I would like first to thank Canadian Manufacturers and Exporters for the opportunity to address this important conference. Il me fait plaisir d'être parmi vous aujourd'hui et surtout, d'avoir le privilège de m'adresser à un aussi grand nombre d'entreprises canadiennes.Your conference is looking at how companies can best equip themselves to succeed in today's competitive world. At EDC, that is something that preoccupies our senior management team, our Board of Directors and each of our business teams throughout Canada and in eight markets around the world. It's what dominates our planning.
At EDC we have a fairly simple and straight forward mandate: to do as much as we can to help Canadian companies grow their business worldwide. Today, with the quickening pace of change, we have to be as thoughtful, adaptive and innovative as we can to not just respond to that change, but anticipate it.
It is also appropriate that we are gathered in Calgary to discuss this. This is a city whose lifestyle, competitiveness, entrepreneurship and innovation have taken it to unprecedented levels of growth and political and financial importance. Calgary now provides a whole new focal point for corporate leadership in our country. And that's a reality that is now clearly reflected in EDC's own business results. We recently announced our mid-year results. EDC's business is up 10 per cent over 2005 - and for the second consecutive year, western Canada leads the way, utilizing EDC to complete $10.1 billion in business. That's 35 per cent of the total - and that's well ahead of Ontario and Quebec.
I mentioned at the beginning the pace of change in today's trade world. The anticipation and close scrutiny of change we need today brings to mind a personal story.
Many of you will remember the excitement surrounding the early space race between Russia and the USA. I recall our neighbourhood assembling on their front lawns, hoping to catch a glimpse of a satellite as it passed above in orbit. At the appointed moment when we all observed what we thought to be the satellite, Ronnie Morrison, the nine year-old from next door started racing down the street. Someone asked Ronnie what the heck was going on, to which he responded: "I'm going to get a closer look!" Well, Ronnie's exuberant naivety was the resident joke for many years after. In today's business environment, however, where proximity and "just in time" mean the difference between success and failure, I can't help feeling that Ronnie was more prescient than we gave him credit.
I have been in the export finance business at EDC since 1979. Throughout my career I have seen Canada's exporters and investors successfully manage their way through many economic cycles. But I don't think I have ever seen an environment where so much was happening simultaneously at such speed, and with such stakes. I believe we are today seeing a rather unique set of factors at play and they are coming together in a way that offers us the greatest opportunities we have ever had. They also pose the greatest challenges we have ever had to sustaining our competitiveness and prosperity.
Today I would like to talk about how these factors are combining. From that I hope to construct a quick sketch of what qualities and skills companies are going to need if they're going to grow and prosper in today's globalized economy. Once we start to define what the successful Canadian company of tomorrow is going to look like, we can then appreciate the scope and speed of changes EDC is going to have to make to remain relevant to Canada's businesses.
Our starting point is that trade is more important than ever -- not just to exporters and investors, and not just to countries like Canada that have been more dependent on trade to maintain jobs, growth and prosperity. Today trade is more important than ever to everyone, everywhere.
Global trade as a share of world GDP is now 57 per cent - that's up by 50 per cent since 1990. Canada is at 72 per cent - a healthy enough increase from around 50 per cent in the same time frame. Among our traditional peers in the G-7, the importance of trade in the European Union has risen to 72 per cent of GDP from 56 per cent. Even in the U.S. and Japan trade penetration has grown by a quarter to about 27 per cent of GDP.
But who else is now involved, and how they are involved? In countries like China, India, Mexico, Brazil and Russia the importance of trade within those economies has doubled and in some cases, tripled. And growth continues at those hyper rates.
Countries are now trading more than ever because companies throughout the world's economies have continued to specialize their production. More companies now trade with each other to obtain the mix of goods and services that they need. By specializing, and forming and participating in global supply chains, today's successful companies are not only selling to the four corners of the world, they are importing from them as well. In today's trade world, two-way trade and cross-border investment are just as essential as exporting for success. Productivity, competitiveness and success in today's world, are defined by how fully companies have embraced globalization - trading eagerly with foreign suppliers and their own subsidiaries along continually expanding global supply chains.
