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- The pandemic is greatly affecting companies of all sizes in Canada as their supply chains are no longer receiving inputs, contracts are being cancelled, and they face a liquidity crunch.
- Export Development Canada is working with government partners and other Crown corporations to get as much liquidity as possible to the Canadian market, which could total up to $20 billion.
- The current crisis highlights the need for redundancies in supply chains both domestically and internationally to mitigate the risks of future crises.
The scope and scale of Covid-19 is unlike anything Canada has ever seen—and businesses are feeling that impact. It is paramount that all players in Canada’s business ecosystem interact together to deliver fiscal stimulus, economic stimulus and business support, and that this collaboration cuts across both the public and private sectors. This will help businesses to ensure that their operations are viable post-pandemic.
The Challenges Businesses are Facing in This Crisis
It is a pretty broad-based impact in terms of the reaction and response to Covid-19 and the pandemic. We are seeing that it is kind of cascading, to be honest. It started with a number of industries that probably are not too surprising to your viewers—including airlines and hospitality. We are now seeing it move more into kind of secondary parts of the economy—oil and gas certainly is feeling a pretty big shock, in fact, a double shock with oil price suppression. As well, retail is now starting to cascade and see the impacts of consumers simply not able to go out and have their normal purchasing patterns.
What started maybe as a fairly isolated impact and very narrowly affecting the economy is now pretty broad-based, and we’re seeing companies of all sizes feeling the impacts. There are three main challenges facing companies of all sizes right now. I will start with disruptions in supply chains. Many companies who rely upon inputs from other producers or other manufacturers—whether that’s domestically here in Canada or internationally—are having those supply chains very significantly impacted. They are not able to get intermediate inputs, to get final products, and are not able to have any sense of certainty. And that is really the biggest impact, is that loss of certainty in terms of production, how they can deliver them their product or service—that would be the first major impact we’re seeing.
What started maybe as a fairly isolated impact and very narrowly affecting the economy is now pretty broad-based, and we’re seeing companies of all sizes feeling the impacts.
Secondarily, of course, is simply the cancelling of contracts. On the delivery side, where they have buyers who in the past have had a fairly steady stream of purchase orders or requirements for them, that too is being disrupted. We’re seeing in some cases 80, 90, 95% reduction in terms of demand for companies’ output, and obviously that is beyond anything that we have seen before, and it has an extreme impact on companies that are facing those kinds of scenarios.
And then perhaps the last is one that is a little more financial, more specific. It is what we would call a liquidity crunch. The first step is companies just simply are not generating that revenue line any longer because they don’t have contracts in place, or they can’t get the inputs to complete their product and then deliver those to end buyers. As a result—while their fixed costs are largely remaining the same—rent, labour costs, things of that nature—they are just not seeing the revenue to come in to support that. Companies of all sizes are facing that kind of pressure, and that is probably the most immediate impact we are seeing.
Reactions to the crisis vary by industry, by company, and by segment—and I think that is maybe the most important one. We’re seeing a much greater impact in some respects from a personal and an entrepreneurial perspective for those who are micro- and small-size companies who quite frankly did not have months and months of cash runway to execute on their business, but who, in some cases, had three weeks or maybe a month and a half. And so you are right to suggest that there is a real human impact here as well—it is not just in terms of delivering on contracts or keeping folks supplied, it is really around how do they keep their staff well and healthy to the extent that they can, and their businesses just simply viable. And so that is where we really focused our initial efforts at EDC, is to try and—working with government partners—to get as much liquidity as quickly as possible in particular to the small- and micro-size companies across Canada. In terms of rough-sizing, EDC’s own analysis would say that is probably somewhere around a million companies, just to give an idea of scale.
That is where we really focused our initial efforts at EDC, is to try and—working with government partners—to get as much liquidity as quickly as possible in particular to the small- and micro-size companies across Canada.
The Government, EDC and Business Community’s Response to the Crisis
I do not think it is hyperbole to say it’s an unprecedented response. You know in the early days, folks were looking for comparisons—as humans do—to say is this similar to what we saw in the Great Recession. Is this similar to how we responded to previous pandemics or epidemics, SARS and MERS, and others of that nature. I think what is becoming apparent is the scope and the scale of Covid-19 is really unlike anything we have seen before—and so the response to date from government has been unprecedented. The response from business is, similarly, feeling that degree or scale of impact. And for me, what is interesting, and what will be ever more important, is actually how all of these players interact together to try and deliver fiscal stimulus, economic stimulus or business support. It really is going to have to be something that cuts across the public and private sector to try and keep all of those viable businesses pre-pandemic viable post-pandemic.
