Canadian dollar affecting B.C. businesses

Canadian dollar affecting B.C. businesses
"Suck it up, princess": the low-currency advantage of the Canadian dollar is gone forever.

Predicting which way the loonie is going these days is a fool’s game, but 
one thing seems certain: B.C.’s low-currency advantage is gone forever

The B.C. economy, like that of the rest of Canada, enjoyed a security blanket back when the loonie was worth less than 70 cents U.S. It helped keep export figures high and workers employed. Now, like a hit of cold morning air, our blanket is gone. And looking at B.C.’s economy today reveals something many of us see when we peer into the mirror each morning: we’re not in as good shape as we should be.

By giving Canadian companies a price advantage overseas, the low Canadian currency has historically allowed us to grow a bit soft around the sides. Too many of our systems are old-fashioned; too much equipment out of date. The output Canada gets per hour worked trails that of most of the developed world, with B.C. trailing further still. And so a discussion about currency naturally evolves into a far-ranging examination of B.C.’s strengths and weaknesses, be it in our business hardware, our leadership or in our distinctive West Coast culture.

Sharing their insight are Daniel Muzyka, dean of UBC’s Sauder School of Business; Jock Finlayson, executive vice-president of policy for the Business Council of B.C.; and Craig Williams, vice-president of B.C. for Canadian Manufacturers & Exporters (CME).

We can’t predict exactly what the loonie will do in the future, but how likely is it that being near parity will have a serious effect on businesses in B.C. in the long term?

MUZYKA: It is going to have an impact. We lived through a long period in Canada when we were down to 63 cents to the U.S. dollar; it made a very depressed currency. That’s a great way to boost your exports, and it’s a great way to create the illusion of progress in wages and salaries, but over the long term it’s not 
sustainable. We didn’t need to be as productive, we didn’t need to appear as competitive, and now with this change in the currency – likely a sustained currency change – we find ourselves at an interesting juncture, where we are having to deal more with productivity issues that have been lingering in the economy. 
And we’ll have to deal with dislocation in the economy in terms of which industries are more viable. 

FINLAYSON: I’ve been surprised that business has not been as affected as I might have thought. I don’t think very many Canadian companies have business strategies that are going to rely on a lower dollar to survive. I think that’s been beaten out of them by the steady appreciation we’ve seen. I don’t hear as many businesspeople complaining the currency is too high or urging the central bank to do something about it, and I think our companies have realized that this isn’t something we’re going to be able to control and they do need to compete. 
All of the export-oriented industries will face some kind of a hit certainly, but it’s not as simple as it used to be. The rise of the global supply chain means there’s a lot more import content in what we produce, so you’re getting squeezed on your selling margins but you’re actually benefiting on the cost of your inputs. The impact of the currency on business is a more complicated story than it was 20 years ago. 


Craig-Williams-3.jpgCraig Williams, vice-president of B.C. for Canadian Manufacturers & Exporters

Have we really started to kick the habit of relying on a low currency to compete? 

WILLIAMS: My basic response to CME members these days is, “Suck it up, princess,” because it’s not going to go away. Our membership touches about 10,000 companies across the country, of which 80 per cent are under 500 employees. I was the CEO of a small electronics manufacturing company from the 65-cent dollar to the $1.10 dollar, and 80 per cent of our product went to the U.S. There were two problems we faced as it ran up: one was volatility; you could lose all your margins just on volatility, so we started bringing in hedging. And the next thing we started to do was look at weaning ourselves off just the U.S., which is something I think the whole country is going to face up to nowadays. Those are the strategies the small and medium-sized companies are taking. At least, they better or they’re not going to exist anymore. 

What are the areas we need to work on?

WILLIAMS: There are four areas we need to push on for success. One is weaning ourselves off the U.S. The supply-chain thing is absolutely critical. It’s not just the U.S. anymore; it’s all around the globe. Historically in the forest industry, for two years you make money till the cows come home, two years you hold your own and two years you lose it and wait for the U.S. market to come back. Well, at some point that’s not going to work, and I think we’re at that point.
The other thing is productivity. We are not productive in B.C. Unfortunately, we haven’t been investing in the processing machinery or information technology and lean manufacturing – that’s getting rid of waste – like others, and that’s a real failing here. The third thing is innovation, and the fourth thing is worker skills. It’s alarming the level of illiteracy out in the workforce, even with those who have high-school education. We’re doing some programs now with literacy, numeracy, problem-solving and trying to roll it together to help the productivity from the soft side. 

