Podcast Transcript: Opportunities amidst economic turbulence
It’s safe to say that 2008 was not the best year, economically speaking. And I wouldn’t be going out on a limb to say that 2009 will be rough too. I’m sure you’ve heard that ad-nauseum.
But in the midst of all the gloom, there is reason to be positive. International business opportunities in non-residential construction are on the upswing. Governments around the world have almost universally announced huge fiscal stimulus packages.
But what does this mean for Canadian companies? And what will it take for them to win these contracts?
I’m Michael Mancini, Editor-in-Chief of CanadExport, the e-magazine of the Canadian Trade Commissioner Service. Visit CanadExport website to subscribe. It’s free and easy.
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Now back to the show. I recently spoke with Peter Hall, Vice President and Chief Economist at Export Development Canada. We were at one of the biggest building and construction trade fairs in Canada called, appropriately enough, Construct Canada. This is what he had to say about international opportunities for Canadian companies in this sector, right now.
Peter Hall: Well clearly opportunities have shrunk over the last while. We’re dealing with a global economy that is reacting very quickly, very rapidly to an unfolding situation. October was an unprecedented month in our careers with respect to the shifts that happened. So opportunities are moving very quickly right now.
In residential investment I don’t see a whole lot of opportunity internationally right now because of excesses that built up during the last five years. That was the end of a very long expansion in the world economy and when that happens you invariably get excesses that build up. These excesses were substantial because this was a particularly protracted cycle - 16 years as opposed to a normal cycle which is eight years.
So on the residential side you didn’t just have excesses in the American economy, but excesses built up in Europe, they built up in Japan, they built up all over the industrialized world. They were essentially exported to the rest of the world. So as those excesses were exported, different economies around the world, emerging markets, developed economies alike they all felt that build-up of excesses inside of themselves.
So there is retrenchment in residential investment going on as far as we can see worldwide. On the non-residential side it’s quite a different picture. Clearly financial markets are seized up right now. So access to capital is a big issue. When demand is shrinking around the world, do you have as much need for industrial space, do you have as much need for commercial space around the world? No. The rates of growth are actually going to be attenuated as we go forward.
So where do the opportunities really lie? Well one of the key developments that has come out of the mega shift that we saw in October is one after the other substantial fiscal packages being announced by governments around the world. A key part of these stimulus plans is infrastructure. So if there’s any bright light around the world with respect to construction activity, it has to be in the infrastructure sector going forward.
So I can’t point to one economy, I can’t point to a particular zone even because the opportunities for infrastructure are widespread.
Michael Mancini: Right. So how can Canadian companies tackle these opportunities in such tough economic times? What are the tools at their disposal?
Peter Hall: Well keeping one’s eyes open, watching the packages that are being released, looking at the elements of those packages to determine where their particular goods and services fit in to that exercise. We’re talking about multiple hundreds of billions of dollars that are being announced and devoted to these sectors.
Look governments around the world are looking for companies that are nimble enough, that are fast enough and that have good enough products to jump very rapidly into these projects. Let’s face it, you know when you embark on infrastructure it usually takes an awfully long time to get the project off the ground. Those companies that are willing and able to jump in immediately are the ones that project leaders are going to be looking for. So being able to actually step up to the plate quickly is a real asset inside of our current environment.
Michael Mancini: So when it comes to that, how well do you think Canadian companies are doing?
Peter Hall: It’s hard to say because everything is so recent. But we have seen in Canadian trade data over the last couple of years a marked move towards diversification that is very encouraging because our traditional markets really aren’t the ones that are going to see the most growth in the near term. We’re going to be venturing out into areas that we really haven’t gone to before.
Some of the key global hot spots, you know the China’s and India’s of the world, they’re going to continue to see rates of expansion of domestic investment in the double digits. So they go without saying. But another of the hot spots is the Gulf Cooperation Council countries where you know there is not nearly enough capacity inside of those economies to achieve even part of what’s being proposed in terms of infrastructure. We’re not just talking about mega projects but a multiplicity of mega projects that are happening inside of that zone. And because of high oil prices over the last few years they have the capital to actually embark on these projects.
Michael Mancini: Given the volatility in oil prices are we in uncharted waters at this point?
Peter Hall: We’re in uncharted waters in a number of ways. I mean October was definitely an uncharted month, if you like. You look at stock market tumbles, you’ve got to go back to very dangerous times in our history to replicate the drops that we saw inside of October. So right off the bat you’ve got to go back to October of 1987. But prior to that we’re talking about the 1940's, we’re talking about the dirty 30's as well. So in terms of stock markets, definitely, in terms of commodity prices, it’s the same. And in terms of currency movements the very alarming data inside of October just speaks to the nervousness that markets are feeling at the moment.
The seizing up of capital markets, that’s pretty unprecedented as well. The package is to actually get the financial markets going again. We’ve never been down that road. So that’s a positive that we’ve actually never seen. The difficulty behind what’s happening is that we don’t really know how the economy is going to react to the fast capitalizations happening. So on a number of fronts we are definitely in uncharted waters.
Michael Mancini: So how do Canadian companies on a strategic level deal with those challenges especially that we’re in now that we’re in uncharted waters?
Peter Hall: Well it’s a good question. I think that the first thing is don’t think for an instant that there aren’t opportunities inside of this situation. The economy is bad but it’s not bottomless. And even although it’s going through down draft at the moment there are growth opportunities. And one of the key growth opportunities is right in this sector, in non-residential construction and particularly in global infrastructure.