The scope and the scale of Covid-19 is really unlike anything we have seen before—and so the response to date from government has been unprecedented. The response from business is, similarly, feeling that degree or scale of impact.
I can certainly reflect on EDC’s own experience, which has been to be brought into a variety of conversations that the Government of Canada is holding in real time. It is various levels of government with many different departments in terms of trying to structure a very holistic approach to meet the needs that are becoming apparent. There are a number of vehicles that have already been launched by the government of Canada. One is the Business Credit Availability Program, or BECAP for short.
That was one of the first announcements that the government made, and in that case, my firm, EDC, as well as our sister Crown corporation, Business Development Canada (BDC), have been very much involved in setting up the different products and supports that are available to small and medium-sized Canadian business. And that has been a very collegial effort is how I would put that—understanding where the government is looking to go from a policy perspective, and then having the two Crowns, in EDC and BDC, help articulate how we can deliver that. The most important piece is how we can deliver it quickly to Canadian companies that are really feeling that liquidity crunch. Specifically, yes, lots of engagement across government on that BCAP file in particular. There are also several dozen Canadian financial institutions on the steering council, participating in that, giving their real live feedback and view from their business clients in terms of how its impacting them and what some of the needs are. That has been a very good experience to-date.
There have been other government programs that have been announced to try to really help flow funds to them extremely quickly. One is the Canada Emergency Business Account—or CEBA for short—which tries to get up to $40,000 per company into their hands right away to help with some of those fixed costs that I explained earlier. And more in the small and medium-sized space, EDC, in conjunction with our sister Crown, BDC, is really working on products that leverage the Canadian financial institutions—the banks and the credit unions—already great relationship with their business clients to get more capacity there to help them do the same.
On the micro-side, that Government of Canada program is providing roughly $40,000 per company, but when you put together the EDC guarantee program and the BDC co-lending program, that’s up to an additional $12 and a half million dollars in liquidity for larger companies. In the small space and the mid-sized [companies] it will be up to a total of $20 billion dollars in additional liquidity for the market. It is pretty sizable. That number was only $10 billion, that announcement, so again it’s changing quickly, reflecting on the size and scope. And so we are finding that that’s really the first pain point for these companies and that’s where we are feeling like we can really step in very quickly, given our existing relationships with the financial institutions and with a number of these companies and clients—of whom EDC would already have roughly 20,000—to try and provide that support right off the get-go.
The Main Chapters of the Unfolding Crisis
Chapter 1: Clouds on the Horizon
The first chapter is clouds on the horizon and that is really about awareness and analysis. A number of businesses, private sector, public sector entities are still in that phase trying to truly understand what we are looking at here—what are the impacts of the pandemic, and frankly, how does it cascade? Again, we have kind of seen it impact certain industries first but now it is starting to move through the economy as a whole. What does that look like? What are the actual gaps that are there, whether its unavailability of credit whether it is in other supports in other areas that we’ve seen the Government of Canada announce—wage subsidies, things of that nature. The first chapter, in a way, is how do we understand the environment we’re in right now knowing that it is changing incredibly fast—almost hourly. That’s chapter number one.
Chapter 2: Weathering the Storm
Chapter number two, is maybe weathering the storm. Once you have a baseline understanding of impacts and how broad this is actually becoming, how do you make sure that you prioritize those areas that need assistance and need support as quickly as possible? I’ll come back again to that concept of liquidity. That’s really the first pinch that businesses are feeling—how can I continue for the next two, three, four months to keep my staff engaged and employed and paid, to some level? How do I make sure that I am up to date on rent and that other fixed costs are taken care of? Again, you see—not just delivered via EDC, of course—but through many different places in government, things of that nature being looked at. And again, I’ll come back to the wage subsidy program, to additional programs that are being put out to help defray some of those immediate costs. What is interesting to note there as well, is that it is going to need to be very fluid in terms of that response. Things are changing so quickly, that you see things come out and then two- or three-days later program terms are actually revised or restated, and I can give to a specific example.
