MAY 1993 Economic Digest - Importing and Exporting

MAY 1993 Edition

NAFTA

            Despite the fact that President Clinton's budget director has claimed that NAFTA is "dead," no legislation has been presented to Congress as yet. (Clinton said recently that "expanded trade is the only way a rich country can grow richer").

            Meanwhile, the private sector presses ahead. Pepsi-Cola announced investment in Mexico of $750-million over the next five years and Coca-Cola will spend $195-million this year. Also, Anheuser-Busch, the brewing giant, is to invest $477-million while its competitor, Miller Brewing Co, is working to complete a deal in Mexico worth $273-million with Molsons Breweries of Canada.

            Closer to home, the Okanagan fruit industry has come out in favour of NAFTA because it will open up the Mexican apple market and could see the country become the third-largest foreign market for Okanagan apples behind the U.K. and U.S.         

RETAILING

            Research compiled by Management Horizons shows there are four Canadian companies among the world's top 100 retail chains. They are:- Loblaws (50th), Univa Inc (71st), Hudson's Bay (92nd) and the Oshawa Group (Food City and IGA), 96th. Top two in the world are Wal-Mart Stores and K Mart and 27 other US chains are on the list. Surprisingly, 55 European firms are included but there are just 10 from Japan and two from Australia.

            The average chain in the top 100 has more than 1,900 outlets, sales of $10-billion US and profits of $240-millions. However, the top 25 companies alone account for nearly half the list's sales and 79 per cent of profit.

AUTOMOBILES

            A strong performance by Chrysler Canada and a good one by Ford Canada in April helped the Canadian subsidiaries of Detroit's Big Three stay on the plus side. Chrysler had a 17 per cent increase in deliveries compared to a year earlier and in the first four months of this year has sold 14 per cent more than in the same period in 1992. Ford, whose truck sales were up 28 per cent in April, had a sales increase of 16 per cent for car and truck sales combined. Japanese and European auto makers are not doing too well in Canada. Honda sales were down 16 per cent in April and 26 per cent for the year to date. Toyota was down 13 per cent in April and Volkswagen dropped 46 per cent.

            In the U.S., a strong yen and a rejuvenated Detroit have caused Japan's drive into the American car market to falter, registering their biggest sales decline since the 1970s. In the first three months of the year, sales of the Honda Accord dropped almost 40%. Honda as a whole saw its sales drop by 18.3 per cent in the same period. Toyota was down 7 per cent and Mazda by 16 per cent.

            Experts say there is a change in buyer sentiment and that Detroit now has quality products at competitive prices. American workers have adopted the techniques of  flexible teamwork and quality control learned from the Japanese. Proof of this is held to be the transatlantic emigration of German makers. Last year BMW built an American plant. Earlier this month, Mercedes said it would open an American factory and Audi is studying the possibility.

            Two years ago, Mercedes said that they would never open an American assembly line. The reason for the change of heart is simple maths. German manufacturing costs just over $22 an hour against $15 in the U.S. Also, the company needs 122 man-hours of labour to build each of its 300-series cars at its most efficient plant in Germany. At their new plant being built in South Carolina, they estimate that a 3-series model will take only 53 man-hours to build.

MANUFACTURING

            Futurist John Kettle foresees a continuing decline in the share of jobs devoted to making things. In 1976, there were 3.4-million goods-producing jobs and 6.1-million service jobs. By 1992, 3.3-million people were making goods, but 8.9-million were in services. Projecting these trends, he estimates 3.6-million goods jobs and 11.9 service positions in ten years.

            However, fewer people are making more. The 3M Company, with 1992 profits of $1.2-billion on sales of $14-billion, keeps raising targets for its workers. In the past decade, 3M has doubled its sales while slightly reducing the size of its worldwide payroll, which stood at 87,015 in December.

            According to Rashi Glazer, chairman of the marketing department at the University of California at Berkeley, "Service is about seeing things through the customer's eyes. The minute you start doing that, you shift from selling products to selling a relationship."