So it’s a bit of a sweet spot as we go forward. You can’t say that for a lot of other industries like the auto sector or primary products. The prospects for consumer goods over the next while are not that great. But given the amount of attention that’s being focussed on construction activity as a means of stimulating the economy through this downdraft, it’s a huge area of opportunity.
Michael Mancini: I want to touch on something you said earlier about emerging markets and maybe shifting focus. With the US market facing difficult times obviously, should Canadians also shift their focus in this sector and in other sector as important as the US market is to Canadian companies?
Peter Hall: Well look, our traditional markets, name them, are not the ones that are growing around the world right now. So we’re, we are looking at a world where the opportunity set is much greater inside of those non-traditional markets, primarily emerging markets. And developed world is in a funk, and we’re looking at a no growth situation as we go into 2009. This is not going to be a short, snappy 2001-style recovery either. We are in for a bit of a deep dive here.
So we’re looking at mid-2010 before those traditional markets start to see some lift. Emerging markets, even though they’re going to react to this situation they’re still going to post growth rates far in excess of the growth rates of our economy and our traditional markets.
So right off the bat it’s a no brainer to harness one’s opportunities to that growth. Then there is potential for market share gain because we’re very small players inside of those markets. So if we can grow market share on top of these barrier rates of GDP growth that they’re going to see, we’ve got a winning situation.
Michael Mancini: Now let me build on the notion of focussing on emerging markets. How are these markets currently responding to the economic situation and what are their strengths and weaknesses for Canadian companies?
Peter Hall: Well that’s a great question as well. Many thought at the beginning of the year that there were some markets that were going to skate through this slowdown, it wasn’t going to be a global slowdown and emerging markets were actually going to be able to tide themselves through this.
We never felt that that was the case. Given how much globalization we have right now, given the integration of supply chains around the world, we thought it was almost foolish to think that there could be a dislocation between different economies. We are a very integrated world economy. So emerging markets get caught up in that.
As I said before, excesses got exported right around the world and emerging markets weren’t missed inside of all of that. So they have internal excesses that they’re trying to deal with at this point in time. And that’s a weakness. They have been accustomed to very fast rates of growth. And so they’ve been putting capacity in place without even really knowing whether that capacity was going to be subscribed because at the rates of growth they experienced, they simply had to ensure that they were going to be able to keep up to that growth.
Well when it goes into a slowdown, those excesses get revealed. And so inside of those markets you’ve got to deal with a situation like that. You see a change in the psychology of investment, if you like, inside of the economy. So momentum slows down and it has a spill effect to the rest of the economy.
But on the positive side, during those good years emerging markets taught us in developed economies a lesson. What they did was they banked a lot of the gains that they made during that time. And so they find themselves with surplus capital funds to be able to use in creative ways during lean times. It’s a wonderful stash of cash to have for such a time as this.
And the other thing that emerging markets did was to reorganize the way their debt was managed. Let’s face it, in the past you know they’ve been very vulnerable because much of their public debt had been in foreign currencies. It had been very subject to the whims of the international market, if you like, and much volatility came into the economies by virtue of the way that their debt was aligned.
They used the good times as well, the easy liquidity years to completely restructure their debt, to put it into local currency and to stretch out the terms of those debts so that they were actually shielded against short term fluctuations and they negotiated very, very favourable interest rates for themselves as well.
So given all of those things they’re much more resilient this time around. They have much more capacity to actually sustain their growth through very tough times.
Michael Mancini: Right. Now we talked about exports a little bit, but how will this all affect Canadian investment flows both into emerging markets and developed markets?
Peter Hall: Well investment flows at a time like this are under a lot of strain. And if we think there’s an area of risk, it’s foreign direct investment out of Canada and into Canada for that matter is going to be under duress. We’ve got a capital system right now where cash is king and everybody is holding on to cash right now. And so at least in the short run there’s going to be a lot of nervousness particularly around the riskier investment plays.
There’s just not going to be the cash and the capital like what we’re used to over the last five years. We had boom years where liquidity was falling over itself to find a home in all sorts of risky areas so risk premiums were lower during this period of time. We’re seeing a great retraction of that, almost an over reaction. And so that investment is going to be very much at risk.
It doesn’t matter whether we’re talking about investment going into our traditional markets or into less traditional markets like emerging markets around the world.
Michael Mancini: Peter if you have one piece of advice for Canadian companies, what would it be?
Peter Hall: Well, seize the day. There are opportunities out there. It certainly is tough times, there’s no question about that. We have to be very careful about the decisions we make over the next while.
But I think it would be a mistake to say that weathering this situation means wrapping our coat around ourselves and hunkering down and doing nothing for the next 18 to 24 months. There are opportunities out there, there are opportunities particularly in this sector. This is a time when many gains can actually be realized. So it’s a matter of taking advantage of those, seeing the opportunities and then taking advantage of them over the near term.
Michael Mancini: Thank you very much for your time.
Peter Hall: My pleasure.
Well, that’s all for this podcast edition of CanadExport.
Check the Trade Commissioner Service website. There you can find a link to a report that includes more information about what countries are doing in this sector.
The report also includes a list of trade commissioners from around the world who can help you make connections with qualified contacts, gather market intelligence and provide troubleshooting advice.
Now before you get back to work, I just want to let you know that my next podcast will feature Max Valiquette, President and CEO of Youthography, a research and marketing communications agency dedicated exclusively to youth. He’s got some great advice about how to tap into youth markets internationally. That’s our next podcast and you won’t want to miss it.
I’m Michael Mancini, signing off for now.
To download our other episodes, just go to www.canadexport.gc.ca or go to iTunes and use the searchword “CanadExport.”
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