EDC, again under the BCAP program, came out with a loan guarantee that was working in conjunction with Canadian financial institutions to make sure that business clients could get access to immediate capital. And we started by saying, here is up to a five million dollar guarantee provided to your financial institution—up to 75% of that loan. Well within a couple of days, we had increased that amount to $6.25 million and an 80% guarantee based on the feedback that we had received from the financial institutions and companies of what was actually needed. In that second chapter, weathering the storm, there are probably subchapters as we continue to need to refine our response to the crisis and to what is actually needed.
Chapter 3: Rebuilding and Recovery
The third chapter is—and these are broad headings—about rebuilding and recovery. When we get to the peak of the crisis and we see things start to stabilize and get back to some sense of normalcy, it becomes, probably from a financial perspective, about helping Canadian companies restructure their balance sheets. There will be some that will really be in really dire straits, that will need help restructuring. Others will likely need consolidation, I would say, in a number of industries, and how can EDC help those companies post-crisis? It may be through things like direct lending and some of our structured finance that could help look at standing companies back up post-crisis, making sure they’re viable, and balance sheets are workable to move into the new reality.
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EDC’s Priorities Going Forward
Priority number one for us is to execute on what we have already established, and the programs that have already been launched. To me one of the big concerns or the potential pitfalls is, as the crisis continues to evolve—and we continue to change, modify or add new programs—there’s a risk of not executing on any of them as well as you would like. Again, back to the BCAP program that we have in place, and the loan guarantee in particular that EDC will offer—we’ve gone out to the banks, about a week ago, to start working with them to understand what needs to be in place to deliver on that as soon as possible. Just about three days ago, we have gone live with that program and we have already seen over 60 applications come in through our partner financial institutions for that program. We expect that number is going to grow exponentially as we get into next week, and the banks are going to be able to start delivering that through their own account managers and work with their customers to make that available.
That is really priority number one for us, to focus on what has already been launched and deliver on that as quickly as possible and in as streamlined a way as possible. We’ve looked at really understanding how to take on more risk then we have in the past from EDC, streamlining process with the banks—instead of it normally being a two or three week process it’s much quicker than that, so the funds are actually in the hands of the companies.
Our second priority would then be to really stay very connected to our government partners and to the public and private sectors to understand the feedback we get in executing some of those programs. What’s working? What’s not? How can we make sure we are nimble enough to meet the needs of Canadian companies as they evolve? And for us, one thing I really should mention, is now as of last week the Government of Canada, in a temporary way, gave EDC brand new measures allowing us to go beyond companies that are only exporting to all domestic Canadian companies as well. So that has the effect of having EDC essentially deliver its product or service to almost six times the number of companies that we would have done before. So again, broadening the delivery of existing products and programs is something we know how to do very well and can do very quickly. That’s really the priority. As we move into secondary phase of the crisis and how we respond to it, then we can look at some of the other things I mentioned—additional lending programs and structured finance to help where there is some restructuring required. However, it really is about getting that liquidity out the door as quickly as possible.
Lessons Canadian Businesses Should Learn from This Crisis
I see seeds of green shoots for the future, and that may be around things like having a much greater understanding of how integrated economies are now—domestically, internationally, and across borders and continents—in as much as how fast as we see the impacts being felt. One analogy that we can draw, or lesson that we have taken, goes back to the tsunami that affected Japan and the impacts there for their auto industry. We really saw how onshoring, reshoring, or building redundancies into supply chain was critical. We are having that lesson expanded and enhanced for us now. Having a single source of supply, sometimes from around the world, and the case of a crisis such as this one, can make it very difficult to execute on your production, as a small manufacturer for example. Building in that sense of redundancy to a supply chain and understanding the impacts that that could have—I think that will be one potential outcome of this that allows us to maybe prepare for the next one or mitigate some risk going forward.
I see seeds of green shoots for the future, and that may be around things like having a much greater understanding of how integrated economies are now.
We are really understanding now that the production and availability of essential goods for Canadians and for Canadian business is critical. When you have to rely upon that supply chain—that stream of product from halfway around the world or from the US—and that gets disrupted, it is really felt immediately. And when it is an essential product or service, that’s something that we do need to think about. Do we need to have some level of redundancy here in domestic production to keep us at a stable level? As fast as the economy has felt the pain, it will come back, and when that happens, being part of an integrated supply chain and understanding the world as your market will not be any different. In fact, it may even be more important, as everyone will look to diversify markets and to diversify supply chains. I think EDC would see that as a real opportunity—it is hard to say opportunity in this environment, but I will—post-crisis for Canadian companies to be part of that diversification of the supply chain, which almost by extension means diversification of markets. And still roughly 75% of our goods, a little less of our services, transit the United States—does that number change post-crisis? I would say quite possibly, and we would hope so—and that is something that EDC is quite well-positioned to be able to support by virtue of being well-capitalized, executing business on behalf of Canadian companies and in over 180 markets in a normal year. We would hope that we can get back to some level of normalcy and can be there to help Canadian companies as they diversify.
