Riding the U.S. market rebound

—Sponsored article by Grant Thornton

TORONTO—The economic rebound in the United States offers major opportunities for Canadian manufacturers.

The US economy has expanded more rapidly than most others around the globe since the global financial crisis—and is projected to grow even if the world economy remains sluggish. This is good news for Canadian manufacturers, as exports to the United States rose to approximately US$218.3 billion in 2014—nearly reaching their pre-recession peak.

The United States is Canada’s biggest trade partner, accounting for 79 per cent of Canadian exports. Only China and Mexico export more into the U.S.

The Canadian advantage
Canada has enormous advantages in trade with the United States—and proximity isn’t the biggest one. As economies around the world foundered during the financial crisis, Canada’s economy and manufacturers stayed strong.

Other Canadian advantages include:
Favourable exchange rate for exports: In early May, the Canadian dollar was worth US$0.80, with some predicting a drop below US$0.70—from a high of US$1.10 in November 2007. (Of course, Canadian manufacturers that rely on imported components will be hurt by a falling Canadian dollar).

Familiarity: Canadian manufacturers are generally familiar with US markets, customer habits, and distribution channels (in some cases, they know more about these facets of business in the United States than about distant regions of Canada). For many firms, their exports to the United States kept flowing even during the downturn—making them ready to capitalize on US growth.

North American Free Trade Agreement (NAFTA): The pact with the United States and Mexico—more than 20 years old—eased trade restrictions among partners. Total Canadian exports to the United States have increased about 200 per cent since then, rising from $110.9 billion in 1993 to $332.1 billion in 2013. NAFTA continues to offer significant advantages to Canadian firms.

Proximity: Canadian manufacturers are close to major U.S. markets, by land and sea—Chicago, Milwaukee, Detroit, Cleveland, Indianapolis, Boston, New York, Philadelphia to name just a few. With transportation costs lower due to low fuel prices, Canadians have a sizeable logistics advantage in getting goods to U.S. customers.

There remains plenty of room for Canadian exports to US markets and elsewhere. A Grant Thornton-sponsored survey with PLANT magazine found that approximately 26 per cent of Canadian manufacturer revenues are from U.S. sales. So it’s not surprising that 37 per cent of Canadian firms will seek new markets in the United States in the next three years (31 per cent will look for new markets in Canada, 15 per cent in Mexico and other Central/South American countries, and 12 per cent in Brazil). In addition, 30 per cent of Canadian manufacturers strongly agree that pursuing new geographic markets is an important strategy — although 43 per cent say pursuit of North American markets is a priority over global markets.

“Export opportunities to the United States vary greatly by manufacturing sector, and so executives need to perform a rigourous analysis of the potential for U.S. sales for their products. It’s not a one-size­fits-all opportunity, and new competitors emerge daily that affect those decisions.” – Jim Menzies, National Manufacturing Leader, Grant Thornton LLP.

Among manufactured products, vehicles (13 per cent of total exports) and machinery (6.8 per cent of total exports) top the list of Canadian exports to the United States. (Mineral fuels, including oil, are the country’s largest export to the United States (26.1 per cent).)

The good news is that U.S. automotive markets are again roaring in 2015, and the broader U.S. manufacturing resurgence bodes well for Canadian equipment makers, especially with a favourable exchange rate. From 2009 to 2013, U.S. manufacturing output grew by an average rate of nearly 6 per cent per year. Not surprisingly, U.S. plant output has reached a median 80 per cent of designed capacity—a benchmark that typically requires new capacity across the industrial sector.

Other sectors are less attractive. For example, the trend toward local sourcing of food and beverages has many shoppers looking for US or regional brands; the boom in US craft beer and distillery products has specifically dampened the demand for Canadian products. Canadian beer exports to the United States totalled just US$245.5 million in 2013, down from US$378.8 million in 2007 and are expected to fall below US$200 million in coming years. Yet despite the allure of promising U.S. markets, many Canadian executives remain reluctant to increase exports. Some remember the bottom-line damage done by the financial crisis while others worry that Canadian products—especially against a backdrop of “Buy American” sentiment—won’t be embraced by U.S. customers.

“We also know that many Canadian manufacturers have been very cautious in their approach to selling and/or operating internationally in the past,” adds Menzies. “For these companies, a first step in breaking through that barrier is to export to the United States, where risks are minimal—especially compared to challenges of exporting to popular export destinations such as the BRIC countries.”

Take advantage of U.S. opportunity
Canadian manufacturers with US customers are already benefitting from the upturn. What’s more, these manufacturers are finding that export infrastructures can be modified to acquire new customers in the United States: fabrication operations that are supplying automotive customers in one region of the States can be leveraged for other regions and for other sectors in need of similar components.

“Seek the advice of experienced industry or local colleagues,” advises Menzies. “And look to professional allies such as Grant Thornton. We have a vast array of offices and expertise throughout the United States— people on the ground with a wealth of industry-specific experience.”

The best news for Canadian business owners looking to the United States is that their desire to export is often matched by readily-available funding. Canada’s banking system—one of the world’s most stable—appears ready to invest in manufacturers with big plans, whether to increase exports or even to acquire new businesses in the States.