Canadian

Business Strategies

in Asia

L E A D I N G T H E W A Y

A C K N O W L E D G E M E N T S

The Asia Pacific Foundation of Canadaprepared this report with generous funding support from Western Economic Diversification Canada.

The Foundation is grateful to the projectSteering Committee members, who devoted considerable time and energy inproviding direction, ideas and critical feedback throughout this project. TheFoundation would especially like to acknowledge the work of Eleanor Gill,who managed this project and compiledthe information contained in this report.

STEERING COMMITTEE MEMBERS:Yuen Pau Woo, President and Co-CEO,Asia Pacific Foundation of Canada

Frank Eichgruen, Special Advisor, Western Economic Diversification Canada

Dr. Roslyn Kunin, Senior Fellow and Director of the BC Office, Canada West Foundation

Werner Knittel, Vice President – B.C. Division, Canadian Manufacturers & Exporters

Dan Muzyka, Dean, Sauder School of Business, University of British Columbia

Thomas Tam, Program Director,S.U.C.C.E.S.S. Business and Economic Development

Mladen Plecko, Manager– Policy and Planning, Industry Canada

George Tyszewicz, Senior Policy Advisor,Transport Canada

Marvin Hough, Regional Vice-President,Asia, International Business Development,Export Development Canada

Wayne Robson, Director and Senior TradeCommissioner, Foreign Affairs and International Trade Canada

Philip Chang, Associate Professor,Haskayne School of Business, University of Calgary

The authors would also like to thank allthe companies which generously agreed to share their experiences with the AsiaPacific Foundation of Canada so that otherscould learn and benefit from them. Theauthors would also like to acknowledge allothers who provided suggestions and information for this project. Those individuals and organizations that providedsubstantial assistance are recognized inAppendix A.

RESEARCH CONTRIBUTORS:Eleanor Gill, Research Associate, Asia Pacific Foundation of Canada

John Powles, Managing Partner, Pacific Bizlinks Trade Consultants, Inc.

Anne Park Shannon, Shannon & Associates,International Trade Consultants, Inc.

John Treleaven,The Treleaven Consulting Group, Ltd.

L E A D I N G T H E W A YCanadian Business Strategies in Asia

Canada has long enjoyed a mutually beneficial trading relationship with most Asian

countries. It has been a supplier of the industrial raw materials and foodstuffs that

helped underpin Asia’s economic modernization. But today Canada is losing economic

relevance in Asia. Its share of the overall Asian market is less than 1%, down from

1.72% in 1995 and 2.51% in 1984. Asia is booming and new markets are growing

rapidly while Canada remains fixed in a pattern of trading relationships that has

changed little in decades. At the same time it is forecast that China will soon overtake

Canada as the top source of imports to the US, perhaps within five years. Clearly,

there are many implications and consequences both at home and abroad of Asia’s

economic growth for Canadian business.

Asia’s growth offers new opportunities to Canadian companies, but they are also

faced with mounting challenges and competition. Yet few have developed strategies

that account for both changes in the international and North American economies.

Many Canadian firms have insufficient resources or expertise to develop appropriate

global strategies, yet they must find ways to overcome these strategic challenges and

constraints in order to survive. A small but growing number of Canadian firms are

actively developing and implementing new approaches that include a focus on Asia

within global strategies. Their visions present possible templates for success that

other Canadian firms could follow. This brief report, based on a series of case studies,

illustrates the ways in which some Canadian companies have developed successful

Asian strategies. The full case studies can be found at

www.asiapacificgateway.net/research/leading_the_way.cfm

AAsia is the fastest-growing region of the

world, producing one-quarter of global

exports, and accounting for over 35% of

the world’s GDP. This is projected to rise

to a 43% share by 2020. Asian economies

have become increasingly integrated

through growing intraregional trade and

investment during the past two decades.

The Japanese economy, despite a lengthy

stagnation following the collapse of the

asset bubble of the late 1980s, is healthy

again and remains Asia’s largest by far.

China is the region’s second-largest

economy and has experienced annual GDP

growth of 10% a year since 2002. India is

catching up after years of poor performance,

growing at an average of 6.8% since 2001,

rising to 9.2% last year. The region is bullish

on its future. Governments are making

significant investments in their port, rail,

roads and air infrastructures. By 2010,

China is planning to have 11 new railways

and 14 new expressways and increase its

total port capacity by 80% to 6.1 billion

tons, with annual container handling

capacity reaching 120-140M TEUs. Total

container handling capacity in Asia will

reach 200M TEUs by 2010.

GROWTH IN ASIA

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Asia measures up as one of the mainengines of world economic growth.

E

IMPACT ON CANADIAN BUSINESS

Even if Canadian firms feel no direct

impact from Asia’s growth, they should not

ignore the significant role that Asia has

come to play in the global economy.

