A Strong Loonie
"If people aren't involved in lean manufacturing, fold up and go home because you aren't going to survive."
By: Lisa Grace Marr
(As Published in The Hamilton Spectator - January 2005)
A Strong Loonie
Robert Hattin, president of Edson in Hamilton, says, 'If people aren't involved in lean manufacturing, fold up and go home because you aren't going to survive.'
Every time the loonie rises, Robert Hattin gets a major goose egg. "I don't mind a little motivation but I don't like being clubbed over the head. It makes for a very painful day and unfortunately the Canadian dollar is clubbing us over the head," said Hattin, president of Edson, a Hamilton packaging machinery company which exports 80% of sales to the U.S.
With fixed prices, Edson loses about 5% plus for every 5% increase in the Canadian dollar. Financial analysts celebrated the TSX's record-setting pace this week. According to a new poll released yesterday, Canadians are more optimistic about the economy than they have been for 13 years.
And many Canadians have changed their mind about the impact of the strong Canadian dollar on the nation's economy, with 43% believing the strong dollar has a positive effect on the economy, compared to 41% who think it has a negative effect.
Maybe that 43% should talk to Hattin.
There aren't a lot of options for manufacturers in the face of such change. But there are some. Jay Myers, senior vice president and chief economist with the Canadian Manufacturers and Exporters (CME), said Canadian companies have responded in a series of ways: raising prices; forging global partnerships; buying equipment or supplies from U.S. companies; and/or making investments in new technologies.
Edson Used a Host of These to Survive
Awhile ago, Hattin was forced to lay off some staff, but then reconfigured his company, changed a product mix to offer a more expensive, higher-end set of machinery and hired a lean manufacturing consultant. That expertise and switch in philosophy has helped get rid of waste at every level of the organization, from engineering to shop floor, and helped Edson's managers and staff take ownership of the process.
"The rise of the Canadian dollar is a two-edged sword. There is loss of revenues, loss of profitability, and all those other things. The upside for those who want to gamble and say there is a tomorrow, we have used this (strong Canadian dollar) to buy machinery to become more efficient. The biggest (change) is the lean processes. If people aren't involved in lean manufacturing, fold up and go home because you aren't going to survive."
He also realized 20 to 70 per cent in savings when he switched from Canadian to American suppliers - a move he regretted but found inevitable when Canadian suppliers refused to lower prices. These changes helped his company recover - Edson hired back some of its old staff, and at about 80 employees is only 15 shy of its level a couple of years ago.
Innovation and Technology
Myers said Canadian manufacturers must use such innovation and technology to survive. "A lot of companies are saying it doesn't make sense to produce a standard product, so we're going to make a more specialized product. They're looking at improving design, quality or service of a product or they're looking at the degree of customization of products."
That's just where Elettra Technologies was two years ago. Elettra Technologies is a company which rose from the ashes of Westinghouse in 1995. Ex-Westinghouse employees decided to forge ahead and make standardized engines to replace or maintain parts for Westinghouse engines that were made all over the world.
But when the dollar started to rise, "things were looking pretty bleak" said Walter Silva, marketing and sales manager for Elettra. "The rapid rise of the dollar caught us off guard. The way we've managed to survive is to get out of standardized products. We had to change our philosophy and quickly."
Elettra now makes custom machines for companies all over the world - it recently sold electric motors to be used in nuclear power plants in Ontario, South Korea and Romania. It also sold specialized boring equipment to transportation officials in Turin, Italy who needed to extend subway tunnels for visitors to the winter Olympics.
Change In Focus
"Our U.S. business is now bigger than we had two years ago. For us, it's been a bit of a benefit." John Leavitt at Pensafe, which makes snap hooks and D-rings, said four months ago that if the dollar went above 86 cents, they wouldn't be able to survive. But as he drily observed yesterday - when the dollar closed at 87.21 cents US, its highest level since mid-1991 - that he's still answering the phone.
"I think it's forcing all of us to change our focus a little bit," he said. "What we're trying to do here is focus on product innovation and design/engineering rather than pure manufacturing. If we're forced into it, we'll take manufacturing elsewhere.
"Business for the last 100 years has chased cheap labour around the globe and will continue to do that. One thing we're hopeful for is our ability to compete on engineering and customer intimacy standpoint."
Pensafe is also working closer with a company in the U.K. which has helped them market and distribute product there. Pensafe will do the same for them in North America. Leavitt said more Canadian companies will need to consider global partnerships to stay in business. "You talk to any Canadian business of any size; it's all about forging partnerships. You look at the electronics business, everybody is a competitor but everybody is also a (potential) partner. We're a microcosm of that."
That's the same position in which Edson has found itself. Late last year, Edson entered into discussions with a Japanese company, "the equivalent of Toyota in the packaging world," about a partnership, said Hattin.
Some analysts suggest the dollar could hit 90 cents this year - that and other factors could throw a wrench in the best-laid plans.
"The No.1 threat for Canada going forward is the U.S. dollar," said BMO's Rick Egelton. He said Canadian firms have "largely adjusted" to the loonie's rise in the past three years but will be ravaged if foreigners weary of buying American assets and pull the plug on the U.S. current-account deficit, causing the American dollar to plunge.
Lavoie said many analysts are projecting the U.S. economy to take a downturn later in '06. That, too, will present even more challenges.
But there is an upside. Lavoie said so far, despite the turbulent economic environment, manufacturing has survived. According to the CME, manufacturing productivity has increased by 15% since the end of 2002, over the time the dollar has risen dramatically.