MUZYKA: Productivity is the giant issue on the table; it’s a 900-kilo gorilla. We have a number of forces in the economy that work against us continuing to evolve skills and adopt new processes that improve output. There’s a natural resistance to investing in capital to replace labour in places where we should. It’s a constant problem; it does drag on us. I’ve been in a number of global meetings, and I spent a number of years working in the Nordic countries where they have very high social demands in terms of how individuals are treated, but they also have a persistence in trying to find new methods, new ways to improve their output per unit of input. They’re also good at balancing inputs flexibly, saying, OK, this has become more expensive so we’ve got to haul back on that and find a different way to produce this product or move our supply chain and find a way to source this somewhere else. And that’s one of the things Jock alluded to where we’re not flexible.

WILLIAMS: About 20 years ago, I was engaged by the Canadian government to find out why B.C. (which was a leader in pulp and paper in its heyday of the ’60s and ’70s) was now lagging Sweden, Finland, Germany and the U.S. – and none of those are low-currency countries. One thing we came up with was a strategy in Finland and Sweden where there was a very attractive tax incentive to invest in new technology. I lived in Europe for four years and ran a Swedish business, a Finnish business and a French business and bought one in Belgium, and I could see the results in spades. I would bring my North American colleagues over and we would go to the Finnish plant and they’d say, “Look at the toys these guys got.” Other things we found were high education and continuous improvement; they’re just relentless on that. 

FINLAYSON: If it’s true that the dollar near parity is going to last for some period of time, firms are going to have to respond to an enduring change in the competitive environment. There will no longer be any slack that can be tolerated through an undervalued exchange rate. I think that is going to drive a relentless search for productivity. Part of our problem in B.C. is that we have an economy that is heavily weighted toward small business, which actually is a negative for productivity. A lot of people don’t realize that. I was just speaking to an unnamed politician earlier today who was surprised to hear that. He bought into the myth that small businesses are the ones that are the most productive and most innovative. False. Larger enterprises can bring in more capital to bear per hour of work, more sophisticated systems, and they have staying power in the marketplace because they have better access to capital and can make the longer-term investment. 


Daniel Muzyka on B.C. EconomyDaniel Muzyka, dean of UBC's Sauder School of Business

If B.C. does have more resistance to change than other regions, where does that come from?

MUZYKA: I’ve been here 11 years and I don’t have the answer, but I have to argue it’s partly cultural. You’ve got to have a culture where you’re adaptive, where your skill levels are constantly improving, getting people to educate and renew themselves, so you don’t just get out of your apprenticeship and you’re done. You’ve got to have incentives to adopt technology but also the managerial incentives to use it. Some countries put in fiscal incentives but people didn’t use it. 

FINLAYSON: Canada is a great country to live in, and we have a high standard of living, but one thing that is missing here is business ambition. You’ve got to want to grow and be innovative and be at the leading edge of your industry, and we have a lot of companies in B.C. that are happy to function at the level of productivity that they currently have and not necessarily grow, and growth is where you can get some of your biggest upside for any dynamic capitalist economy. I think there’s something in the environment here in B.C., I don’t know what it is, that seems to impede that a little bit. If I was in government, I’m not sure what I could do about it. I’m not sure if it’s even amenable to a public-policy response. 

Part of the problem must be with our business leaders then. What help do they need?

WILLIAMS: The U.S. has the mentality of Mary Kay: the leader jumps up and gets the pink Cadillac, and everybody applauds him and bows. Whereas in Canada and Australia – I lived in Australia for a while too – as soon as you start being successful the natural mentality is to knock you down. Up in northern Europe it’s much more like here; down in the southern Mediterranean, it’s much more like the States. So if you had an incentive program for the Italians, that would be great. If you had an incentive program for the Scandinavians and the guy got held up as being good, the next month he wouldn’t get any help from his co-workers. Even our SR&ED program [Scientific Research and Experimental Development tax incentive], which should enable us to do the most R&D in the world, stops dead when you want to 
commercialize it. We develop these good technologies with Canadian taxpayer money, then somebody who’s good at marketing and commercializing and adopting comes along. The Americans do it, the Koreans do it, and it’s problematic.

MUZYKA: I’ve spent almost a decade in Europe, and the European Union had several studies conducted about why isn’t there more entrepreneurialism across Europe, and one of the biggest factors it came down to was culture. One of the key issues they focused on was the view toward failure. I know venture capitalists in Silicon Valley who don’t invest in people who haven’t failed. It’s sort of an innate distrust. Well, imagine that conversation here. We don’t tend to forgive, and we don’t tend to forget.