Consequently, while few Canadian firms

have chosen to invest in Asia, any

company that produces goods and services

for domestic or export markets must

account for Asia in its planning. Canada’s

small and medium-size enterprises are

starting to consider how Asia’s economic

surge will affect them, and how they can

take advantage of opportunities and

mitigate any associated risks.

Growth in Asia is creating new and larger

markets for resources, consumer products

and technologies. There is a burgeoning

entrepreneurial class, as well as an

expanding middle class with substantial

demand for consumer goods and services.

China alone has more than 300,000 US-

dollar millionaires. There is a strong

demand in Asia for technologies that will

enhance economic development and

counter accompanying problems such as

environmental degradation.

However, this rise of Asia, and China in

particular, is also creating new challenges

for businesses. Across North America,

relative production costs are rising due to

abundant, low-cost labour in Asia. In a

recent survey of Canadian manufacturers

and exporters, the biggest strategic

challenge cited was rising business costs.

Growing demand in Asia for energy is

pushing up the price of oil and gas

worldwide. While greater demand for

energy means higher prices for producers

like Canada, the energy boom in Western

Canada has led to a severe labour shortage.

Global competition is intensifying for

Canadian firms, both from rivals that are

outsourcing or investing in Asia, and from

Asian competitors that are increasingly

able to compete in the same products with

similar levels of quality. Traditional

manufacturers are especially hard hit by

this competition.

3 |

Canadian firms are feeling thecompetition from Asian rivals.

CCanadians seem to understand the

opportunities and risks presented by Asian

economic growth. A national survey

conducted last year by the Asia Pacific

Foundation of Canada (APF Canada) and

The Globe and Mail on Canadian views on

Asia revealed that 42% of respondents

believed China holds the most potential

for Canadian exports and investment. Far

fewer, 29%, saw the US in the same light.

In contrast to this perceived importance of

Asian markets, another survey showed

that only 17% of companies have a formal

China strategy. It is tempting to conclude

that the impact of Asia in Canada is felt

more at the consumer rather than the

corporate level.

However, an increasing number of

companies are thinking globally, developing

global strategies and considering how Asia

in particular affects their activities. In this

year’s Asian Investment Intentions Survey

by APF Canada, the majority of

respondents (all of them companies that

already have facilities in Asia) reported

that their investments are focused on

supplying Asian customers and accessing

Asian markets. In contrast, only 10% of

respondents are planning further

investments in Asia to remain competitive

in North America. Some 15% of respondents

are investing in Asia to supply the Canadian

market. Furthermore, in a survey

conducted last year of Canadian

manufacturers and exporters, an equal

number of respondents were seeking to

access the Chinese market as those that

were seeking to maintain global

competitiveness.

The primary methods of doing business in

Asia remain unchanged: there is still a

need to understand local conditions and

ASIA BUSINESS STRATEGIES

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Gemini Fashions manages productionin India from Winnipeg.

culture, create and maintain partnerships

and relationships, conduct due diligence,

and localize products. These protocols

should be understood by any company

before considering involvement in Asia.

Canadian companies have been learning to

master these skills in Asia for decades:

there is no easy way to achieve success.

But the degree and pace of change in

conditions, market opportunities and cost

structures in Asia are increasing, and the

complexities these create are multiplying.

In order for companies to adapt and

succeed in the global market, they must

engage in constant re-thinking, readjusting,

innovation and creative idea generation.

Canadian companies can pursue several

options in their quest to engage Asia.

Specific approaches include: outsourcing

and developing global supply chains; using

investment as a tool to access global

supply chains and new markets; focusing

on service sectors and moving up the value

chain; and becoming involved in secondary

industries related to Asian trade and

investment. Different companies have

used different strategies, or combinations

of strategies, depending on specific

circumstances.

OUTSOURCINGFirms are increasingly turning to outsourc-

ing. Successful manufacturers like Palliser

Furniture, priMED and Gemini Fashions

have turned to China, India, Indonesia and

Mexico in order to remain cost-effective.

Outsourcing is loosely defined here to

include importing lower-cost components,

as well as offshoring, which is the produc-

tion of one’s own products overseas at a

lower cost. For Canadian firms, China is

currently most commonly utilized for

outsourcing. A recent study by Canadian

Manufacturers & Exporters shows that 36%

of Canadian companies source products or

components from China, while 42% say

that China holds the most opportunity for

low-cost imports. Other low-cost economies

such as Vietnam, India and Mexico are

also becoming popular alternative out-

sourcing options. The stronger Canadian

dollar and increased global competition

make it imperative that Canadian firms

develop the ability to produce goods and

services cost-effectively. In today’s supply

chains, production is distributed around

the globe to seek the highest efficiency

and lowest costs for each component of

the final product. Firms use inputs from

multiple sources to make a single product.