            And Richard Whiteley of Forum Corp., Boston suggests, "In a lot of organizations, people listen to the voice of hierarchy. The boss becomes the customer. This is called internally focused behaviour. It is one of the huge detriments to becoming a successful organization. Employees spend all their time posturing and looking good."

TAIWAN

            Until recently, few Canadian companies did business in Taiwan which now has a per capita income of $10,000 (US) and foreign exchange reserves of $80-billion, and those that did probably just shipped lumber and coal to the island. 

            No longer. Taiwan is now Canada's 13th-largest trading partner and many exports are in the high-tech and energy sectors as Taiwan strives to upgrade its industrial base. Two-way trade in 1992 reached $3-billion (Can) up from $70-million in 1970. This figure is almost equal to Canada-China trade. In the 1980s, a restrictive Canadian visa policy resulted in the U.S. having a preferred trade access. Last month, Taiwan agreed to lower duties on imports of Canadian beef and if Taiwan joins the GATT this year as expected, then the playing field will become level.     

            Taiwan is now letting out contracts under a six-year $350-billion (US) infrastructure development program which is estimated to take 12 years to complete. Canadian officials are urging companies at home to investigate the more than 700 projects which cover areas ranging from the environment and transportation to tourism and housing which are expected to raise gross domestic product per head to $14,000 per year.

            MacDonald Dettwiler and Ebco Technologies have recently been awarded large contracts and Canada Post Corporation has signed a contract to help set up five mail distribution systems.

HOOVER REVISITED

            Last month we recounted the marketing fiasco which found this famous UK appliance manufacturer, a division of the Maytag Corporation, with 200,000 applications for two free tickets to Europe or the US for anyone who bought an appliance valued at $150. The damage control has now begun.

            Hoover has chartered planes flying to Europe and the US and has taken block bookings on 1,100 flights. The first charter, carrying 323 passengers, left in late April for Orlando, Florida. It is now estimated that this promotion will cost $48-million. At Maytag's recent AGM, shareholders complained about the Hoover promotion and executive compensation. The Chairman, who earned $455,000 in 1992, defended the high salaries saying they were necessary to attract quality leadership and assure the company's future!

THE ENVIRONMENT

            We reported in December that the environment is going to be a growth industry for the 1990s. A retired fire chief in Newfoundland decided to pile up wood bark and fish heads on his hobby farm near Corner Brook. This year, his Genesis Organic Inc. expects sales over $1-million and 1,000 tonnes of his rich compost was shipped this spring to Saudi Arabia. In the company garden, Genesis is growing bumper crops of watermelons, peanuts and 300-pound pumpkins, all produce you are not supposed to be able to grow in Newfoundland. The company is also shipping compost to Ontario and Maine and half of the company's sales are outside Canada.

BEEF

            Canada exports 38 per cent of cattle and beef production to the U.S. worth over $1.5-billion a year. Now, Canadian cattlemen have asked Ottawa to trade some of its best farm security packages for ones that Americans will accept. Noting that U.S farmers have filed non-stop trade actions against the Canadian pork industry for more than nine years, the Canadian Cattlemen's Association wants to avoid this fearing that there would be a rapid decline in Canadian market prices if they were hit with countervailing duties because of unfair stabilization payments.

PORT OF VANCOUVER

            11 shipping companies are ready to move to Vancouver's International Maritime Centre now that the immigration hurdles have been overcome. The Centre was set up in 1991 to assist foreign shipowners to move their head offices to Vancouver. The federal government is to speed up the process for permanent residence for the shipowners' essential employees. It is estimated that from 35 to 40 people will seek permanent residence but around 200 jobs will be created for Canadians. Nine companies are based in Asia, one in Latin America and one is in the U.S. They have from seven to 20 ships each.

            Last year, container shipments through Vancouver were up 15 per cent to a record 441,055 units. Grain shipments reached 14.4 million tonnes, up eight per cent over the previous year and also a record. Also, there was an increase in Alaska cruise ship passengers to 449,239 from 423,928. However, exports of coal were down 26 per cent, potash down 21 per cent and sulphur

off by 19 per cent.

