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For Canadian manufacturers, foreign assets tantalizingly cheap

Gerry Price is a proud Canadian, the head of a company that has been making ventilation equipment for commercial buildings in Winnipeg since 1946.

Strip out the emotion, though, and Mr. Price can't think of a good reason to build anything in Canada.

"If you look at the just the raw numbers of where it's economic to build these things, it wouldn't be Winnipeg," acknowledged Mr. Price, chairman and chief executive officer of E.H. Price Ltd. "These jobs are here because I choose to live here and support the plant. They're not here because of economics."

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E.H. Price, like a growing number of Canadian manufacturers, is steadily shifting production outside the country - to plants in Georgia and Arizona. The southern U.S. is closer to the company's main markets, and virtually everything there is cheaper, including wages that are half what they are at home. A Canadian dollar above parity seals the deal.

The dollar's ascent in the past decade has been a major force in reshaping Canadian manufacturing. And increasingly, success means shifting what was traditionally done in Canada to somewhere else. Foreign assets are tantalizingly cheap, and a strong dollar is providing a compelling business case to locate manufacturing closer to customers - in the United States, Europe, or in super low-cost developing countries in Asia and Latin America.

That's exactly what many Canadian manufacturers are doing. They're keeping head office functions at home, along with the engineering, branding, research and development, and the most specialized of fabrication. A lot of the rest is being outsourced, and offshored.

For companies that already operate outside Canada, a dollar at parity creates a huge incentive to invest there. Jayson Myers, president of the Canadian Manufacturers and Exporters trade association, sees it happening with alarming frequency. "Companies are investing, but they're investing outside Canada," he said.

That trend is reflected in Canada's stock of direct investment abroad, which nearly doubled from 2000 to 2008, rising to $640-billion from $360-billion. And it has been growing at a significantly faster pace than foreign investment flowing into the country, according to a recent Conference Board of Canada report. Nearly half that investment is in the United States.

That has implications for Canadian manufacturing jobs. But it's not necessarily a bad news story. The surge in foreign direct investment abroad has "brought benefits to the domestic economy," according to a recent study for the Institute for Research on Public Policy. Some companies flee Canada because their operations are no longer viable. Many others expand abroad to exploit their competitive advantage in foreign markets.

"Direct investment abroad serves as a beachhead for market access, stimulating domestically produced exports and high value-added head office activities," the report said.

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Locating production outside Canada is a natural form of currency hedging, and it can lower manufacturers' costs, boost foreign sales and ultimately make them more productive, said Stephen Poloz, president and chief executive of Export Development Canada.

"The more of your operation that's spread around the world, the more you're impervious to exchange rate fluctuations," he said.

"The good news is that when the dollar is high that's the most inexpensive time to [expand globally]"

The dollar alone isn't driving foreign investment. But it's making the case that much more compelling, particularly with predictions that the loonie will remain high for several more years.

"Companies need to develop a strategy that's consistent with the high dollar," said Walid Hejazi, a professor at the University of Toronto's Rotman School of Management who's working on a major study of Canadian investment abroad.

Sheltered by the depressed value of the Canadian dollar through 1990s and early 2000s, manufacturers were ill-prepared for the loonie's run.

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"Canada lagged the Americans in offshoring," Prof. Hejazi said. "The low dollar was a big part of that."

The offshoring wave hit the United States a decade ago, but it's only now catching up to Canada.

Shifting production outside Canada doesn't mean the death of Canadian-based manufacturing. From 2000 to 2008, sales by foreign affiliates of Canadian companies grew at a rate of 4 per cent per year, or twice as fast as the country's exports, according to a recent EDC report.

Consider E.H. Price. It started its U.S. foray tentatively in 1989 with one plant in a suburb of Atlanta, Ga. Since the loonie began its run to par in 2003, the company expanded to five plants from two, and more than doubled its U.S. work force to nearly 1,000, as one production line after another moved south. Nearly half of its $300-million in sales are in the U.S, up from 1 per cent in 1989.

But the fast-growing company hasn't abandoned Winnipeg. It has found a role for its Canadian operations, which now employ 800 employees, up from 500 eight years ago.

The company has moved production of high-volume, "commodity" products to the United States. Winnipeg, in turn, is the hub for research and development, patenting, and software development, as well as production of key niche, custom and low-volume products. It has 60 workers dedicated to R&D.

The company's success rests on a significant investment in innovation - developing new products, tools and manufacturing processes for its plants in both countries.

"If we didn't develop new products, Winnipeg would be gone for us," Mr. Price said.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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