But with increased trade comes increased volatility -and the global economic boom we have witnessed is showing signs of moderating. For two years now, we have seen a gradual slowing and recent developments lead us to believe that economic growth in 2007 will come in weaker than originally anticipated. The economic and financial outlook is becoming increasingly uncertain as 2006 winds down. Slowing growth in the US, Europe and Japan will have a knock-on effect across the world.
At this point, it is difficult to gauge the full extent of the slowdown we are expecting but the global economy has become highly integrated so that a downturn in the US will almost certainly spread throughout the rest of the world - the domino effect on a global economic scale.
Our outlook calls for global growth to slip below 4% in 2007, down from an estimated 4.6 per cent in 2006. In the U.S., growth is forecast to slow to less than 2.5 per cent in 2007, the first time it has dipped below 3 per cent in five years. Slower growth in the U.S. will affect other countries and sectors. Growth in Canada is expected to also moderate to 2.4 per cent next year. In the high growth emerging markets, those rates will still ease but at rates like 9 per cent in China, 7 per cent in India and 5 per cent in Russia.
What does this mean for our trade? We expect Canada's export growth in 2006 to be around 3 to 4 per cent, before leveling off in 2007. Much of that growth will come from energy and metals, and we also see machinery and equipment posting some decent gains. Unfortunately, other key industries such as automotive, forestry and consumer goods are facing some tough challenges. Their exports will likely decline over the next two years.
At the same time, we are going to continue seeing trade with emerging markets outpace growth in sales to industrialized countries. We expect exports to emerging markets to rise by around 10 per cent in 2006, and another 5-6 per cent in 2007. We track this activity as part of measuring our own business results. At the mid-year mark, we have seen our business in emerging markets this year grow by 18 per cent over the same period last year. Emerging market business now represents 25 per cent of EDC's overall insurance and financing activity, and I expect this percentage to continue to climb in 2007.
And while competition will heat up as global economic growth slows, Canadian companies are also going to have to be extremely resilient to a continuing strong dollar. Canadian exporters have been challenged by the dollar for a while now, and we are starting to expect that, in today's political climate and uncertainty around energy and oil, the "spike" in the dollar is more likely to become a fixture.
The good news is that we are already seeing Canadian firms taking significant action to offset the impact. First, they have put a strong dollar in their favour - they are using it to increase productivity. For a number of years Canada's productivity performance had lagged other economies. In the days when the U.S. dollar was strong, and the Canadian dollar weak, Canadian companies had less incentive to invest and to innovate. A weak Canadian dollar also increased both the cost of imported technology, and the cost of investment abroad.
That situation has reversed, and there are indications that Canadian companies have recognized an advantage and seized it. Canadian companies saw the volume of machinery and equipment imports grow at a 16 per cent rate in 2005. The first seven months of 2006 posted a further 12 per cent gain in imports of machinery and equipment. That's investment in innovation. A recent Statistics Canada survey showed that Canadian companies are planning an additional $17.9 billion in new capital equipment spending this year. Those investments are paying off. Labour productivity for Canadian manufacturing increased by 5.4 per cent in 2005, compared to 2.3 per cent for the economy overall. Further productivity gains have been made in 2006, although at a more moderate pace.
Impressively, Canadian companies have been able to grow their export sales in the face of a near 40 per cent appreciation in our currency. Spending on new productivity-enhancing equipment helped, so has the fact that firms were globalizing their business. They are increasing their use of global supply chains, sourcing inputs of labour and components wherever they can be produced most efficiently. With a stronger dollar, direct investments abroad in supply chains, affiliates and partnerships are both more affordable and more necessary as a means to keep their costs down.
