Canada’s reliance on the U.S. market is high and with uncertainty south of the border, diversification is worth exploring. Here’s how.
Most analysts agree that Canadian exporters should broaden their geographic reach. They regularly quote the statistic that 76 per cent of Canada’s 2016 exports went to the U.S.
Brian Kingston, who spoke on a diversification panel at iPolitics Live’s International Trade Forum in Ottawa in June, quoted that stat as well, and said it was particularly concerning given the upcoming NAFTA renegotiations.
Kingston, who is Vice President of Policy, International and Fiscal Issues at the Business Council of Canada, acknowledged that Canada has “moved the dial” a bit when it comes to branching out to emerging markets, but said it hasn’t done so nearly enough, given the scope of opportunity in those markets.
And in addition to diversifying geographically, Kingston said Canada should be encouraging smaller businesses — the lifeblood of the Canadian economy — to export.
“I think we could do a better job of diversifying who Canadian exporters are,” Kingston said. “Companies with 500 or more employees represent 2.7 per cent of all exporting enterprises, but those enterprises are responsible for more than 60 per cent of our total exports. We have an issue where our whole export profile is dominated by a handful of our largest companies. If you want to diversify, you need to get more SMEs into the exporting game.”
Kingston had a few recommendations to the government of Canada. First, he said, his council has been trying to get the government to “get aggressive on Asia.” He said Canada should be negotiating a free-trade agreement with China and should also be looking at agreements with India and the ASEAN nations, which includes Indonesia, Thailand, Philippines, Malaysia, Singapore, Vietnam, Brunei, Laos, Cambodia and Myanmar.
He also suggested Canada focus on three key sectors, the first of which was cleantech, on which China is expected to spend $3 billion in the next three years while the global market for clean-tech is estimated to reach $3 trillion in spending by 2020. He lauded the government for having a cleantech strategy in place.
Kingston’s second sector was agriculture. “We have a strong agricultural sector, but I think we could do better,” he said. “I’ll say something controversial — I think reforming supply management and actually enabling our dairy farmers to export would be a great place to start.”
His third area for concentration is infrastructure, a field in which Canada has expertise, particularly with rail and power. He said global spends are expected to total $3.3 trillion between now and 2020, just to support expected rates of growth. Emerging economies should account for 60 per cent of that.
Asked for his views on what Canada should do to diversify, Todd Winterhalt, Export Development Canada’s Vice President of Global Trade, said Canada has about 77,000 direct exporters and 21,000 indirect exporters, with another 20,000 to 25,000 who are ready to export and yet another 50,000 he referred to as “nextporters” — those who are getting ready to do so.
“So from our perspective, the total customer market for EDC to help companies be successful internationally is probably about 200,000,” Winterhalt said. “That comes against a total of two million Canadian businesses. So yes, our penetration as a country in the international trade space is very low and there’s a great deal of opportunity there.”
After analyzing why that is, he said some of it is cultural.
“There’s human nature, and then there’s Canadian human nature,” he said. “We have a certain amount of risk aversion and it’s a very big step to take.”
Asked for his top emerging markets, Winterhalt named Indonesia, the fourth-largest country in the world by population, which has growth in the double digits, as well as the Middle East, with the UAE as a gateway to the broader market. Kingston named ASEAN, and gave specific mention to Indonesia, Malaysia and Vietnam.
So how should would-be exporters get into these emerging markets? Winterhalt said to “front-end load your strategy because your plan in Canada won’t necessarily work elsewhere.”
He also said that entrepreneurs should “Go, don’t Google,” meaning it’s best to get on a plane and learn about the country’s business environment first-hand while confronting any prospective challenges head-on. Finally, he recommended partnering with government support services such as those at EDC, and also the Trade Commissioners Service, as well as Canadian banks that can offer support.
Winterhalt added that partnering with another business might allow exporters to get into their supply chain without too much initial risk. He said he knows of a small medical technology manufacturer in Northern Ontario that thought the risk was too great, so it successfully partnered with German conglomerate Siemens.
“You have to over-invest in the partnership approach because that’s the single biggest thing in new market approaches,” Winterhalt said. “Companies can often ‘opportunity themselves’ right out of existence.”
Kingston said Canada has to educate its entrepreneurs about the importance of markets such as China. Speaking specifically about intellectual property, he said there are issues on that front with China, but that a free trade agreement gives you a framework to address those issues.