The clamour of industry still rings in the air at the 300-year-old waterfront shipyard in Kingston, Ont.
The scream of grinders and the bark of mechanized saws competes with the hiss and crackle of welding torches as craftsmen inside two steel sheds work on gleaming aluminum utility and patrol vessels soon bound for the United States, Panama and Lebanon.
This is the home of 23-year-old MetalCraft Marine Inc., and business is booming. But the Kingston-based company's good fortune could have capsized if it hadn't made a dramatic shift in marketing strategy. In the summer of 2007, U.S. business journalists began reporting on the subprime mortgage crisis and a growing crisis in the financial sector. Bob Clark, MetalCraft’s contracts manager, set out to learn more about the potential trouble ahead. At the time, 95 per cent of the company’s revenue came from selling high-speed patrol and search-and-rescue craft to U.S. regional and federal governments: MetalCraft’s continued prosperity depended on a strong U.S. economy.
“When I found out what it was, I realized it could have a domino effect—a house of cards collapsing—and we immediately started looking for business outside the U.S.,” he says.
Within weeks, MetalCraft shifted much of its sales and marketing budget overseas. It began to focus on Asia, the Middle East, and Central and South America.
While Mr. Clark describes MetalCraft's move as a necessity, business strategy expert Douglas Reid says few Canadian companies “had the guts” to make the same decision when signs of a looming economic crisis first began to surface.
“It reflects exactly the kind of thinking that I would hope more businesses would do, which is foresight and a willingness to not go with the herd,” says Prof. Reid, a Queen's University business professor.
After years of steady but slow growth, revenue at the boat builder suddenly took off. By 2008, overseas business increased by 20 per cent. With boats ranging in price from $300,000 to $5-million, MetalCraft’s annual revenue is now about $10-million. Offshore orders represent 45 per cent of business while U.S. business accounts for just 55 per cent of sales. The company used to do business with the Canadian government but stopped because it has a procurement window of only a few months and it did not consistently order new boats every year, so the domestic market was too short and undependable.
Based on MetalCraft's 2010 order books, overall revenues will rise by 50 per cent over 2007 numbers, Mr. Clark says.
Many Canadian companies were hit hard by the collapse of U.S. financial markets as a result of being tightly bonded to the United States by 22 years of free trade, Prof. Reid says. Approximately 78 per cent of Canadian merchandise exports go south of the border, according to a February report by the Conference Board of Canada.
While there's no data representing the number of Canadian companies that have followed a similar strategy as that of MetalCraft, the Conference Board suggests Canadian companies have been trending away from the U.S. market since the middle of the decade.
Between 2004 and 2008, the share of Canada's merchandise trade going to the U.S. dropped from 85 per cent to 78 per cent, says the Conference Board report.
It suggests a number of factors are the cause: slower U.S. economic growth, the tech bust, the appreciation of the Canadian dollar, and the two bi-lateral free trade agreements running out of steam.
“Today it's not difficult to see why you should avoid the U.S. It's a difficult market to get sales, and the advantage of sharing a common language and business structure isn't going to make it simpler to pry money out of their pockets,” Prof. Reid says.
He expects momentum toward global diversification to grow among Canadian companies over the next few years as a result of a realization that Canadian business cannot continue to rely on the U.S. market. With U.S. state governments in financial trouble, the federal government in a massive deficit, tax increases imminent, and unemployment numbers at record levels, it's expected that U.S. firms will continue to face pressure to buy American.
Even when unemployment falls to more normal levels, there's no guarantee that sentiment will dissipate, Prof. Reid says. “You're going to see a lot of that until unemployment gets down to a couple million (people), but even then there's no guarantee that the buy-domestic sentiment will go away.”
A degenerating U.S. market isn't the only reason Canadian companies are gravitating towards doing business globally. Canada's huge multicultural population means that this country has links to every other country on the planet, says Eric Gilboord, a Toronto expert in lead generation business development, which involves helping established companies generate growth opportunities.
“Due to immigration over the past decade, it's not so difficult for a quote-unquote Canadian company to go and do business in the country where they came from—it just makes perfect sense to go back to where you have connections,” Mr. Gilboord says.
While MetalCraft is still winning orders in the United States, attributable the to the sheer size of the market, Mr. Clark expects demand there will shrivel over 2011 and 2012 as federal and state governments work to get their budgets under control.
But thanks to its overseas diversification, staff numbers have swelled to 92 from the 45 employed at MetalCraft in 2007—the work force size had been static since 2004—and a new building has been purchased offsite to accommodate the increasing workload. More sales staff hiring is also planned.
“We're thinking of adding a second shift, which is unheard of in the business,” Mr. Clark says.
MetalCraft has earned a reputation for high quality boats and top technology at mid-range prices around the world, making its boats popular. It began by selling at low prices, but now has earned a reputation that allows it to sell at mid-range prices.
Mr. Clark says that in many ways drumming up business overseas for MetalCraft was easier than in the United States. The U.S. has its own domestic boat manufacturing network, so its procurement policies are not geared to make life easy for outside manufacturers. The opposite is generally the case in offshore countries and their rules tend to reflect more international standards.
The company received help from the Canadian government when it started marketing south of the border in 1994, but it no longer required assistance when it began to focus overseas.
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