Canadian companies know that their future success depends on the strategies they select to take advantage of these new conditions. The future is not going to be forgiving to those who hope to just ride these conditions out until they change again. Canadian entrepreneurs understand that, and at EDC we are being told that through the Trade Confidence Index we commission twice a year.
Yes, confidence levels have decreased from the boom years - and two-thirds of respondents repeatedly noted the impact of the dollar as a factor. And two thirds also said they fully expect the dollar to continue to rise. But those exporters also told us they are making strategic operational responses to deal with it, including cost cutting, altering business models and increasing prices.
In our survey, one quarter identified investment abroad as a major component of their strategy - with the most common types being direct investment abroad, joint ventures, and expansion or upgrading of existing facilities. While over 50 per cent of large companies were involved in foreign investment, our survey also sees growth in this area among medium-sized business and small business too.
While the U.S. remains the most common destination for Canadian investment, this year the number identifying it as the top destination for their investment planning declined to 29 per cent from 45 per cent in 2005. The biggest jumps in interest as preferred investment targets: Western and Central Europe, China and India.
Among those not now involved in investment abroad, almost one quarter said their company or product was not ready at this time. An additional 30 per cent indicated they are interested, but cite insufficient available financing as their reason for not yet acting on it.
What is all this telling us about what we need to succeed in today's world?
Success will come to those who fully integrate their traditional export sales with foreign sourcing and investment in one strategy to maximize a company's productivity and profitability. Success will come to those companies that understand trade is not just about expanding sales territory. Trade is to be harnessed as an essential means of making a company more productive, and therefore, more competitive.
Success at trade will be the key ingredient for a company to sustain itself, grow and generate new jobs. A company that fails to maximize its productivity through trade is on a road to losses, reductions and ultimately, closures. This does represent a change. While we in Canada have always considered ourselves "a trading nation" because of the importance of trade to GDP, I think we should more properly called ourselves an "exporting nation". The new requirements of a truly globalized economy are going to force us to make the adjustment from exporting to trading nation.
Some of the research we have seen on the plans and strategies of Canadian companies on investment abroad shows that many have already started well down that road. The challenge to government and its agencies like EDC is to make sure we make the same adjustment - that we offer the support and structures companies need to continue to expand their global reach, their market expansion, investment, and the development of global supply chains.
So what should be our focus? Let me just share a few of the things I have heard from business and government leaders over the past year:
Our world is more dependent on trade than ever. And greater too is the potential dislocation and impact of self-destructive protectionist measures. Advancing free trade whether multilaterally, regionally or bilaterally will always be in our interest.
There is a need to ensure the agreements and structures are in place to protect investments abroad, particularly in low-cost emerging markets.
There is a need to have the right people positioned on the ground in key markets to help Canadian companies find the partners they need to participate fully in this new trade model.
There is a need to make sure that the full range of financial and risk management tools are available so that more Canadian companies can go global, and that those who have already started increase their scope.
What does this all mean? All of us - companies, employees, and citizens - have more at stake as the international trade game unfolds. We are all more interconnected than ever, and changes in conditions spread their effects country to country almost instantaneously.
The stakes are higher than ever. As a result, we at EDC have undergone a major re-thinking of our services, and our own organizational structures to make sure we are accessible to everyone who needs us, and to make sure that our products and services meet and evolve with customer needs. As I said earlier, in today's world we can no longer respond to the needs of Canadian business, we have to anticipate them.
A large part of that is listening better.
Last June we brought together 15 leaders representing a wide range of business associations with membership drawn from every region and virtually every sector. The CME was represented by the Vice Chair of your Board of Directors, David Fung. We wanted a frank discussion of what Canadian business needs to meet the trade challenges they face.
They told us that trade today is a continuum, and that we are going to have to become more creative at all points of it - from insuring receivables and foreign investments to financing foreign investments or buyers of Canadian goods and services to helping Canadian companies increase their working capital, even taking equity positions if needed.
The conversation quickly focused not just on what EDC could be doing, but on what Canada could be doing. And there was a lot of discussion of gaps, and about their fears that other countries are doing a better job.
