Manufacturers persevere with dollar volatility
Industry professionals across the country have declared the high Canadian dollar a national emergency, claiming although it’s good for importers, its extremely bad for exporters. But a new study by the Conference Board of Canada shows that manufacturing industries are the mostly likely to weather the volatile loonie because they have more ways to hedge against its fluctuations.
The Dollar Volatility: Who Should Care? report used four indicators—export intensity, import intensity of inputs, import intensity of machinery and equipment investment and the extent of Canadian direct investment abroad (CDIA)—which identified 27 industries that rely heavily on international transactions.
The study found internationalized manufacturing industries such as oil and gas extraction, plastics, primary metal, non-metallic mineral production, and electronic product manufacturing, have more flexibility with operating structures.
In the larger globalized business category, “You have companies like Bombardier, which has plants in Mexico, the US, and a presence in Asia. Research In Motion (RIM), is another example,” says Louis Theriault, director of the board’s International Trade and Investment Centre.
In the smaller category you find niches that tap into foreign markets and global supply chains. Niche companies often have this strategy in place from the start and simply follow the demand.
“You can’t just lean on the US markets for revenue or only Canadian suppliers and limit yourself to domestic activity alone in terms of production,” says Theriault. “For large and medium manufactures, opening plants abroad and outsourcing makes sense.”
However, most Canadian manufacturers fall into the small to medium enterprise (SME) category, have a long history of trading with the US and rely heavily on North American supply chains. Theriault says that we’re in a “new normal” economy and SMEs must change the way they look at global markets and diversify to move forward.
“For small manufacturers, the challenge is that although they may think of Asia and Europe as other markets for suppliers, they also have to think of them as a final market for their products,” says Theriault.
For help, Theriault says the Export Development of Canada (EDC) and the Business Development Bank of Canada (BDC) have experts to help small manufacturers take advantage of the global supply chain and make it part of its globalization strategy.
“If you want to hedge against dollar volatility, you need to be more present in foreign markets, look at foreign suppliers,” says Theriault. “All of this builds a natural hedging to your cost structure.”
SME’s can also leverage customers serving an international market. “A multi-national that you supply indirectly is also a way to get engaged with the global supply chain,” says Theriault.
Over the past few years the Canadian dollar has peaked and declined against most major currencies, and such rapid movement has made it difficult for many businesses to develop workable cost structures. But as the Canadian dollar inches towards parity, Canada’s economy is picking up pace, ranking it high among the G8.
In a recent Statistics Canada report, labour productivity posted its biggest gains since 1998 in the fourth quarter. Granted, even a small boost in productivity seems successful after a few years of decline.
In recent press, Finance Minister Jim Flaherty suggested there’s new comfort level for Canadian industry and that our currency strength could help drive Canadian productivity by boosting investment in imported machinery and equipment priced in U.S. dollars.
But for many of Canada’s manufacturers lack of capital to invest is limiting their chances of moving forward. As the Conference Board’s study suggests, to gain a natural hedging against the strong dollar, diversification and globalization are essential.