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In 1989, Toronto-based Bassett & Walker International (BWI) was primarily an importer of agricultural commodities into Canada. Today, about 30% of its business is exporting from Canadian sources to other markets, 30% is from the US to other markets and the balance or about 40% is South-South trading. BWI buys and sells beef, fish, chicken, pork, soya, dairy and more between 40 countries. “It’s going from Brazil, Argentina, Uruguay, Chile and Colombia to South Africa, Ivory Coast, Angola and Mozambique,” says CEO Nick Walker. “We also sell goods from Argentina into China, and Chinese fish into Colombia and Peru.”
Bombardier builds trains in India
and sells them in Turkey
Through its agricultural product brokering, BWI is also one of only about 100 companies who collectively do half a trillion dollars in trade every year. It’s a poster child for how Canadian businesses can tap into the surging growth in South-South trading, or trade between developing nations, something that needs to happen if Canada is to remain competitive in 21st Century global commerce.
Amid disposable income growth and a proliferation of bilateral trade agreements in Latin and South America in the mid-1990s, Walker and BWI used its experience in the Mexican market to expand into brokering agricultural trade to third nations, often ones that like Mexico were newly industrializing. “We figured, if this is how it works, maybe we should start looking at Africa as well,” says Walker. “Our philosophy is that, if we’re going to sell to a country and invest the time, money and energy to establish and maintain these relationships, we might as well try to find ways in which we can add further value by buying product from these countries as well. We found some great opportunities and used our relationships on the sell side in these markets to help us grow our business.
In the world marketplace there are three major types of two-way trade. First is North-North, or trade between developed Western nations, like Canada, the U.S. and Europe. Next is North-South trade, which is between developed and emerging markets, such as Canada and China or Germany and Brazil. Then there is South-South, or trade between the emerging markets themselves, such as China and India. The first two kinds directly involve Canada as a trading partner, while the third does not. The challenge for Canada is that more than 80% of global GDP growth in 2012 is expected to come from emerging markets. South-South trade is projected to double between now and 2030, from 13% of global trade to 26%. According to the IMF, North-South trade is growing by about 15% a year right now, compared to 21% growth for South-South trade. The global trade pie is getting bigger, but Canada’s slice could get thinner if we don’t take measures to invest more in the trade between emerging markets.
In the 20th Century, the two most influential trade powers were Europe and the U.S., from which the bulk of innovation and major push behind every industry emerged. Things have changed. “If you look where the markets of scale are in terms of growth, innovation and productivity are now, they’re largely in the so-called emerging world,” says Rana Sarkar, president and CEO of the Canadian-India Business Council (C-IBC). “And the relationships between these countries and their markets are not going to be coming through us. They’ll be doing it amongst each other, so we have to work hard to intercede and find where we can add something to those relationships. That’s where our competitiveness is going to come from.”
According to Export Development Canada (EDC) chief economist Peter Hall, Canada’s trade growth with traditional partners has been lacklustre over the last decade, and primarily with the U.S. But our trade with emerging markets—North-South—has grown by 12%, still behind the global average of 15%. However, the growth rate for foreign affiliate sales (sales by Canadian company subsidiaries in emerging markets) is 13%. An EDC study last year found that Canadian foreign affiliate sales reached $508 billion in 2008 and surpassed Canadian exports to all major world regional markets except the United States. “The amount of foreign affiliate sales we’re doing in emerging markets is three times the amount of export North-South trade we’re doing there,” says Hall. While foreign-affiliate sales don’t directly reflect South-South trade, it’s a strong indicator for how much Canada has invested in emerging markets and the potential for it to be leveraged in order to build its presence in trade among these fast-expanding economies.
There are a few ways Canadian companies can participate in South-South trade. The first, and most direct, is to set up operations in an emerging market and use it as a hub for trade. Montreal’s Bombardier has operations in more than 60 countries, with 70,000 employees and 76 production and engineering sites among them. In 2008, the company built its most recent Indian plant in the city of Vadodara that made it the first multi-national with the capacity to manufacture complete railway vehicles in India. The plant has built subway cars for contracts with the Delhi Metro Rail Corporation and is poised to serve Southeast Asian markets.