A few persistent themes emerged.
The first was market entry. The feeling was that fewer resources, less information and fewer support systems are in place to help Canadian companies enter new markets - particularly for small business. Encouraging globalization also means help with finding and assessing partners, developing distribution channels and following up on leads. The general view was that Canadian business has less available to it today than was the case even a few years ago, and less than what is currently provided to their foreign competitors by their own governments.
There was a significant discussion of our largest market, the U.S., and the harsh reality that security trumps trade and the need for government in securing access to that market.
There was a lot of discussion of connecting to supply chains, and the particular needs of small business to better position themselves in this new trade world.
There was much discussion of entering strategic emerging markets, with China, Russia, Central Europe and Mexico dominating discussion. And there was a general consensus that in many cases, companies that were markets for them a few years ago are now their competitors in other markets.
There was a lively exchange of views on areas for new product development by EDC, particularly where they relate to difficulties associated with the U.S. market like border bonds, and product liability insurance.
We were also told point blank that we at EDC need to improve awareness of our services if we are ever going to get all possible users accessing them. We found two principal challenges: first, those who know us have a general awareness rather than a real understanding of what we can do for exporters and investors. It doesn't occur to them that we can help in circumstances where they've never used us before. Second, even among those who know us best, their view is too often dated - they know us by what we did in the past, and are often unaware of the flexibility we have to meet today's more complex trade environment.
And last but probably most important, there was a unanimous view that we need more venues where business and government can meet to identify what's working, and what gaps need to be filled. I am heartened to hear that in calling for more venues of this nature, these organizations were identifying internally their own limits, as well as those of government.
In one day we all shared a lot of information. Let me tell you briefly about what EDC is doing with that advice.
Canadian companies are going to have to invest in global supply networks to acquire cheaper inputs while specializing in value-added production here at home. As a consequence, EDC is rethinking how and where we fit into that scenario, industry sector by industry sector.
The automotive sector, often highlighted in the news these days, can help illustrate how we are rethinking our approach. Maintaining the sector's contribution to Canada's economy and the expertise that Canada has amassed is critically important to Canada and critically important to provinces such as Ontario. But that contribution is challenged by the dramatic shifts in market share being experienced by North American OEM's and its attendant impact on suppliers. Not surprisingly, there is currently a drought of financing and credit for the auto sector as the traditional sources of private-sector financing re-assess their portfolios in light of global risks. This opens the door for an increased role for EDC.
We already provide accounts receivable insurance covering sales to the OEM's and major Tier 1 suppliers as well as after-market sales. We have been using our full risk capacity to do so.
We have also been providing financing to parts manufacturers in the form of Tool Build-out and parts amortization facilities to help them bridge financial gaps while they prepare to meet their clients' changing production requirements.
Financing and insurance combined, EDC supported approximately $2 billion in business in the sector in 2005, and we have already surpassed that volume so far in 2006.
But given the efforts that OEM's-particularly North American manufacturers-must undertake to improve their global competitiveness, we are compelled to go further when conventional receivables insurance and coverage from private financial institutions become limited. The risks are higher, and private sector finance and insurance is understandably more cautious, leading to a need for EDC to jump in and do more to help the sector manage its adjustment to tighter global competition.
EDC has answered the call with a new, selective insurance coverage designed as a bridge to get companies over this hump. Exporters can purchase an amount of non-cancellable coverage, equating to a period of supply for losses they would incur if payments were interrupted owing to an OEM entering into bankruptcy proceedings. We have structured this insurance with the full knowledge and cooperation of private sector insurers and brokers, since credit insurance markets have limited capacity to cover such risks at the moment, but would be expected to restore conventional coverage once conditions stabilize.
But providing extra coverage in times of extraordinary risk is only half the job. The long-term answer for the auto, and many other sectors, is to help them diversify and expand abroad.
We are developing ways to facilitate expansions, and provide capital financing for foreign investments.
