More and more Canadian companies are investing in foreign affiliates. Why? Because they need to diversify their customer base. And because foreign buyers in high-growth emerging markets, such as China, Mexico, Brazil and India, increasingly expect companies to have a local presence.
No doubt, spreading your company around the world can be challenging and expensive, and opening a foreign affiliate can be riskier than simply making an export sale. To some Canadian companies, the prospect might seem daunting. But investing abroad can be a natural hedge against other risks such as currency fluctuations, and many companies are learning that – in order to survive – they can’t afford not to.
And the strategy is paying off. Canadian companies operating abroad today are generating about the same level of sales from foreign operations as they are from export sales from Canada: about $460 billion as of 2009 data. According to Statistics Canada, Canadian foreign affiliate sales grew at twice the rate of Canadian exports over past decade, with sales originating in emerging markets nearly tripling during this period. Make no mistake – globalization is a force of nature.
Now is the time to make these inroads; the dollar is relatively strong and new opportunities are emerging every day. As the speed of scientific and technological advancements accelerates, consumer tastes are shifting, giving rise to entirely new industries and demand for new products in sectors like food, transportation, health, education, energy and clean tech.
Making connections in Vietnam
Montreal-based Groupe Lavergne produces high-quality engineered resins from recyclable materials. They take undervalued scrap, returned expired goods, or damaged products and produce a resin that can be molded back into the original end product or upcycled into a value-added product. These specialty plastic resins are in many applications such as auto components and ink cartridge materials for companies like Hewlett Packard, where 70 and 100 per cent of the plastic in a new cartridge can be recycled material.
The company started in 1984 and their competitors are the huge resin producers such as Dupont, so it’s been a challenge to overcome initial impressions of being a small player without the huge name recognition, says President Jean-Luc Lavergne.
But tremendous change occurred in specialty resins technology around 1999, which is when their business really took off and exports exploded. Now, they export primarily to Asia – China, Malaysia, Singapore, Korea and Japan – where demand is huge. In fact, domestic business is now less than one per cent.
About three years ago, Lavergne understood that he needed a local presence in Asia – his large Asian customers wanted him closer to the market.
“The challenge was finding the right location, in the right country,” says Lavergne. “We knew nothing about the local laws and regulations of various Asian countries and weren’t sure if the idea was even viable. And it’s a significant investment.” After looking at many options, he eventually determined that Vietnam was the place.
First, he made contact with the Vietnamese embassy in Canada, from which he received a lot of support. “The embassy in Ottawa helped me make some critical local Vietnamese connections,” says Lavergne, connections that in turn led him to specialists in real estate. “I wanted to buy and rework an existing facility, and that takes local contacts in Saigon and Danang.”
He was then able to connect with people who could guide him to the industrial sectors. Of course, then he needed contractors and he wanted to hire locally. After several trips to the region, Lavergne also made contacts with several Canadian and European business people operating in Vietnam.
Making the Right Connections
Groupe Lavergne’s experience in Vietnam
- Contacted the Vietnamese embassy in Canada.
- Used the embassy to make critical local contacts; such as real estate agents, contractors and universities.
- Visited the market and became familiarized with local laws and regulations.
Lavergne wanted to replicate the production process in Quebec and ensure it was fully automated. The technology is sophisticated, which required engineers and other specific skill sets. To do so, he was able to make contacts with the local university to help find new graduates with the background required. Three of these graduates are now in training in Canada. “I needed to ensure we were producing the same quality in Vietnam as we do in Canada,” says Lavergne.
As of July this year, the facility in Vietnam was operational, with close to 50 employees. The auto market in Asia is also showing interest in Groupe Lavergne’s specialty resins, so he hopes to piggyback on the current business, grow his North American base and bring more revenues home. Certainly, it’s cheaper to operate in Vietnam, but he didn’t do so for the cost savings. He recognized that Asia is a huge market – and he needed to be in the heart of it.
“If you’re not close to your customer, you might have trouble surviving,” says Lavergne. In fact, he’s fairly certain that his company would not have been able to sustain its business otherwise. Now he also hopes to gain more local customers, something that would have been more difficult from Canada.
EDC financed $2.89 million for the equipment in Vietnam through a direct loan and helped Groupe Lavergne progress through the learning curve. Now Lavergne is learning more about the local laws and customs and as a result is less fearful when he considers his next venture. “Developing a start-up is hard enough in Canada. Try doing it so far away.”
Emerging Markets: Where the real global growth is
Within five years the economies of India and China are expected to grow by more than 50 per cent, Brazil by 25 per cent. These economies are becoming major world exporters, importers, foreign investors and recipients of inbound investment, which means consumption, investments and exports will only rise.
Adopting “integrative trade” practices – such as creating foreign affiliates – has helped many Canadian companies transition away from a dependency on the U.S. market. At the start of this decade, 84 per cent of Canadian exports went to the U.S. By 2008, that figure was down to 75 per cent and has continued to drop, whereas 11 per cent of our exports went to emerging markets in 2010, up from 4 per cent in 2000. If this trend continues, in five years emerging markets could account for 20 per cent of total exports.