CATEGORY-KILLERS

            These are fast-growing, low price, high volume retailers who are significant players in the commercial real estate industry nowadays. Their stores are huge, some as big as 140,000 square feet which must be surrounded by about 800 parking spots and they all have aggressive expansion plans. Traditional supermarkets object to these stores because they usually locate on industrial-zoned land which is often a fraction of the cost of commercial-zoned property.

            Toys "R" Us opened with four stores in Ontario in 1984. Today they have 44 outlets across the country and will open another five this year. Costco opened in Burnaby in 1985 and now has 13 stores in the west and shortly will move into Ontario and Quebec. Price Club launched their first store in 1986 in Quebec. It now has 17 outlets and plans to expand to the west. Business Depot opened in Toronto in 1991. Now it has 13 stores in the east and plans to have 26 by the end of the year. Aikenhead's Home Improvement Warehouse first built in Scarborough, Ontario in 1992. They now have four stores and plan to have 10 stores in the Toronto area alone by 1995. Two of their Ontario stores are adjacent to Price Club outlets.

MANUSERVICE SECTOR

            The distinction between services and manufacturing is losing its meaning. General Motors is the archetypal manufacturer yet its biggest single supplier is not a steel or glass firm but a health-care provider, Blue Cross Shield. In terms of output, one of GM's biggest `products' is financial and insurance services which along with EDS, its computing services arm, now accounts for a fifth of total revenue.

TOILETS!

            Founded in 1985, the Japanese Toilet Association describes itself as a "voluntary network of researchers, architects, government officials, toilet manufacturers, sanitation and transportation enterprises dedicated entirely to the toilet." The association is devoted to "toilet culture," has established a National Toilet Day and convened seven symposiums.

            In 1991, Hong Kong's city fathers consulted the association on public lavatories. In France a sister body has sprung up, France's Association of Toilets and in June an International Toilet Symposium will be held in Kobe. Despite these encouraging strides, the association is worried. The world still suffers from "the simple lack of awareness of the present conditions of the toilet and the critical need for change."

            It is tempting to wonder if this is destined to become a worldwide movement.

APRIL 1993 Economic Digest - Importing and Exporting

APRIL 1993 Edition

NAFTA

            President Clinton wants side deals on labour, environment and trade-volumes before he will press Congress to adopt NAFTA. Canada has now introduced NAFTA legislation to parliament and the Mexican ambassador to Canada says that Mexico will pull out of the free-trade agreement if Canada and the U.S. try to impose deals which infringe on Mexican sovereignty.

            The U.S. is now talking about creating commissions and tribunals to deal with these issues. However, disputes mechanisms are a two (or three) way street and it is hard to imagine circumstances which would allow Mexico to file a complaint against Canada and the U.S. because of pollution on the Great Lakes, for instance.            It seems that the panels will likely undertake advisory roles, with the power to investigate and publicize rather than issue  binding decisions.

CUSTOMS TRADE SEMINAR

            Revenue Canada will host its next Customs Trade Seminar in Vancouver on 26 May 1993. The seminar will concentrate on individuals in the small and medium-sized business sector who are or will be importing goods to, or exporting from, Canada.

            It will address topics which will be of interest to the importing community in general, including exporting from Canada\importing from the United States; the basic Customs process; valuation; the adjustment process; the New Business Relationship Initiative; and duties relief.

            There will be an exhibit area staffed with officials from National Revenue, U.S. Customs and other federal departments. The registration fee is $100. For further information, please contact Roslyn MacVicar, Registrar, Customs Trade Seminar '93, at 604-666-2973. 

CROSS-BORDER SHOPPING

            February saw 246,000 fewer Canadians crossing into Whatcom County compared with a year earlier. A recent survey indicated only slight cost differences on many of 33 popular items checked in metropolitan Vancouver and Whatcom County. It showed that shoppers would pay US$1,337 for the goods in B.C. and US$1,210 in the U.S. Twenty of the items were cheaper in the U.S. and thirteen cheaper in B.C.

