Canada's Loonie Creates a Conundrum

By Erik Heinrich / Toronto

Chris Carrier has been hammered with two plant closures in less than a year. First Alcoa shut its wheel-rim plant in June after more than two decades in operation, idling 365 people. Then last month Goodyear Canada did the same at its engine-hose plant, forcing 165 out of work. "It's created a great deal of turmoil," says Carrier, mayor of Collingwood, Ont., a town of 25,000 north of Toronto. "Families aren't sure how they're going to pay bills. Some have moved away." The closures mean not only lost jobs but also a loss of nearly $5 million in annual wages and taxes for the local economy.

Both Alcoa and Goodyear had operated well below capacity for a number of years, so it came as no surprise when they announced plans to move production to Venezuela and Mexico, respectively. Unfortunately, Collingwood's tale of economic woe is being repeated in communities across Ontario and Quebec--Canada's industrial heartland. "A high Canadian dollar is an absolute killer," says Peter Nygard, chairman of Nygard International Ltd., a manufacturer of women's clothing in Winnipeg, Man., whose $1 billion in annual revenue comes largely from the U.S.

It's the reverse side of the strong loonie, the $1 Canadian coin that gets its name from the lake bird pictured on it. Canadians have been pouring over the border to bargain hunt, and the unemployment rate hit a 33-year low of 5.8% in October, owing to gains in the natural resource and service sectors. But the world's eighth largest economy has lost 329,800 manufacturing jobs since the Canadian dollar began its marathon climb five years ago. From an all-time low of 62-c- in 2002, the turbocharged loonie shot past the U.S. greenback for the first time in nearly 31 years this September and kept right on soaring. Fueled by record prices for Canadian commodities, a surge in foreign investment and anxiety over the subprime-mortgage meltdown, the loonie broke the $1.10 barrier in early November. It has since settled close to parity. "The U.S. dollar is going to stay weak against major currencies for a while," says Dan Katzive, director of currency strategy at Credit Suisse in New York City.

Although Katzive predicts the loonie will drop below par by the end of 2008, that may be too little too late for many. "No one can adjust cost and pricing fast enough," says Jayson Myers, president of Canadian Manufacturers & Exporters, the country's largest trade and industry association, referring to the loonie's 18% run-up over the past 10 months. "We're going to see more manufacturers close down as a result."

Canada and the U.S. are each other's top economic partners, with two-way trade valued at $625.9 billion. Normally, Canada's exports significantly outpace imports, but in September the country's trade surplus with the U.S. dwindled to $6.2 billion, according to Statistics Canada. The main reason is that the automotive sector, which includes cars, trucks and parts, posted monthly deficits from April to September.

At the same time, auto-parts makers are expected to see profits drop nearly 41%, to about $1 billion in 2007, according to the Conference Board of Canada, a leading economic-research group. Not everyone is equally affected. "You have to be smart to offset the impact of foreign-exchange fluctuations," says Mark Hogan, president of Magna International, based in Aurora, Ont. The $24.2 billion company--a strategic supplier to the world's leading automakers with operations in North America, Europe and Asia--moved more than 300 jobs from Canada to Mexico in the past two years in anticipation of a stronger loonie. "When you're supplying new vehicles, you have to make sourcing decisions three or four years ahead of production," says Hogan, who is asking his 52 remaining Canadian plants for annual productivity gains of 6% to 10% to avoid offshoring more jobs. Gerry Fedchun, president of the Automotive Parts Manufacturers' Association, says his industry can adjust to a strong loonie rivaling the greenback, but there will be consequences. "We're going to shrink dramatically if the Canadian dollar stays where it's at," says Fedchun.

Clothier Nygard was ahead of the curve, having outsourced most of his company's production to Asia years ago. He's not alone; annual manufacturing shipments of made-in-Canada garments have plummeted more than 35%, to about $4.5 billion, since 2002. "With the rising dollar, we couldn't afford to make everything in this country anymore," says Elliot Lifson, vice chairman of Montreal-based Peerless Clothing, which has outsourced 70% of its production to plants in China, India and Vietnam over the past three years. Once the loonie passed 80-c-, the $500 million company, which has exclusive licensing agreements with top designers, including Ralph Lauren, Calvin Klein and Michael Kors, exporting to the U.S. became problematic. "Our margins would have been eaten up," says Lifson. Peerless continues to make its most expensive garments at a Montreal plant that employs 2,000 because of its proximity to the company's main distribution center in St. Albans, Vt. "It costs money to have inventory sitting for weeks on a slow ship from China," says Lifson.

Quebec Premier Jean Charest recently announced a $620 million aid package to help his French-speaking province's ailing manufacturers and has urged the federal government to follow his lead. In the meantime, Mayor Eddie Francis of Windsor, Ont., near Detroit, is trying to cope with an 8.6% unemployment rate in a town known as the automotive capital of Canada. "It's a challenge and we're going to have to get through it," he says. The strong loonie may be great for cross-border shopping excursions, but it's of little help to anyone without a paycheck.