Top tool to beat rising dollar: Retool
Invest or else is what some analysts believe But Canadian companies’ rate of reinvestment lags
Rob Hattin is getting hammered from both sides.
Energy costs for his Hamilton factory have nearly trebled while, at the same time, the soaring Canadian dollar is slashing sales revenues from his key customer, U. S. industry. The idea of uprooting operations, which employ about 100 Ontarians, to the United States becomes more tempting every time the loonie jumps higher.
“ You are closer to most of your customers,” added Hattin, president of Edson Packaging Machinery Ltd. “ And in this era of security awareness, they like people waving the same flag.”
Yet, Hattin is sticking it out, and that means investing in more efficient machinery and technology. He and his business partner are off to Japan next month to study and bring back techniques and strategies. The stronger dollar actually helps on this front since most productivity-enhancing goods are imported from the U. S.
If recent complaints from Bank of Canada governor David Dodge are correct, not enough businesses are stepping up to the plate. The central banker told reporters in Toronto last week investment spending has been disappointing given low borrowing costs, profits and dwindling spare capacity in factories.
“ There are two camps,” said Hattin.
“ There are those, like Edson who are investing in now cheaper machinery for higher productivity because we believe that there is a good future ahead. Then there are those who still wish to wring the last drop of usage out of current assets, which is a typically Canadian approach.”
It’s a mistake for firms to think they can avoid investing in new equipment by merely cutting staff and streamlining processes, said Jay Myers, chief economist at Canadian Manufacturers & Exporters. “ Other countries are out ahead because they are investing in new capabilities through technologies.” The Bank of Canada governor is right when he gripes about insufficient capital spending, Myers added. Though investment spending has rebounded in the past two years, and is expected to grow again next year, much more is needed for Canada to even come
close to productivity growth stateside, said Myers.
In fact, the total value of Canada’s industrial capital stock is lower than it was a decade ago, he noted.
“ The rate of investment is strong but it hasn’t been enough to replace the depreciation of equipment that is already there,” Myers said.
“ That is a big problem because investment in new technology is pretty important to driving productivity improvements.” A prime — and timely — example of how lack of investment spending can stall efficiency gains is energy consumption..
Manufacturers increased their energy efficiency — the amount of energy needed to produce a unit of output — by 50.7 per cent between 1991 and 2000, according to CME data. That pace sputtered to a mere 0.7 per cent increase over the following three years. Few Canadian companies have electricity bills even close to those of Dofasco Inc. The Ontario steel giant paid about $ 155 million for electricity last year, up from $55 million in 2000, said spokesperson Gord Forstner. And those increases come despite investing $2 billion in the past 10 years, including $400 million for more efficient furnaces, he said.
Today’s hyper-competitive global markets give manufacturers little choice but invest in new equipment if they hope to raise productivity enough to survive, Forster said.
“ It takes capital and extreme sophistication. Any low hanging fruit was plucked a decade ago.”
If the Canadian government is truly serious about helping industry become more productive and competitive, the solution is quite simple, said Calgarybased manufacturer Mel Svendsen, who employees more than 500 people.
Ottawa must allow firms to immediately write off from their tax exposure half of any new investments in equipment and technology, putting them on even ground with U. S. competitors, said Svendsen, chief executive of Standen’s Ltd., a parts maker for heavy machinery.
“ Let us keep some of that hard- earned cash and we’ll show you some reinvestment.” Under the current tax rules, Canadian companies effectively are able to only deduct, in depreciation, 10 to 15 per cent of new investments in the first year, Svendsen said. Though he’s not ready to give up on Canada just yet, Svendsen said arguments for moving his operations south are becoming persuasive.
“ Do we reinvest in Canada? Hmm. Dubious. There are many, many opportunities offshore or in the U. S.,” he said.
“ Let me say this: We are taking steps toward investment outside of Canada at this time.” The Conference Board of Canada is forecasting investment in machinery and equipment will increase by 10.4 per cent this year and 7.7 per cent in 2006. But the strength will be concentrated in the booming oil and gas sector.
Investment in Ontario plants is expected to grow only 2 per cent this year, and drop by 1 per cent in Quebec.
Faced with a strong Canadian dollar, which hits exporters particularly hard, firms are reluctant to spend large amounts to expand capacity, said Glen Hodgson, the Board’s chief economist.
“ David Dodge is correct. Profits are strong but they are not strong everywhere. They are strong in oil and gas and resource extraction. In many sectors, profits have already peaked.”
Canada’s overall unemployment rate is running at 6.8 per cent, flirting with an all-time low. But manufacturing shed 108,000 jobs in the past year, or 4.7 per cent of payrolls.
After a bit of a reprieve in the first half of the year, the Canadian dollar has shot up 7 cents since mid- May, driven by rising energy prices. The so- called petro- loonie broke above 86 cents on Friday.
Exporters should get some relief next year as falling energy prices ought to bring the loonie down to the 80- cent range, Hodgson predicted.
“ It will help provide a more stable base for people to adapt.”
Longer- term, firms that can specialize and innovate will succeed, but overall the outlook for the factory sector isn’t rosy, Hodgson said.
“ Frankly, the very best we can hope for is a stabilization but the more likely outcome is decline.”