We need to make sure that Canadian affiliates abroad can obtain accounts receivables insurance coverage for sales in their foreign market, as well as political risk insurance to protect their equity commitments.
The ultimate goal is to assist Canadian companies in the auto sector to diversify their OEM customer base beyond the big players in North America. We are working to see how we can help them break into the supply networks of automakers in Japan, China, and Korea.
But accessing these supply chains won't happen overnight. Canadian companies will need to demonstrate a unique value and a commitment to continuous value enhancement.
Demonstrating this value very often means that Canadian companies will need to set up shop in close proximity to their prospective customers, an expensive and risky proposition, but one where EDC can play a key role.
And that is still not enough. We are also working to help Canadian companies with the logistics of managing their global supply chains. To that end, we've made a good start with regard to new U.S. security measures that are impacting cross-border trade.
Many large buyers in the U.S. are requiring Canadian suppliers to comply with the U.S. Customs C-TPAT program whereby suppliers must ensure the integrity of their security practices. Such compliance requires a lot of expensive steps to meet physical, personnel and procedural security requirements. To help out, EDC developed the Security Compliance Loan program to provide affordable financing to Canadian companies undergoing the necessary security refinements.
We're also looking at how we can help Canadian companies to manage their supply chains. Global supply chains bring a lot of efficiencies, but only if they are well-managed. The more times you cross a national border before a product is complete, the more complex the management of logistics becomes. The odds are that you're constantly grappling with government regulations, multiple currencies, documentation requirements, tax issues, and mountains of paperwork. Not following international rules and stringent security regulations can even result in severe penalties, and loss of trade privileges.
EDC is looking at how it can help Canadian companies with setting up their global trade management systems. We have established a GTM Innovation Centre that is exploring a variety of EDC products and services that will help ensure long-term Canadian competitiveness in global markets. We have already commenced discussions with the CME to get their perspective on global trade management issues relating to Canadian competitiveness. I invite any of you who have an interest or opinion in this subject matter to participate with us in helping shape this initiative.
These are just some of the new initiatives we are undertaking in the auto sector, some of which have broader application. We are replicating this tailored approach in our work with other industry sectors-applying our knowledge of each sector's needs to provide timely and relevant services.
But all these new measures, and the many products and services we've offered for years are no good if exporters don't know about them. Frankly, our customers don't know us well enough, and are not aware of the full breadth of EDC's capability to help them.
Our ability to help exporters was also hampered by the fact that we presented too many disconnected points of contact with EDC. This was impairing our ability to transfer knowledge of opportunities throughout EDC, and was impairing our ability to bring the full range of EDC services to each customer to help them with those opportunities.
But that is all changing, based on a new EDC customer service model that addresses broader industry sectors and the inter-relationships of companies and sectors across global supply chains. We have created six core industry teams, each possessing experienced trade professionals who know the challenges of their sector and who can bring the full breadth of EDC resources to bear on solutions tailored to the specific needs of these sectors. We have also established a team dedicated to serving Small Business to extend EDC's reach to all small exporters and export-oriented companies in Canada with up to $5 million in total annual sales.
We have expanded and are re-deploying our human resources involved in business development by introducing dedicated account management for all of our customers. We are also expanding our partnerships with financial institutions as another means to reach out to Canadian businesses.
Our partnerships also extend to business advocacy groups -one of our most important partnerships is with the Canadian Manufacturers & Exporters. I had the pleasure to represent EDC at the signing of a new partnership agreement, with your President, that will strengthen the collaborative efforts of our organizations, extend our co-marketing initiatives and enhance our representation on issues of mutual interest.
And we are expanding our representations abroad to build long-term relationships with local buyers, and match the procurement needs of these buyers to Canadian expertise. We recently established a second representation in China, located in Shanghai, to complement the work of our representative in Beijing. And this winter we will establish a new representation for Russia and the Confederation of Independent States, based in Moscow. This will bring our complement of foreign representatives to ten-in addition to China and Russia, we have representatives serving in Southeast Asia, Brazil, Mexico, India, Central and Eastern Europe.
