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Thursday, March 18, 2010 - No more hiding behind weak dollar

When the loonie rocketed nearly 30 per cent against the greenback in 2007, peaking at $1.10 US, it prompted an outpouring of national angst.

Buzz Hargrove, the fiery former president of the Canadian Auto Workers union, branded it "a black day" for the nation's manufacturing and tourism sectors.

After living off the avails of a weak currency for decades (the loonie previously flirted with parity way back in 1976), Canadian businesses were abruptly thrust into a new world. Most didn't like it one bit.

Thanks to Canada's status as an emerging energy superpower, the lowly Northern Peso had morphed into a mighty Petro Dollar, threatening the health of the entire economy, or so we were told.

Canada's factories, which had already shed some 300,000 workers since 2002, when the loonie bottomed at 63 cents US, would continue to slash jobs.

In fact, the pain would extend far beyond manufacturing, the sages predicted, as exporters of everything from energy to petrochemicals, lumber, copper, gold and agricultural products took a hit.

There was some truth in that, to be sure. Sectors like auto manufacturing, forestry, tourism, natural gas and agriculture have continued to struggle, although their problems can hardly be pinned exclusively on a strong loonie.

Last year's brutal global recession, and lingering supply gluts in industries like natural gas, motor vehicles and building products are at least as much to blame for the woes these industries still face.

But the world didn't end. Canada's export-driven economy didn't roll over and die. In fact, it emerged from the recession in surprisingly decent shape. Even Ontario's battered auto sector is hiring once more.

Now that the loonie is again nearing parity versus the greenback -- it was hovering around 99 cents on Wednesday, up a nickel since Feb. 1 -- Canada's economy is bouncing back, and adding jobs.

No, manufacturers aren't churning out profits as they once did. Struggles remain. But they are learning to adjust to a strong loonie.

They've invested in new equipment to boost efficiencies, and they're focusing less on the U.S., and more on fast-growing markets like Brazil and China. Productivity is surging, and export shipments are rebounding.

In fact, factory shipments jumped 2.4 per cent in January, according to Statistics Canada. That was four times higher than expected, and it marked the fifth straight monthly uptick.

During that period, it should be noted, the loonie jumped nearly eight per cent against the greenback. It seems a strong loonie is no longer being used as an excuse for industrial decline.

"Canadians in general now believe they can't hide behind a weak dollar," one Ontario auto-parts manufacturer told a Toronto-based newspaper. "It's hard to adjust, but we're going to do it."

Got that? The strong loonie is yesterday's news. Learning to live with it is the new reality. Fortunately, many Canadian manufacturers are up to the challenge.

"I look at the dollar at par as something that's a fact and that our members have put within their economic challenges, and they're meeting it," says Brian McCready, Alberta vice-president of the Canadian Manufacturers & Exporters.

"As the dollar has come closer to par, far more manufacturers have been spending money on equipment, and a lot of that is in U.S. dollars. So it's allowed them to use their Canadian dollar to add more productivity to their organizations, which is allowing them to compete."

Workers also deserve a lot of credit. Most employers are asking their existing staff to do more, rather than beef up their payrolls -- at least for now. McCready says workers are clearly responding.

That's a big reason why business productivity in Canada rose 1.4 per cent in the last quarter of 2009, nearly twice what was forecast, and the biggest quarterly gain in almost 12 years.

The adjustment process isn't over, of course. Many economists expect the loonie to soar above par by summer. Some even think it could approach the 2007 high of $1.10.

For his part, McCready figures $1.05 is a more likely near-term target. And if it does spurt to $1.10 overnight, he says there will be some real pain, no question.

At Edmonton's Upside Software, CEO Ashif Mawji admits the rising loonie has hit his company's profit line. For the fiscal year ending May 30, 2010, he figures Upside's earnings will be down by 10 to 15 per cent, compared with 2009.

Unlike Canadian suppliers of lumber, drilling equipment or auto parts, the 160-person firm can't invest in new equipment to boost its profit margins. In fact, it's been forced to cut prices on its contract-management software by five per cent to stay competitive.

But Upside is looking at doing something other Canadian manufacturers are doing -- it's gearing up to penetrate new markets beyond the U.S., which now accounts for about 80 per cent of its revenues.

"In future, North America isn't going to be the market for growth. There is a huge market for our software beyond the U.S. We've just never targeted it," he says.

That's about to change. Upside is already active in South Africa, and it's eyeing possible partnerships with software resellers in Brazil, India, Japan and South Korea. Within three years, it hopes to generate 40 per cent of its revenues outside North America.

For Canadian exporters, it's a brave new world. Fortunately, it looks like more and more of them are getting ready to join it.

posted in General at Thu, 18 Mar 2010 07:40:26 -0600

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