            Cross-border shopping by mail is plummeting also, perhaps by as much as 25 per cent, due to the declining dollar and the rules imposed last year by Revenue Canada which added a $5 duty-collection fee by Canada Post and reduced the entitlement for a single order from $40 to $20.

            Now, Revenue Canada is examining a proposal by the Frontier Duty Free Association which wants to sell untaxed gasoline to tourists and Canadians leaving the country for at least 48 hours, though no one has explained how the latter group would be monitored. The owner of West Coast Duty free at Pacific Highway has stated that he would be prepared to invest $2-$3-million in capital costs and hire 15 more people if the proposal is approved.

PRESCRIPTIONS BY MAIL

            Since opening last August, Toronto-based MediTrust Pharmacy Inc has become the "Price Club" of pharmacies with 50 staff and 50,000 square foot facility and has upset many competing retailers along the way. MediTrust makes its money doing high-volume business and undercutting the markups and dispensing fees of traditional pharmacies and should sell $33-million worth of drugs in its first year.

            The niche MediTrust is after is the employer-sponsored drug plan market, worth about $1.4-billion in Canada. MediTrust charges a flat dispensing fee of $5, against an Ontario average of $10.08, and a mark-up on unregulated drugs of 10 per cent. On average, employee drug costs have been rising at a rate of 12 per cent a year, which will be closer to 18 per cent in 1993. Many firms with expensive employee drug plans are faced with

reducing drug costs or reducing benefits.

            One company, with 150 employees, has saved 28 per cent on drug costs in the first six months. Employees can phone or fax their prescriptions from work during the day, and then have them delivered to the office or their home within 24  hours. MediTrust bills the insurer direct. MediTrust expects to be  ministering to the prescription needs of 250,000 in Ontario by the fall when they will begin expanding to other provinces.

ABSENTEEISM

            According to the Conference Board of Canada, absenteeism robs the economy of an estimated $15-billion a year, eroding productivity by up to two percentage points.

            The board states that working parents, an aging population, increased job stress, abuse of sick leave and overly generous workers' compensation are making absenteeism a growing and costly problem for employers and the economy. 20 per cent of employees account for 50 per cent of all sick days taken. The report suggests that fast-changing technology, increased workloads and job insecurity have added to worker stress which is responsible for one quarter of absenteeism. Older workers are more likely to suffer certain types of illness or injury, such as back problems and the increase in working parents, especially mothers, creates difficulties in balancing work and family responsibilities.

JAPAN

            Japan's trade surplus surged in February intensifying pressure for it to stimulate the faltering economy and boost imports.

            Canadian exporters looking to penetrate the Japanese market are being extended a helping hand by the Japanese External Trade Organization (JETRO) which has opened a Business Support Centre in Tokyo. The Centre will offer a range of free services on a temporary basis to businesses and trade organizations with a focused plan to approach the Japanese market for ongoing export business, but without an established base in Japan.

            The Centre offers private furnished offices, full-time advisors on how to approach the Japanese market, a business library, use of the JETRO database terminal, meeting rooms, support staff and a variety of other valuable services. More information on this Centre may be obtained from the JETRO office in Vancouver at 604-684-4174.

MARKETING

            Hoover, the well known UK appliance manufacturer and a division of Maytag, was recently in the news for contravening the European social charter by closing a factory in France and opening another one in Scotland where they are paying employees considerably less. They are in the news again with a scheme that has cost the jobs of the company's top three executives, including the managing director.

            Consumers were offered two free return flights to Europe or the U.S. (value up to $1000), if they purchased any appliance worth more than $150. The company relied on the fine print in the offer, such as when the flights can be taken and which hotels may be used, to deter purchasers from actually collecting their tickets.

