ExportWise - Fall 2008 - Manufacturing Global Growth
By Peter Brake
Started more than 30 years ago by Manfred Lupke, Corma Inc. designs and manufactures production systems that fabricate corrugated plastic pipe that is used in a wide range of industries such as the electrical, medical and automotive sectors, as well as storm water and sewage applications. The company exports almost 95 per cent of its production to more than 80 countries.
“Until relatively recently, all of our parts were machine-tooled in Canada for better quality control,” says Stefan Lupke, Executive Vice-President. “Now, however, suppliers based mostly in China and Southeast Asia are able to provide lower cost parts and the quality is getting better(with constant inspection). To remain competitive, we had to revamp our supply chain.”
“We were very aware that many Canadian companies had started using Chinese producers for the sub-supply of parts only to find those suppliers becoming competitors once they had become familiar with Canadian design and technology. In fact, Chinese end users of our machinery gave access to the products to local Chinese manufacturers to copy.”
To that effect, Corma opened its own manufacturing facility in Shanghai in 2006. This represented a huge investment for Corma but one they regarded as necessary to service the burgeoning Chinese market and face its competitors, both in China and Europe, head on.
Lupke explains, “We decided that investing in a greater Chinese presence would help Corma grow, allow us to better control the use of our patents and technology and establish the global supply chain that would lower costs and enable us to be more competitive internationally. So far, we’ve gained valuable market share in China; eventually we are looking at being able to service the entire South East Asian market from our Shanghai base.”
Initially, Corma was concerned that relocating might cost jobs in Canada but has instead experienced the opposite, says Lupke. “Since 2006, Corma has increased its head office personnel, with more design, engineering, management and logistical support staff to service its production facilities in Canada and the rest of the world. At the same time, Corma has remained competitive and has expanded its international business by about 7 per cent, during a difficult time for Canadian manufacturing.”
Threats to intellectual property
Corma’s decision to locate in China also meant it had to directly challenge competitors who were infringing on Corma’s intellectual property. When Corma first started marketing to China in the 1980s they also decided to register their patents with Chinese authorities. That decision played in Corma’s favour, allowing the company to pursue legal action against Chinese copycats.
“Protecting intellectual property is an absolutely necessary part of doing business for us. Copycats have devastated many of our foreign competitors in Europe who have not been as aggressive in protecting their rights.” Lupke stresses, “A base in China enables us to keep a closer eye on infringement of our patents.”
Corma has won eight successive suits in China and settled with three other past infringers, defending its intellectual property rights, winning judgments that may not have covered its legal costs but have served as a warning to copycat companies. Lupke notes, “Chinese enforcement of intellectual property rights has improved in recent years
but we need to keep up the pressure for it to meet global standards.”
EDC support for investments
Corma’s investment strategy is an example of the integrative trade model being adopted by companies globally. Lupke notes, “EDC recognized that Corma’s investment in China was benefiting Canada because it helped Corma grow in Canada by expanding its footprint abroad.”
Chris Despond, EDC Senior Account Manager, emphasizes that in response to globalized trade and foreign investments undertaken by Canadian companies such as Corma, EDC takes an all-inclusive view when assessing the benefit to Canada in trade and investment deals it is asked to support.
“Today, the Canadian content of our manufacturing exports averages around 50 per cent, meaning many Canadian goods have even less. In fact, a foreign affiliate such as Corma’s Shanghai operation may bypass direct Canadian manufacturing input all together. But strong Canadian benefits remain in the intellectual capital, management, sales and logistics and research and development anchored in Canada. The result is clearly beneficial to Canada.”
EDC has found that a flexible and innovative package of financial services enabled Corma to gain increased access to financing without tying up valuable capital. Since the investment represented overseas assets, Corma would usually have had to rely on its Canadian property as collateral for bank financing, effectively limiting the company’s working capital for some time. Working closely with the TD Bank, EDC saw an opportunity to tailor its political risk insurance and export guarantee solution for TD that allowed the bank to offer financing without demanding additional collateral.
“Obtaining the export guarantee and political risk insurance enabled us to proceed with more confidence in our investments abroad,” said Lupke. “Our bank was very keen on the combination because it reduced their risk even further.”
Jennifer Hum, EDC Associate Political Risk Underwriter adds. “In the past, the demand for political risk insurance in a country like China was quite low. Today’s credit environment though has commercial banks wanting to reduce risk as much as possible. Political risk insurance has much more flexibility now. Whereas before it was used more by the mining sector and large companies, now we see it as equally useful to the manufacturing sector as well as medium and small enterprises.”
Closer to the customer
Low labour costs are often touted as a key factor driving where investment takes place. Other dependencies though are also providing incentive for offshore investment. Not surprisingly, the increase in oil and gas prices over the last year has highlighted the continuing importance of proximity to markets and customers. Today’s cost of transportation can represent up to 15 per cent of the cost of goods sold and has become an even more critical consideration in trade and investment decisions.
“The price of oil now accounts for almost half of freight costs and every dollar rise in a barrel of oil increases shipping costs close to 1 per cent,” according to Despond. “In fact, transportation costs influence trade patterns and companies may have even more incentive to establish manufacturing and assembly operations closer to component suppliers and consumers.” Economists have come to term this trade shift a ‘neighbourhood effect.’
Lupke says Corma’s investments in China have largely insulated the company from rising transportation costs. “While there has been a significant increase in transport costs, the fact we have invested in a manufacturing base in Shanghai means we are able to service our Asian market directly, in much the same way our Canadian operations service our North and South American market.
Corma’s investment strategy has allowed the company to retain its status as a leader in its sector and face its competition directly. The benefits derived from adopting an integrated business model have Corma looking to duplicate its success elsewhere.
“India is a new potential market which we are examining very carefully. We also are looking at new markets in petroleum and water systems where energy and clean water requiring quality pipe products are going to be in high demand.” Lupke thinks the future holds fresh promise. “Our success with our Shanghai operation has given us a template for growth.”
 Integrative TradeFor many Canadian companies, the early benefits from globalization meant access to cheaper imported components for goods designed and assembled in Canada, and bound for export. Today this trade relationship has been largely replaced by an integrative trade model where component supply, design and engineering and product assembly may be separately sourced where it’s most convenient and most cost-effective. It is an evolving model of trade where imports, exports and investment are all integrated and equal contributors of growth. The degree of change is evident in Canada’s trade statistics. Jennifer Hum, EDC Associate in Political Risk Insurance observes, “International trade statistics reveal increased trade between a corporation’s various divisions and affiliates.” By 2007, Canadian direct investment abroad totalled $515 billion, a stock of investment that has largely come from companies establishing foreign affiliates to facilitate a global supply chain and service a foreign market directly. Each $1 of Canadian Direct Investment Abroad generates about $2 of additional exports in emerging markets and 60 cents in developed markets. 1 From Statistics Canada Table 376-0051 International investment position, Canadian direct investment abroad and foreign direct investment in Canada. |
Transport Costs
From CIBC World Markets ‘Will Soaring Transport Costs Reverse Globalization.’ |
FOR MORE INFORMATION
cdespond@edc.ca
jhum@edc.ca
www.corma.com
Photo: Courtesy of Corma Inc.
