Canadian firms must adapt to high loonie or face extinction: study

OTTAWA — The strong Canadian dollar is forcing businesses into an unhappy choice, says a new study — do the hard slogging and adapt, or do nothing and die.

OTTAWA — The strong Canadian dollar is forcing businesses into an unhappy choice, says a new study — do the hard slogging and adapt, or do nothing and die.

With the loonie now expected to hover around parity for years, the Conference Board of Canada says firms that innovate, invest and go international will prosper, and those than don’t — particularly manufacturers — will rust away.

The adjustment will be painful for both businesses and the Canadian economy, the think-tank says, but there is no longer any choice.

“We’re having a challenge right now that people are loving us to death,” said report author Glen Hodgson, the board’s chief economist.

“It’s not just commodity prices, it’s also that the world sees Canada as a safe place to invest. That’s why we think along with many others that the dollar is going to be strong for a long time.”

For many businesses, “It’s adapt or die,” he added.

There is evidence that manufacturing has already started to whither away. UBS Securities notes that from 2002, when the loonie began its climb to parity, exports in real terms as a portion of gross domestic product have plunged 14 percentage points, representing 553,000 manufacturing jobs.

Equally, some firms have begun making the necessary adjustments, as reflected by an increase in foreign-based inputs and diversification in markets.

This week Statistics Canada noted Canadian exports to the United States dropped precipitously during the recession in 2009 due to a fall-off of demand. But, a closer look shows exports to the U.S. had been declining even before the recession.

Meanwhile, exports to other countries have risen 25 per cent since 2005, even counting last year’s decline, while sales to China have kept going north, rising by 55 per cent in the past five years.

That has coincided with a period in which the Canadian dollar has appreciated a whopping 60 per cent against the U.S. currency, but remained relatively stable against other currencies.

Hodgson believes some Canadian executives know what needs to be done, while others “don’t get it.”

“I’m struck by the fact that there’s a lot less moaning about the dollar this time compared to two years,” he said of those that are making adjustments.

“Everybody was looking for some sort of relief from government, (but) this time people are figuring out they are going to have to do it themselves.”

In a speech late last month, Bank of Canada governor Mark Carney called out Canadian executives for the country’s lagging productivity, saying governments’ had done their part in offering incentives and reducing taxes to give firms room to invest, but too few have taken advantage.

The central banker cited an eye-popping statistic that goes to the heart of the woeful productivity record in Canada, about half the growth of the U.S. in the past decade — Canadian workers have about half the amount of information and communications technology of their American counterparts.

Jayson Myers of the Canadian Manufacturers and Exporters agrees that some of the criticism is justified, but only to a point.

“I think a lot of companies get it, but it’s not easy and it also costs money,” he said, noting firms must identify new markets, make contacts, get into supply chains, invest in new equipment and machinery, and often re-configure their product mix.

“One reason that companies have been slow to diversify is that the U.S. is such a great market for existing products.”

A benefit of low productivity is more jobs, since it necessarily takes more working hours to produce to same output as in high-productive countries.

That is one reason Canada has outperformed the U.S. in terms of jobs during the recession, having picked up about 180,000 net workers since July, and was expected to gain another 25,000-30,000 in March when data is released Friday.

By comparison, the U.S. had dropped more than twice as many jobs during the recession, relative to population, and only posted its first significant jobs gain in two years last month. U.S. productivity has sky-rocketed during the recession, while in Canada it continues to stagnate.

Economists say such short term gains in job protection leads to long term problems for any economy, including industries withering away and lower incomes.

The Conference Board report lists four choices ahead for Canadian businesses. Only two are good ones.

The easy choice is to do nothing and watch as a commodity-driven currency undercuts manufacturing competitiveness. The second is adopting a fixed exchange rate, which the think-tank says won’t happen and shouldn’t.

The only options that can work, it says, is boosting productivity and becoming more international in terms of deriving more low-cost inputs abroad, and selling products beyond the U.S.

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