As a result, roughly one-third of world

trade is intra-firm. This phenomenon is

revolutionizing most industrial sectors and

is also resulting in greater focus on

specialized production. Consequently, the

line between imports and exports is

increasingly blurred and managing global

production has become complex.

5 |

Production line at priMED plant in Liyang, China.

FOREIGN DIRECT INVESTMENTForeign investment is becoming an

increasingly important part of corporate

global supply chains, market-access,

production, and cost-restructuring

strategies. In the case studies, Palliser

Furniture, Gemini Fashions, priMED,

Hanfeng Evergreen, Alcan, BioteQ, and

CIBT School of Business and Technology

have all used outward investment to

further their strategic objectives.

Foreign investment allows a firm to

establish a presence in an overseas market,

providing a higher level of control over

production and distribution networks and

foreign sales affiliates. This enables firms

to achieve the most cost-effective supply

chains, production platforms or distribution

mechanisms, ultimately ensuring better

product quality. Canadian direct investment

in Asia has grown from $7.37B in 1990 to

$30.4B in 2005, although it is concentrated

primarily in Australia and Japan. This

level seems paltry when compared to

Canadian investment in the US of $213.7B

and other developed countries’ invest-

ments in Asia (US investment in Asia

reached $362.8B in 2004). The recent

Canadian enthusiasm for China does not

match the reality that only 0.2% of total

Canadian outward investment is destined

for China. Clearly, Canadian firms have

generally not seen Asia as part of their

investment strategies.

Significant barriers remain to foreign

investment in Asia, in the form of both

governance and political risk (regulations,

legal systems, corruption and competition

policy) and insufficiently developed

infrastructure (roads, railways, ports and

telecommunications). Nonetheless, the

investment climate in Asia is becoming

increasingly liberalized, allowing foreign

firms to invest in a greater number of

sectors. In China, for example, foreign

enterprises are allowed to establish wholly

foreign-owned enterprises in selected

sectors, whereas in the past, they were

required to establish joint-ventures with

local partners. Companies such as Next

Level Games are taking advantage of this

recent liberalization by setting up

representative offices in China. Next Level

Games is a part of BC’s new media cluster

and its office in Beijing not only further

develops this cluster but creates links

between this cluster and Asia. University

of Alberta is following a similar strategy

with its science and technology partnership

with China’s Ministry of Science and

Technology to leverage Canadian expertise

in biotechnology and energy to access

Chinese expertise and funding in

these areas.

Investment from Asia into Canada ($20.9B

in 2005) is considerably less than Canadian

investment in Asia ($30.4B). Asian

investment into Canada has traditionally

come from Japan, which still accounts for

half of all inward Asian investment.

However, the inflow of capital from China

is increasing rapidly; in 2005, Chinese

investment into Canada ($1.36B) sur-

passed Canadian investment in China

($1.02B). As China ‘goes global,’ its firms

are looking to boost their overseas

investment, primarily in Asia but also in

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Hanfeng fertilizer production line.

Alcan packaging products.

developed economies like Canada. Chinese

firms recently indicated in a survey by

APF Canada that the most promising

sectors for investment in this country are

ICT, energy and biotech. Offshore

investment allows a firm to expand its

production abilities by creating new access

to resources, capital, knowledge and

technologies. Chinese businesses are taking

advantage of this strategy more aggressively

than are Canadian companies in China.

SERVICES AND MOVING UP THEVALUE CHAINThe services sector is opening up in Asia,

providing new opportunities for Canadian

firms, such as education providers, banks,

insurance companies and consulting,

engineering, architectural and accounting

firms. CIBT School of Business and

Technology, for example, is meeting

demand in China by providing vocational

and technical training programs.

Manufacturers are also becoming service

providers, adding design, distribution,

marketing and logistics services to their

traditional operations in order to capture

higher returns generated by these value-

added activities. Gemini Fashions, a

garment manufacturer, is successful be-

cause it adds value to its apparel through

design, branding, pricing and distribution.

Similarly, some firms are moving up the

value chain to capture higher profits in

niche markets, competing on quality,

innovation and custom products rather

than on price alone. Sunterra Enterprises,

for example, sells high-end pork products

at a premium price to Japanese consumers

who value its quality and cannot buy it

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Sunterra pork destined for theJapanese market.

Manufacturing wheels at theCAPTIN plant in B.C.

Next Level Games’ SuperMario.

elsewhere for the same price. Toyota

offshoot CAPTIN is remaining competitive

by acquiring engineering and R&D

capabilities while Saskcan Pulse is

upgrading Canadian quality foodstuffs with

traditional Asia know-how to succeed in

an alien environment. Morris Industries

has established solid business relationships

and captured markets by providing services

such as financing and training in addition

to manufacturing its seeder machinery.

