” said Preston of Axiom’s manufacturing work. “If we start making tooling and parts for a vehicle that never ends up reaching production… we at the supplier level are stuck with that massive investment.” 

While it’s not easy to keep up with the changes in the supply chain, Preston said it’s worth it.

“Canadian manufacturers need to take risks….because we have a huge, huge opportunity in Canada, in North America to keep supplying the rest of the world.”