In conducting all this support for export trade and investment, we continually re-evaluate how Canada benefits from that trade, and reflect our findings in our qualification criteria, sector by sector. This includes our commitment to support investment abroad, not just exports.
This transition has meant rethinking what "manufacturing" means in a globalized world with a free flow of inputs and outputs across continents. We have clearly moved beyond a mentality which recognizes only fabrication as a benefit to Canada, a concept of which David Fung has been a strong proponent. We now find ourselves grappling with complex networks of transnational relationships to move even simple products from concept to customer.
To support this model of global trade, EDC has to do more than accept new concepts and reorganize itself. We have to rethink the basic tenets of our risk culture.
EDC's ability to contribute to the growth of Canada's exports and investments is linked to its success at assessing and managing risk. Over the past ten years, EDC has experienced all phases of the credit cycle, including periods of sustained credit deterioration and market instability. The Asian and Russian crises and the aerospace and telecommunication sector challenges are just a few examples of the turbulence we've weathered.
EDC has come out of this period with a strong capital position. Just as important, we have gained valuable perspective on the level of risk we can take, should similar circumstances arise in the future. We are confident that we can do more to broaden our risk appetite and respond to the needs of Canadian exporters and investors.
This perspective will guide EDC as we consider how to deploy a new pool of strategic risk capital we have created to help companies expand their international footprint in markets that carry a higher level of risk and uncertainty. The measurement of our success will be the degree to which EDC can create capacity; promote it; and utilize that capacity.
The new strategic risk capital will to be used to facilitate additional business of a higher risk and/or an innovative nature that is outside the scope of EDC's current risk management framework. Priority usage of the strategic risk capital will be focused on the key strategic emerging markets such as Brazil, Russia, India, China, and Mexico, and on strategically important industry sectors.
To wrap up, I'd like to recap the essential elements for success in trade today:
Successful companies are going to be those that increase their global reach. We are committed to getting closer to Canada's exporters and investors to know what they need, and more importantly, to leverage the relationships and knowledge we have worldwide to their advantage.
Successful companies are those that are willing to take on emerging markets - opportunity rich, but posing much greater risks. We intend to cover those risks on your behalf, and have the financial resources to do so.
Finally, successful companies are increasingly going to be those that have globalized their operations, increasing productivity. EDC is committed to taking a much greater role in helping Canadian business make the type of investment they need to establish global presence, while still bringing tangible, measurable economic benefits back to Canada.
Today globalization has set competition at a level beyond what most of us could ever have imagined when we started our careers.
The world we face, and the changes coming should not be daunting. They offer more than they threaten. But they require us to watch, to listen, to assess and to then take the drastic steps that are needed before we are forced to. In this world, I am reminded of a quote from James Yorke, the American mathematician who coined the phrase "Chaos Theory" - the description of how small, distant and seemingly random and irrelevant events can lead to enormous life and universe-changing consequences. As Professor Yorke put it, "The most successful people are those who are good at Plan B."
As I conclude, I would be remiss not to draw your attention to an important process which will soon give those who have a stake in EDC to comment on how it can better work -and plan- to the benefit of Canadian companies. This process is called a mandate review and in 2008, our shareholder will consult our customers, our partners -and even our critics- as to how EDC, through its enabling legislation (the Export Development Act), needs to be positioned to meet future needs and expectations. What is most important about this process is that the context on which EDC is evaluated is more focused on where Canadian business is going, and the challenges it will face, rather than where it comes from.
We at EDC believe that we are uniquely poised to do much more for Canadian companies. We will be drawing on your experience and advice to identify where our efforts should be focused to have the greatest impact for growing your business. It is our commitment to draw from as many sources of expertise and support we can find - in government, banks, business associations and potential partners - to share in that purpose.
Thank you. Merci.
