Welcome to the new trade era. The commodities super cycle has run its course and the loonie has taken a dive. At the same time, the U.S. economy — Canada’s largest trade partner by far — is beginning to stir after a long hibernation. This translates into more opportunities south of the border and has companies asking how to seize the day.
According to Jacqueline Palladini, senior economist at The Conference Board of Canada, a company’s ability to increase its success in the U.S depends on three factors: whether it is currently competitive in that market, the strength of demand for its products, and whether it has enough capacity to meet that demand.
She has identified five Canadian industries that have strength in all three areas and are well positioned to look south for new opportunities: Transportation services, other commercial services such as wholesale trade and administration, computers and information services, financial and insurance services and food manufacturing are all in a sweet spot.
Six other industries, all manufacturing, are lacking capacity: wood products, pharmaceuticals, aerospace, motor vehicle parts, other transportation products and clothing. To expand, companies in these sectors will have to find the people, plant space and machinery they need to increase production.
“These six industries are already competitive,” Palladini says. “Some of them have already been boosting their exports to the U.S. in recent years, and are operating at full capacity. So they’re going to have to make some additional investment if they want to continue to grow their exports. And some of these industries have actually lost workers or laid off people in the last 15 or so years, so finding people might be a challenge for them.”
Another challenge companies in these industries face is deciding how much debt to take on. The key is to identify where they can get the most bang for their buck, according to Palladini.
“They need to think very strategically about where they want to invest (and ask themselves) ‘Which machinery, which technology, which type of people do we need?’”
For some companies it might make sense to put new people on the ground in untapped regions to make new connections. An auto parts manufacturer, on the other hand, might want to build a whole new plant close to an auto manufacturer to take advantage of supply chain opportunities.
In general, it is riskier to go after new business than it is to deepen relationships with existing customers. “There are many different ways to approach this,” Palladini says. “Some companies have more of an appetite for risk than others.”
While cutting prices is another way to increase market share, she points out that the currency differential is already making Canadian goods relatively cheap for U.S. buyers and that the higher cost of labour in Canada makes price cutting unrealistic for many. Instead, she says, companies would be wise to go full bore on value add.
Take wood products, which is benefitting from a rebound in the U.S. housing market. Canadian R&D has produced plywood that is stronger and more fire resistant than it has been in the past. Vehicle parts is another area where Canadian companies are adding value, for instance by developing lightweight components that lead to greater fuel efficiency.
“Adding value, making a product that is innovative or fills some kind of a gap in the market, tends to be the area that is preferable [to cutting prices] in terms of being competitive,” says Palladini.
Export Development Canada (EDC) predicts that Canadian businesses can expect to see a seven-per-cent increase in the value of their exports in 2016 following a one-per-cent decline last year, and that most of the increase will come from the U.S.
“U.S. companies now have very tight capacity constraints, which is really good news for Canadian businesses, many of which enjoy a significant price advantage when selling to the U.S. due to the lower Canadian dollar,” explains Peter Hall, EDC vice president and chief economist.