Strong loonie wreaks havoc on Canadian firms

Companies are increasingly sourcing inputs and technologies from outside Canada as loonie soars

April 19, 2011   by Matt Powell

TORONTO—The current strength of the loonie continues to stir the pot for Canadian firms doing business globally.

Parity with the U.S. dollar is causing some firms doing business in Canada to avoid dealing with Canadian suppliers that conduct business in U.S. funds because many are forced to charge surcharges to off-set prices.

“The volatility of the currency is difficult to manage and the high dollar is forcing exporters to innovate to produce high value products or adopt more automated processes to stay competitive,” says Jeff Brownlee, vice-president of public affairs at Canadian Manufacturers and Exporters (CME).

But, Canadian businesses have the opportunity to load up on equipment and products from across the border to boost R&D efforts.

“Companies are hedging,” says Brownlee. “In particular, companies are increasingly purchasing more inputs and technologies from outside Canada.”

Canadian businesses are driving recovery efforts by ramping up productivity and R&D because equipment is cheaper, but doing business globally is becoming increasingly difficult because more businesses aren’t willing to pay more for Canadian companies doing business in U.S. funds.

And the cost of this situation isn’t cheap.

Based on data from Statistics Canada and CME economic research, every one per cent increase of the loonie costs domestic exporters about $1.5 billion a year, says Brownlee

Canada’s trade deficit has also consistently climbed as the value of the loonie has increased, despite the fact that exports grew by 9.5 per cent last year.

It’s times like these when companies need to sit back and identify their core competencies, says Warren Granger, a partner at Ernst & Young, a global assurance, tax, transaction and advisory services firm.

“Companies need to ask themselves: where is it that I can add more value to my core competencies?” he says. “Improving processes and creating value that exceeds expectations need to be at the fore-front of a company’s focus right now.”

Granger says outsourcing will become increasingly popular if the loonie stays above parity.

Indeed, Canadian hockey equipment manufacturer Sherwood Hockey announced it will outsource the remaining 15 per cent of its composite hockey-stick operations to China. The company says it hasn’t been able to compete with cheaper competitors made there already.

While outsourcing might be an iffy alternative for Canadian firms, it gives them time to re-focus best practices and potentially invest in newer equipment, says Granger.

“At this point, it’s crucial for Canadian firms to try and trim away as much as possible,” he says. “If a company can’t be productive or control costs in Canada, it might mean looking for new production markets.”

Focusing on core competencies allows companies to retain the close connection with their customers while being able to monitor quality. And can help improve results without resorting to offshore sourcing, he says.

“If management resources are being reduced, there isn’t as much time or funds to invest in improving all aspects of the manufacturing process,” he says. “Companies need to focus on where and when they drive innovation and development to maximize the payback and protect their customer relationships in as short a time period as possible.”

Granger adds that companies need to identify their core competencies and opportunities to add value to processes.

“Outsourcing will stay popular as a means of cost constraint,” he says. “As companies see their revenue shrink or adjust to the status of the loonie, they will be searching for all possible avenues to maximize their return on sales.”

At this point, companies need to build on their competitive advantages, he says.

“Sourcing alternative suppliers or processes to reduce costs or to hedge their foreign exchange exposure (expendable activities), but decisions should not hurt quality, delivery time or customer relationship.”

While a significant amount of time will be spent on retaining customer relationships and diversifying as much as possible, the remaining time and funds should be spent on core operations, leaving other processes as candidates for outsourcing and cost reductions, adds Granger

“Companies will still struggle to find productivity improvements and reliable outsourcing partners,” he says.

“The longer the relationships remain established and companies have the chance to get comfortable with new relationships, it’s less likely they are to return to all activities being performed in-house, especially if there is a cost to retool.”

The control factor over the whole manufacturing process is replaced with control over the key areas and management of the remainder, creating a more agile business enterprise that’s not rooted to a particular location.

The change is also a reflection of an increasingly global economy where customers and suppliers come from everywhere, he says.

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