Making it here and taking it global, despite trade uncertainty
Understand the risks and mitigate them through diversification.
Global markets for Canadian manufactured goods are rapidly expanding due to negotiations and recent ratification of several trade agreements. Trade barriers are falling. Thankfully, US tariffs on Canadian steel and aluminum – seen to be contributing to a sag in an otherwise booming economy – were recently lifted. And growing demand for goods due to emerging middle class consumers in nations such as Mexico, India and China offers opportunities for Canadian manufacturers.
But the new trade scenario is not without risks. For manufacturers, understanding what they are and how to mitigate them is key to success.
Risks exporters run into include changes in economic activity, foreign exchange volatility and supply chain disruptions. “These are the top three challenges to keep an eye on when looking at risks that impact the manufacturing sector,” according to Andrea Gardella, senior economist at Export Development Canada (EDC).
Economic uncertainty is chief among trade risks, Gardella says. Such uncertainty can hit demand for what you are exporting. Just ask soybean farmers caught in the middle of a huffing and puffing contest between China and the US, which have raised tariffs against each other to win big in an ultimate trade pact expected this year. Once that and the North American deals are finalized, she says worldwide economic trade tensions should ease.
“Foreign exchange is probably one of the risks that’s most difficult to predict especially for smaller companies. The main risk is that it hits the margin directly,” Gardella says. “It really puts pressure on buyers when there is a significant change and more so on the depreciation side of foreign exchange. Most contracts are done in local currency and then there has to be some exchange factor that happens. So predicting the movement is quite difficult.”
Gardella notes a manufacturer’s supply chain is only as strong as its weakest link. “Any type of trade uncertainty really impacts investment flows. It impacts business decisions. [Manufacturing] is a highly globalized sector and highly interlinked, so it’s difficult to predict what’s going to happen within that context and how it could impact the manufacturer’s business and how it could impact financial performance.”
Spread the risk
What’s a manufacturer to do to succeed? Diversifying markets is crucial to mitigating risk when exporting, according to Gardella. Manufacturers would do well to consider exporting, period. Even for small- to medium-sized companies it’s a good idea. The PLANT Manufacturers’ Outlook 2019 survey shows only 10% of respondents’ export revenues come from overseas. The survey, in partnership with Grant Thornton LLP and SYSPRO Canada, shows most revenue (67%) comes from domestic sources, followed by the US (27%). Of those that do export, one out of every 10 companies grew at an annual rate of more than 20% between 2009 and 2011, according to EDC.
A little homework helps identify countries where Canadian products would have good growth potential. Gardella advises manufacturers to focus on more than one country to spread the risk of non-payment or foreign exchange volatility. She also recommends diversifying by sector. Think about whether the product can be adapted or sold into different market segments. Sensors, for example, can be marketed to automotive, security or aerospace sectors. Look to those countries where your target market sectors do well.
Consider also that while Canada’s new trade deals open more markets for Canadian-made goods – a respected global brand, by the way – it also opens our door to increased competition from abroad. How are you going to compete with that?
The Canadian government is encouraging manufacturers to export and offers help and incentives to those who want to expand into countries where Canada has trade agreements.
Here are some tips for exporters and those who could be:
1. Stay informed. Do your homework. Even for SMEs, it’s a good idea to assign risk management to at least one person who keeps an eye on developing trends in the market. Build a risk-mitigating strategy, which will help prepare for change, and plan for uncertainty,” Gardella says.
A good resource is EDC’s Global Financial Markets, a weekly publication that reports macroeconomic information for developed and emerging markets. It covers currency exchange rates, stock markets and government bond spreads for more than 50 countries in Latin America, Asia, Africa, Middle East and emerging Europe, as well as other key markets.
2. Leverage partners. Work with your bank. Work with your buyers. “Have an open dialogue with your buyers to prepare for uncertainty, for example, on the foreign exchange side or the supply-chain side. If you have good dialogue with your partners to understand where the vulnerabilities are, you’re better equipped to plan for those risks and challenges,” Gardella says.
Whether a large company or an SME, there is help available to create an export plan, reach new markets, innovate products, tap funding and mitigate financial risks. Banks are one example. Also check out:
Export Development Canada (EDC). It offers help on the financing and insurance side of mitigating risks. For example, accounts receivable insurance offers protection against buyer non-payment. It can also be used to leverage more capital from your bank. EDC also offers a foreign exchange facility guarantee. The Crown agency offers the following advice: protect your intellectual property by registering your IP in Canada and in the international market; ask each new customer to complete a credit application; and protect against non-payment with credit insurance.
Business Development Bank of Canada (BDC). It provides financing, advisory services and capital. BDC recommends offsetting currency fluctuations by:
• finding foreign suppliers in the country to which you are exporting;
• setting up a foreign bank account;
• adding foreign operations, which can smooth out currency differences, making a company more competitive; and
• using financial instruments, such as forward or future contracts to hedge currency fluctuations.
Trade Commissioner Service (TCS). For more than 120 years, the TCS at Canada’s Global Affairs department has been helping companies navigate international markets. Offices are located in more than 160 cities worldwide. It offers funding and support programs; introductions to potential business partners and clients through trade missions and events; marketing assessment; and information on trade agreements, country and sector markets, tariffs, sanctions and export controls.
Check out its CanExport program designed to give small businesses across Canada funding incentives to develop and diversify their sales abroad. There’s also the Forum for International Trade (FITT) program. It helps more Canadian companies diversify and compete globally, and provides a Certified International Trade Program (CITP) designation for developing global trade professionals.
World Trade Center. It offers the Trade Accelerator Program, a six-week course for Canadian SME manufacturers that want to develop a strategy for exporting. The hands-on program is offered in several cities across Canada.
“You don’t have to take six weeks away from the office. It’s four days spread across six weeks,” so it’s ideal for small- to medium-sized companies, says Gwenaele Montagner, senior director, international trade development, World Trade Centre – Toronto.
Participants gain access to export experts. Company size ranges from those with annual revenues of $1 million to $20 million. “By the time it is finished, participants have a strategic plan for exporting,” Montagner says. “The United States is the number one destination for Ontario exports at 77%, but when companies come through TAP that number drops to 30%.”
She says there are “many, many pots of financial assistance available to exporters. They can access it if they have a good strategy.” TAP helps them develop a plan.
Companies with minimum annual revenue of $500,000 and in business more than two years are eligible for the program.
Diversification is key to protecting your company. The impact of policy changes will be minimized, Montagner says. “If you stay at home or limit yourself to one market you are subject to policy change that can have a detrimental effect on your business. It all boils down to doing your homework.”
Kim Laudrum is a Toronto-based business writer and regular contributor to PLANT. E-mail email@example.com.
The Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) is between Canada and 10 other countries in the Asia-Pacific region: Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Once fully implemented, the 11 countries will form a trading bloc representing 495 million consumers and 13.5% of global GDP, providing Canada with preferential access to key markets in Asia and Latin America. Canada signed the agreement Dec. 31, 2018.
The Comprehensive Economic and Trade Agreement (CETA) is between Canada and the European Union and its member states. CETA entered into force provisionally Sept. 21, 2017, meaning it’s mainly in effect, with some member states expected to ratify soon. Intended to eliminate trade barriers, it covers virtually all sectors and aspects of Canada-EU trade. With CETA, 98% of EU tariff lines are now duty-free for Canadian goods. The EU government procurement market is worth $3.3 trillion.
This article originally appeared in the July-August 2019 print issue of PLANT Magazine.