People tend not to embrace fundamental change unless the status quo is unacceptable. For years, Canadian business leaders, policy makers and academics have been talking about the need for our economy to diversify from its reliance on exports to the United States. Yet only 40 per cent of Canada’s top 1,000 companies have a plan for emerging markets such as China or India.
However, the good news is that executives at almost all those companies recognize the need to develop such a strategy. The urgency results from the prospects that business leaders see in the United States.
Already, C-suite expectations are that the United States will be in recession throughout the next 12 months, and most Canadian executives believe that a recession in that country could result in a recession in their sector. They are watching the developments in Europe anxiously. Almost every Canadian business leader thinks there is the prospect of another recession in Canada.
That is why diversification planning is being led by the manufacturing sector. It has by far the greatest exposure to the U.S. situation. Forty per cent of top Canadian manufacturers generate at least half their revenue from sales in the U.S. and two-thirds derive at least a quarter of their revenue there. Not only do most manufacturers have an emerging-markets strategy, unlike their peers in resources or services, but most are looking at ways to implement those strategies this quarter. There is a sense of urgency now.
The rate at which Canadian-based businesses invest and sell abroad will determine where Canada stands at the end of what many are predicting could be years of stagnation in Western countries. Already, there is a pronounced difference in outlook between Canadian companies that are selling to foreign markets and those that aren’t. Those with an emerging-markets strategy were not simply more bullish and more likely to predict strong growth for their companies; they were also more bullish about Canada.
Those without an emerging-markets strategy were nearly three times as likely to predict the Canadian economy would contract in the coming year. Executives with sales in China were nearly twice as likely as others to predict strong growth for their companies.
The ability of Canada’s service companies and manufacturers to diversify away from North America will tell the tale of whether Canada truly outperforms the United States, and whether we can maintain an economy that benefits workers in all sectors and regions.
If more companies are not able to access emerging markets, then we will see a greater divergence in the health of our businesses in future. We will see two classes of companies: those focused on North American markets, which will be less optimistic about growth (and more focused on cost containment, and pricing to remain competitive), and those that have some focus on growth markets, with the promise of expansion, jobs and a stronger outlook for Canada generally.
David Herle is principal and Alex Swann is vice-president of Gandalf Group