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July 1, 2006

IN CANADA, CURRENCY CONCERN IS U.S. DOLLAR

Canadian manufacturers feel pain from Chinese imports. But Canada’s worries are overshadowed by another currency-related issue: the strengthened Canadian dollar versus the U.S. dollar.
 

The Canadian dollar has gained some 35% against the greenback since 2003, making Canadian companies exporting to the United States less cost-competitive. That makes it more difficult for Canadian manufacturers to compete with Chinese rivals for U.S. markets.

“Relative to U.S. manufacturing, Canada has become significantly less competitive than it was two years ago,” says Wayne Bassett, CEO of Samuel, Son & Co. Ltd., a metals service center based in Mississauga, Ontario. “We’re losing a significant amount of business back to the United States.” Adds Jayson Myers, senior vice president and chief economist with the Canadian Manufacturers & Exporters (CME), which represents 2,500 companies, “The main problem for Canadian manufacturers isn’t the currency situation with China; it’s the currency situation with the United States.”

The North American currency situation unites small and large Canadian manufacturers. Because Canada’s domestic market is much smaller than that of the United States, CME’s members tend to be export-oriented, especially since adoption of the North American Free Trade Agreement in 1994. As a result, there is little disagreement between domestic and multinational manufacturers on trade policy like the one roiling members of the National Association of Manufacturers (NAM) in the United States. (See “Who Represents Domestic Manufacturers?” Forward, May/June 2006)

“There are a lot of small companies that are under a very high degree of pressure from China that probably would like us to take a more forceful position in protecting Canadian industry from Chinese competition,” Myers says. “But we don’t have the same clear division as there is in NAM.”

Differing interests between big and small Canadian companies are “not something that we’ve had a lot of discussion about,” agrees Bassett, who also co-chairs the Canadian Steel Partnership Council, created last year to identify and promote ways the country’s metals companies can become more competitive.

Bassett says the federal and provincial governments are working with representatives of manufacturing sectors to explore how Canadian steel producers can ensure access to competitively priced energy sources and achieve the country’s greenhouse gas and other emission targets.

The council also wants to address shortages of skilled labor, how the Canadian government can better encourage corporate research and development, and how regulatory burdens can be eased to improve access to capital.

Canada’s government is limited in its ability to tackle the currency situation directly, says Sara Filbee, director general of the Manufacturing Industries Branch at Industry Canada, the country’s trade and commerce department.

Instead, the Conservative government that came into power earlier this year expects to help manufacturers by lowering corporate taxes over the next three years. “This will make Canada a more attractive place for investment,” Filbee says.

Canadian automotive and heavy equipment manufacturing continue to do well, as do areas where high quality and customer collaboration are priorities, says Scott B. Jones, president of Novamerican Steel Inc., a Montreal-based service center and manufacturer. Yet some makers of fabricated metal products outside the auto sector are struggling, he adds.

The tougher climate for manufacturing has its benefits. “It’s forcing Canadian companies to be much more productive and much more innovative,” says Myers, noting that productivity levels have risen 5% in the last year. “But, of course, it costs money to make those adjustments. It’s a pretty challenging environment out there right now.”


ENERGY PRICES ROIL MANUFACTURERS

by Michelle Bowles

Higher energy costs are causing unrest in the industrial world. Executives surveyed by PricewaterhouseCoopers in its quarterly Manufacturing Barometer said they are growing more cautious about spending this year as rising oil and gas prices pose an impediment to profitability and growth.

The consulting firm’s first-quarter survey shows 47% of executives questioned anticipate making major new investments during the next 12 months, but that’s down from 60% a year ago and 57% in the prior quarter.

The survey shows 32% of respondents expect increased merger and acquisition activity this year, down from 48% in the fourth quarter of 2005, but up slightly from a year ago. The expectation for geographic expansion fell to 27% from 44% in the fourth quarter of 2005 and 36% a year ago. Increased investments are, however, expected in new product introductions, research and development, and information technology.

Higher energy prices clearly are on the minds of manufacturers. Two-thirds (67%) of executives surveyed said their companies are absorbing higher energy costs rather than passing them on, PricewaterhouseCoopers reports. Sixty-three percent predict that energy costs will continue to rise over the next year, and the same number are concerned that the costs will be a barrier to growth.

The full report can be found at www.pwc.com/mb.*Interviewing in the first quarter of 2006 for the next 12 months
Source: PricewaterhouseCoopers