FINLAYSON: Let’s just switch gears for a moment. We can spend a lot of time 
saying Canada’s not good at this or that, but one of the reasons why our currency has gone up is because Canada is viewed as having a successful economy. We’ve gone through the great recession of 2008-09. Everybody’s been hurt, but we’ve come out of it in relatively good shape. Our financial institutions, whatever their failings, didn’t need to be bailed out; our financial systems have been resilient; public institutions have performed really well; our economy has actually been quite adaptable in the face of big changes, including the exchange rate. 
And one of the reasons the currency is up is the shift of the global centre of economic gravity toward Asia. I spoke to a group of German institutional money managers here in Vancouver for the Olympics who wanted a briefing on Canada, the warts and all. These 17 people were managing I don’t know how many billions of euros of capital and were in the process of reallocating part of their North American investment portfolios away from the U.S. into Canada. I asked them why, and it was because of the macro story. They thought Canada was better positioned. Maybe they’re wrong, but that perception is out there, widespread.

MUZYKA: I totally agree that it’s our 
network connections with Asia that will provide us a big opportunity. Not just their consumption of resources but – this is where we’ve got to get better – their consumption of knowledge: what it is we know that can create the products and services that are going to meet their needs. It’s a huge opportunity for us because of our natural linkage with both India and China. We should be shaking off the storm and saying, OK, that’s great. Where’s our opportunity here and what are we going to do to seize it? And that’s where it gets back to this ambition point. 


Jock Finlayson on B.C. EconomyJock Finlayson, executive vice-president of policy for the Business Council of B.C.

We may have these advantages: a stable financial system, more international buying power. But do we have the right skills to exploit these strengths?

MUZYKA: We do, but what Jock is saying is this is a critical transition point for us. We need to move from being focused on the resources we have and resources we can control and start asking ourselves 
constantly, What is the opportunity? Are we capturing the opportunity? This is really a shift toward building a more 
entrepreneurial economy. 

FINLAYSON: And an outward-looking economy. 

MUZYKA: That’s exactly right. It’s not about us. It’s about what’s the opportunity out there. We need to be export oriented. We’ve got to use our innovation, our ability to create new ideas and teach them. We’re not going to win a pure manufacturing game for lots of reasons. Our base labour rate around here and the desired labour rate is high, and we’re going to be at high-value-added sorts of industries to be able to win in the medium- and long-term. So we’re going to be selective. It’s going to be, Where can we use innovation to increase our value-added so we can 
sustain those labour rates? That’s the name of the game. 

What can we do, whether it’s the government or the business community, to make the most of these opportunities?

WILLIAMS: I think we should encourage training in the workforce, whether it’s through tax incentives or other programs. You don’t want to have to lay off guys in the workforce to get help to train them. If we could have some sort of policy to help, that’ll make those people’s wealth and knowledge more productive in the workplace. 
On innovation, I think we have a terrific SR&ED program, but I think that could be improved. It could be allowed to go more into commercialization and 
adoption of new technologies, as opposed to doing R&D that keeps getting scooped by others. So I think we need tweaks, but generally it’s gone the right way at the macro level. Even the feds have done some good work. All the equipment and machinery coming in to the country is tariff free now. 

FINLAYSON: I think governments in Canada and in B.C. have actually done a pretty good job on a lot of the macro pieces. We’ve had small stable inflation, and we’ve had good fiscal management for a period of time, which has allowed us to withstand this great recession and come out not quite as damaged as some of the other countries. We’ve had a lot of tax changes, mostly in the right direction.
But if we’re going to compete with the world-scale businesses, Canadian companies have to grow. In Canada we’ve got a preference for small. We’ve got it in the tax system, where basically you are taxed at one level and then tax goes up dramatically. We’ve got it in the SR&ED program, where tax credits that encourage research are not available to big or foreign-owned companies. I think we should be looking at removing the bias toward big and growth. But again I’d say governments have done a pretty good job. If you look at 
R&D in Canada, it’s really a failure on the business side. 

MUZYKA: If innovation’s the key, the question is, How do we get that innovation employed more efficiently than anybody else? Now the good news is that the government has been responsive, but government’s not necessarily going to solve the problem by picking industries. Where countries pick industries, it’s by and large failed. So government needs to be lean, mean and provide a good base of services so individuals and companies can be successful, and they need to watch the tax rates. And we have some good news stories on the tax point in B.C. We’re starting to see more professionals locating here because we’re not oppressively high in taxes. 
But allow me to turn the cannon, because ambition and culture do get in here. So what BCBusiness does as a publication matters a lot. I think it’s truly critical that we recognize the people who add value in the economy. Let’s make heroes out of these successful entrepreneurs. Do we do that enough? In my mind, probably not. We’ve got to recognize them for the impact they have. They created how many thousand jobs? How many more professionals did they bring into the economy? We have to become, as a culture, much better at recognizing those people for the positive contribution they have.