Firms are also capitalizing on new export

opportunities in value-added sectors such

as high technology, research and

development, standards, licensing and

copyrights. Even transportation and

logistics companies are focusing more on

value-added areas by providing services to

meet customer needs for integrated

logistics management solutions. Firms can

build and manage partnerships and inter-

organizational relationships with both

suppliers and customers, and they think of

themselves as ‘asset managers,’ adding

value to their customers to realize a profit

on each piece of inventory.

SECONDARY INDUSTRIESFirms are capitalizing on rising demand for

a variety of services to facilitate trade,

such as currency exchange, information

technology, telecommunications, shipping

and logistics, financing, accounting and

legal services. For example, Custom House

is providing foreign exchange to businesses

as well as banks and financial services

providers that need access to foreign

currencies to make and receive payments.

Canadian firms also look to Asian Canadian

entrepreneurs and companies to find

business partners who are familiar with

Asian markets. SUCCESS Gateway to Asia

program is geared towards facilitating

these introductions and partnerships, by

linking Canadian manufacturers and

suppliers with Asian immigrants who can

facilitate new business relationships and

opportunities in their home countries.

These businesses and organizations are

not necessarily directly dealing with or

investing in Asia, but rather riding the

wave of growing international trade with

Asia. They are thinking globally but acting

locally, recognizing global trends and

positioning themselves, and Canada, for

future growth.

The most directly related secondary

industries emerge from transportation

hubs, or gateways, such as ports, airports,

highways and corridors, and inter-modal

operations. In Canada, these secondary

industries are found around Canada’s

gateways, from Vancouver’s Lower Mainland

and Prince Rupert ports, to Winnipeg’s

Mid-Continent Corridor, to the Atlantic

Gateway. Western Canada alone moves an

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The main plant of Saskcan Pulsein Regina.

estimated $381B each year in goods and

services involving a myriad of air, truck,

rail and marine services, cargo handlers,

transportation and logistics suppliers,

storage and warehousing, freight forwarding

and transportation maintenance operators.

In British Columbia, some studies estimate

that up to half of all economic activity is

related to transportation. In Greater

Vancouver, one of the largest transportation

hubs on North America’s West Coast for

the movement of people and goods, one

in five jobs is related to trade or

transportation. In 2004, $81B worth of

goods and 22M tourists passed through the

region, using its ports, railways, roads,

bridges, airports and borders, and

generating employment for 134,000 people.

Secondary industries also include services

that facilitate and increase the movement

of goods and the flow of investment capital.

Although there is little research on

gateway-related services, a recent survey

by the Asia Pacific Foundation of Canada

of the top accounting and law firms in

Vancouver found that almost all the

respondents carry a designated team, or

practice, which provides services related

to Asian business; in the majority of cases,

the Vancouver practice is the “lead” or

“head” practice within the Canadian firm

with respect to Asia-related business.

If a gateway is recognized by trade and

services companies as a platform for

opportunities, companies will locate

around that gateway to form a cluster

capable of servicing the needs of

exporters, importers and investors. This

amplifies the economic significance of a

gateway. It also spurs the development of

other industry clusters, in areas such as

high-tech and research and development.

While some research has been done to

map and understand the development of

industry clusters in Canada, little research

has been done to understand how

transportation gateways give rise to

secondary industries related to trade and

investment, or to map the relationship

between transportation gateways and

industry clusters that either feed into the

gateway or are supported by it.

9 |

Farmers in Mongolia with MorrisIndustries’ air seeder.

FForward-thinking managers of many

Canadian firms realize they will lose

competitiveness unless they incorporate

Asia into their long-term strategies. More

Canadian firms need to consider how their

businesses will respond to the emergence

of Asian economies, both as competitors

and as markets. While the strategies

employed by firms covered in the case

studies underlying this report are often

company and sector-specific, there are a

number of commonalities among them:

the utilization of outsourcing, the building

of global supply chains, and the move up

the value chain. Increasingly, they are

thinking globally and acting locally by

participating in secondary industries that

emerge from increased transpacific trade

and investment.

Companies successfully engaged in Asia

rely on business protocols that are unique

and specific to Asian countries. Firms have

negotiated partnerships, accessed local

knowledge, fostered long-term and mutually

beneficial relationships, and remained

committed to their Asian strategies. New

entrants will face challenges and risks in

Asian trade and investment, but the

presence of successful Canadian companies

proves that the challenges can be overcome.

Developing a new mindset to understand

and manage global change is vital for

Canadian business to succeed in the global

marketplace.

MEETING THE CHALLENGE

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A S.U.C.C.E.S.S. Gateway to Asia tradeshow booth.

Graphic Design and Layout: Five Stones Creative

Cover Photograph: David Roels

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