            Purchasers were clearly better at maths than Hoover executives and there have been 200,000 applications for flights since the promotion was launched last summer with only 6,000 tickets issued so far. Even worse, recent purchasers seem to have been more interested in free flights than household appliances. The campaign  has not built up real demand but merely created a gigantic second-hand market in unused Hoover appliances. Maytag said that it will take a $30-million charge against after-tax profits to pay for the mess created by Hoover, which is equivalent to nearly half of Maytag's net income for last year.        

INTER-PROVINCIAL TRADE

            Almost everyone agrees that tearing down provincial trade barriers will contribute several billions of dollars to the economy. However, two provinces are going the other way.

            The New Brunswick government, frustrated by Quebec's refusal to ease its strict labour code, has decided to take reciprocal action against Quebec companies and labourers who want to work in the province. Quebec companies bidding for construction and government contracts will now have to follow the same strict guidelines that govern labour in Quebec. That means Quebec companies will have to hire local, unionized workers.

            Meanwhile, the Quebec government is close to signing an exclusive deal for three hundred transit buses if a company agrees to keep an assembly plant open in the province. The same buses obtained from Ontario could each be acquired for $35,000 less.

SUNDAY SHOPPING

            Last June, the Ontario government allowed Sunday shopping in an effort to stem the tide of cross-border-shopping. This has had a dramatic effect on corner stores, a $3.8-billion a year sector. It is now estimated that they will lose $300-million in sales this year because of Sunday shopping. An association representing corner stores warns that without government intervention, the sales decline will result in closings and layoffs among the 52,000 employees of the 6,000 corner stores. 200 stores have closed since last June and an unknown number of independent stores have filed for bankruptcy. To offset their hardship, store operators want the right to sell beer and wine and earn commission from the government for collecting sales tax and GST.

            In New Brunswick, a survey of small businesses indicates that 79 per cent of those responding are opposed to Sunday shopping  as a way to keep consumers from crossing the border saying that Sunday should remain a day of rest.

EMPLOYMENT

            48,000 jobs were added to the economy in March and employment has increased by 203,000 since April of 1992. The added jobs were primarily in services but there were also 9,000 jobs in the manufacturing sector bringing the total of additional manufacturing jobs to 42,000 in the past five months. Manufacturing has benefitted in the past year from soaring exports, but new jobs have been slow to appear as companies increased output with less labour.

            The economy has recovered 40 per cent of the 409,000 lost during the recession according to the Bank of Nova Scotia. Despite the buoyant job growth, the unemployment rate still edged up to 11 per cent as 85,000 job-seekers returned to the labour market.

GOVERNMENT

            The Newfoundland government has called an election to underline its determination to cut program spending by $29 million and civil service wages by $70 million. New Brunswick is eliminating 500 jobs and limiting spending to a 1.7 per cent increase. Nova Scotia, which has already frozen public service wages, announced plans to cut its spending by 10 per cent and to pass legislation requiring a balanced budget within three years. Manitoba has bought in a budget  with a 1.2 per cent cut in expenditures. The Saskatchewan budget cut spending by more than $100 million and the Ontario government is attempting to get union agreement to slash the civil service before taking more drastic action.  Quebec has frozen public service wages.

            Only in B.C. is it business as usual. Tax increases of $600 million to support a spending increase of 5.7 per cent and several thousand new employees added to the public service.      The Retail Merchants' Association of B.C estimates that the recent increase in the provincial sales tax will result in 4,200 jobs lost in the retail sector.

U.S. CUSTOMS AUDITS

            An apparent rise in U.S. Customs Service audits is causing many Canadian shippers to stop claiming tariff exemptions under the Canada-U.S. Free Trade Agreement according to American trade lawyers and customs brokers. Many Canadian shippers and U.S. importers have opted to pay the full tariff rather than take the time to determine if the product qualifies for a duty break. Many shippers are declining the opportunity for substantial duty reductions for fear they will be audited by U.S. Customs, seeking to deny their claim.

            U.S. Customs have denied that Canadian companies are targeted for audits but acknowledged that audits throughout the country are rising.