Honestly it is about taking lessons from this crisis. Human nature is such that we tend to move on once the crisis has passed, and don’t always remember those earlier lessons. Covid-19, from my perspective, is unlike anything we have seen before, and certainly businesses are giving us that feedback. Even coming back to that understanding of what the impacts are for an individual, for an individual’s business, and how it cascades I think are really important lessons. We come back to again: is three four weeks of cash runway for a business enough? In normal times and in good times, yes, it has proven to be enough. We are seeing that right now, that that is really straining the micro and the small side [companies] in terms of their resiliency to this crisis. Do we really need to build that into our thinking really as an economy going forward? I think so. I think that future mitigant to risk is really critical to understand. Again, the speed at which we are able to adapt to crises of this nature will be another lesson that will come out of this.
The ability to see the early warning signs would be the third point I would mention, it is a lesson I think we have all learned. Seeing the start of this crisis at the end of 2019 and into January in Asian markets, would have been plenty of heads-up for folks to prepare—and we know that now going forward. We just did not know what to expect before, and that is another great lesson we can take—is when we see that happen, we really do need to be prepared and ideally have a bit more of a cushion on which to operate for when it does become a crisis for North America and in Canada specifically.
The Future of Business and Our Economy
The short answer is yes, business does change coming out of this—but maybe not to the extent that some people would imagine. The reason I say that is again, if we look back in history in terms of economic response to previous crises—whether they are financial or health-related—certainly not to the scope again, but generally what you see is more of what the economists would call a V-shaped recession: where you have a very sharp, steep decline, but an equally sharp rebound that follows. Everyone is hoping that rebound part of this equation is going to happen sooner rather than later, but even if it is later—half of this year—for the rebound to start, our view would be that certainly into the early part of 2021 the economy is pretty much back to where it was pre-crisis. Given that speed of rebound, if that is indeed what happens, I think the scope of change to business more broadly is not quite as dramatic as we would see today. However, there are elements that come from this, and some of them are frankly the mundane—the ability to execute and work remotely, and work from home, and how folks interact and do their best to communicate in a brand new way—I don’t think will go away. People have actually roadtested this in some respect to say we can still be productive and execute in many industries—not all of course—in remote fashions, and that will not diminish.
Understanding how the public and private sector can continue to interact and really provide intelligence one to the other will be something that remains post-crisis.
Going back to the need and the imperative to communicate going across segments of the economy, that will not change. So, understanding how the public and private sector can continue to interact and really provide intelligence one to the other will be something that remains post-crisis. Hopefully that allows policymakers to draw on a whole new set of valuable data than they have had in the past, and on the flip side, it allows corporate Canada in this sense to really understand the value Crown corporations or the Federal Government largely can play in helping to mitigate some risk and to respond to issues or crisis like these.
#WFH Top Tips
It is a great question and maybe lesson number one is that if you don’t remain healthy in every way, physically, mentally, emotionally, you’re essentially no good to anyone at this point of time.
Whether it is to provide additional support to Canadian companies in need, or more importantly your family and loved ones, it really is around trying to manage through this with some degree of balance. It’s easy to put in an 80-hour work week—working from home gives you some benefits—but it also means you have the ability to be online and working all the time. And at the same time, you need to be able to connect with that smaller group—generally friends and family in your own little environment. Your personal health, to me, is number one and has to be paramount.
Number two would really be taking the time to connect. Connect with clients, with counterpart organizations, and with peers in your industry. FaceTime, Skype, you name it—do what you need to do. Again, it’s easy to get locked into that bubble, for those in particular that are not deemed essential and might find themselves not in any way shape or form in terms of a normal business cadence, that’s important. Staying connected and connecting in whatever way is possible, that would be number two.
And then number three is, unless you are actually a brain surgeon, you need to recognize that it is not brain surgery and you have to give yourself permission to make mistakes and to learn from them very quickly You have to be able to go fast, absolutely—to try to help those Canadian companies, in our case—but you must also understand that you might not get it right the first time. But you learn from that mistake, you improve, and you get it right as quickly as possible and on your second effort. Those would be the top three for me.