The automotive industry has been a leader in supply chain innovation and its potential for South-South trading. Canadian auto component manufacturing corporations like Magna International, Martinrea and Linamar boast vast operations and trade networks around the globe. In China alone, Magna has a headquarters and 31 manufacturing and engineering facilities with more than 7,000 employees. Canadian companies can also look at U.S.-based Leggett and Platt Automotive, the world’s largest manufacturer of seat comfort, suspension and lumbar products, as an example. The company’s largest factory is in Lakeshore, Ont., just outside Windsor, but it expanded its operations to China in 2003 and India in 2007, specifically to serve those markets and the surrounding region. “In the auto business, these markets are really growing so quickly that it’s very important to have a presence there,” says Leggett and Platt vice-president of worldwide sales and marketing Peter Hoehne. “Primarily we manufacture in China for China and in India for India, but we also look for export opportunities. From China we’ll ship to Japan, Thailand and Australia.”
Another strategy for Canadian companies to tap into South-South trade growth is to act as a facilitator between trade partners. This includes using our North-South and North-North experience to help others negotiate South-South. There has been significant growth in preferential trade agreements between developing nations over the last 15 years, growing from 150 in 1995 to 290 in 2010. “We’re seeing a push for more inter-regional trade agreements between countries like Japan, Korea and India,” says C-IBC’s Sarkar. “Where Canada can play a role is to help countries like Japan and Korea with their India strategy, for instance.”
And this isn’t just a game for the Magnas and Bombardiers of the world. Canadian small and medium-sized enterprises (SMEs) should be looking at how they can get involved. They account for 45% of Canada’s GDP, 60% of its economic growth and 75% of its net employment growth. Yet a recent KPMG study reported that 60% of Canadian companies have no emerging market strategy. EDC’s Hall says that smaller companies can take a staged approach, perhaps starting with a joint venture or partnership in an emerging market, expanding to a fully-owned operation and then looking into trade options from there. “It’s about establishing a beachhead inside a southern market that’s trading with other southern markets in order to eventually open yourself up to the entire region,” he says.
For the first 35 years of its existence, Toronto-based Samco Machinery stuck close to home. As recently as 2005, 90% of sales for its metal roll forming business came from the U.S. Around that time, company founder Joe Repovs read Thomas Friedman’s book on globalization, The World is Flat, and became convinced that Samco had to look beyond North America. So Repovs and his son Bob, the company’s president and COO, got on a plane and went to India.
“We picked India over China because of India’s British-based legal system and English-speaking population,” says Bob Repovs. “Also, a number of our key employees here in Canada are originally from India so having operations there makes it easier than in China.”
Samco’s India strategy has gone through three stages. First, it integrated Indian suppliers into its supply chain to learn about costs and other lessons about doing business in that country. In 2006, Phase Two was establishing a joint manufacturing venture with an Indian partner. Soon after, the company landed a key contract with Indian conglomerate Tata to produce the chassis for its celebrated Nano car, the most inexpensive production car in the world. In 2008, Samco bought out its partner and became whole owner of its Indian operation, which now has about 50 employees. By that same year, just 30% of Samco sales were from the U.S.
While the company has just started to realize the potential of its Indian operation, Bob Repovs certainly recognizes the geographical advantage for future trade. “We are looking at that possibility for the India facility more and more,” he says. “Saudi Arabia is right there and China is close by, so there are promising options.”
For businesses wondering how and where to take the first step, Walker says the most important thing is to get out the door. “You can’t just sit behind a desk and make a phone call, you have to get to the marketplace,” he says, suggesting Canadian consulates and trade missions around the globe as an excellent place to start. “Get in front of everybody’s face and ask a lot of questions. Also, know the language. If you don’t know the language, it’s very difficult to invest in professionals with the language and cultural skills to deal with the local nuances. If you don’t it can be a lot more difficult.”
Sarkar says it’s key to Canada’s growth that companies become more involved in global supply chains and the opportunity is there. “It means getting Canadians abroad, tapping into our diaspora networks and working with our major companies like Bombardier as torchbearers to help promote our prowess in a whole variety of areas.”
For many fear of the unknown, particularly when the unknown can be very, very expensive, is what holds back an emerging market strategy. For Walker, the key is making known as much of the unknown as possible. “You have to do your homework, even before you contact the Canadian consulates or embassies,” he says. “You can get all the contacts you want but if you don’t understand the dynamics of the market you’re attempting to enter, you’re going to lose a lot of dough. Everyone has a learning curve, but the more you know the shorter it will be.”