Companies march to the beat of their own loonie tune

A close look at why the government thinks the plunging loonie will kick-start manufacturing
Fabrizio Costantini/The New York Times/Redux
Fabrizio Costantini/The New York Times/Redux

From labour agreements to government subsidies, Sergio Marchionne, the CEO of Fiat Chrysler Automobiles, has a lot to consider before deciding whether to build Chrysler’s next-generation minivan in Windsor, Ont.—a struggling city badly in need of the $2-billion project. But one thing the bespectacled Italian-Canadian auto executive isn’t paying attention to is the value of the loonie.

When asked about the impact of a weaker Canadian dollar at this year’s Detroit auto show, Marchionne noted that Chrysler has been operating in Canada with the loonie at or above par with the U.S. dollar for several years, but not long ago—2002 to be exact—it was worth as little as 62 cents. The point, he stressed, was that “there’s no way of knowing what it will be in 24 or 30 months.”

If the dollar’s value doesn’t enter into Marchionne’s calculations—with billions on the line—one has to wonder why policy-makers in Ottawa seem convinced Canadian firms will react differently. Bank of Canada governor Stephen Poloz has all but voted in favour of a weak loonie by continuing his dovish stance on interest rates, while Prime Minister Stephen Harper has dismissed the idea that the dollar’s drop is a negative development, despite making Canadians’ vacations more expensive and raising the cost of imported products. Finance Minister Jim Flaherty explained the government’s thinking in a recent TV interview when he said, “The dollar in the 90s somewhere is good for manufacturing.”

In theory, a cheaper currency should indeed make exporters more competitive since, all other things being equal, they can sell their products for less money in the U.S. without sacrificing profit. But in practice there are many reasons why that might not spur the sort of economic rebound politicians are hoping for. For one thing, exporters took steps to insulate themselves from a strong dollar over the past decade, including increasing the amount of raw materials purchased from the U.S., which are now more expensive. “For all I know, all [politicians are] doing is putting lipstick on a pig and making the best of a bad situation,” says Philip Cross, a senior fellow at the Macdonald-Laurier Institute, an Ottawa think tank. “It’s unlikely to make much of a difference to output and employment of export industries.”

Cross, a former chief economic analyst at Statistics Canada, says what’s really needed to revive manufacturing is a sustained recovery south of the border. “If the outlook for the U.S. was that great, I would expect to see improving commodity prices,” Cross says. “But we’re not seeing an improvement in metals and oil isn’t doing much better. So, if we’re looking to goose GDP and unemployment, we’re playing with the wrong variable.”

The parade of high profile manufacturing job losses in recent months would seem to underscore Cross’s analysis. In southern Ontario, food processors Heinz and Kellogg announced plans to shutter factories and lay off workers this year. In Quebec, Bombardier is laying off 1,700 employees as it looks to cut costs amid a tough market. Overall, Statistics Canada said manufacturing employment fell by 2.3 per cent in Canada last year—a period when the dollar fell by six per cent. And while January’s job numbers showed 29,000 net positions being added overall—a reversal from December’s surprise loss of 45,900 jobs—the manufacturing sector was still a net loser, shedding about 6,800 positions during the period.

The failure of Canada’s exporters to reap the benefits of a more favourable exchange rate, at least so far, has left observers scratching their heads. “The loss of competitiveness is something that concerns us,” said Roberto Cardarelli, the IMF’s mission chief to Canada, on a recent conference call. He added that Canada’s export sector may have suffered from some “structural sort of damage” after being subjected to a high exchange rate for 10 years.

Between 2002 and 2012, the country’s manufacturing heartland in Ontario shed nearly a third of its workforce, or just over 300,000 jobs. The steep run-up in the Canadian dollar, driven by the global commodities boom, squeezed exporters’ profits since they paid their employees and other expenses in Canadian funds, but sold their product in less valuable U.S. dollars. The global financial crisis only made matters worse by sapping U.S. demand for Canadian-made goods, while the loonie remained stubbornly stuck near par even as commodity prices waned. “Commodities are an important driver of the (dollar), but the currency can become disconnected from those fundamentals for long periods as we saw from 2009 to 2013,” wrote Bank of Montreal senior economist Benjamin Reitzes in a recent report. “The loonie was conspicuously overvalued over that entire period.” The culprit? Global investors who were drawn to the currency thanks to Canada’s relatively stable banking sector, hot housing market and healthy resource industry. Now that Canada’s growth is slowing, however, the so-called “hot money” has moved on to greener pastures.

But the loonie’s rise wasn’t the only factor speeding Canadian manufacturing’s decline. Industries like textiles and furniture-making also suffered from the off-shoring trend on both sides of the border as companies realized they could save money by shipping production to low-cost countries overseas without suffering a signi?cant loss in quality. Jayson Myers, the president of Canadian Manufacturers and Exporters, says the dollar’s weakness throughout most of the 1980s and 1990s likely had the effect of attracting industries that “competed on cost and volume” and therefore probably didn’t belong here in the first place.

Exporters have changed the way they do business, too. “What many companies did, as the dollar was going up, was take advantage of the higher dollar to import more raw materials and buy production facilities in the United States and Mexico,” says Myers. “So now that the dollar is coming down, that’s going to have an impact. It will mitigate some of the benefits that might otherwise have been there.”

Investments in labour-saving technology have similarly helped some Canadian manufacturers stay afloat, albeit at the expense of jobs. Cereal-maker Kellogg, for example, said in December that it will close an aging plant in London, Ont., where it has operated for 90 years, and move some of the production to a newer, more modern plant in Belleville, Ont. Other plant closures in the province have also seen production absorbed elsewhere in North America—part of an industry-wide push to do more with less. “Manufacturing investment was close to a record high last year,” says Cross. “But they weren’t building plants to expand capacity. Most of that was going into machinery and equipment, which is reflected in the steady drop in manufacturing employment. They have boosted productivity. It’s how they survived and stayed in business.”

Ironically, the one area of the export sector set to bene?t most from a falling loonie is the one that least needs help: resource companies. Unlike, say, auto assembly plants that must import vehicle parts from south of the border, miners and oil producers can’t source their raw materials from anywhere but beneath Canadian soil. “That’s why the stock market has done well over the past few months,” says Cross, referring to a 10 per cent climb in the resource-heavy S&P/TSX Composite Index. “It’s almost nothing but pure gain for these guys.”

For most manufacturers, though, the painful transition they experienced over the decade continues to loom large. Any additional profits realized from today’s more favourable exchange rate are just as likely to be socked away or spent on more labour-saving technologies—neither of which will spark manufacturing job growth. “There’s no clear sign now that there’s a strong recovery under way in the U.S., and that’s essential,” Meyers says. “So companies are holding on to the cash and waiting until customers return.”

As for Fiat Chrysler, it may well decide to build its new minivan in Canada, helping to save thousands of jobs. But it won’t be because the loonie is cheaper. It will be because taxpayers stuffed the automaker’s pockets with more of them.