Twenty years ago, Toronto’s Bassett & Walker International (BWI) imported agricultural commodities into Canada. Today, it’s a whole different kind of company. Rather than importing goods into its home country, BWI is focused on helping other countries—especially developing countries in the South—trade between each other. As of this year, about 30% of BWI’s business involves exporting from Canadian sources to other markets, 30% is exporting from the U.S. to other markets, and the remaining 40% consists of what’s called “South-South” trading. BWI manages buying, selling and trading of beef, chicken, soy, dairy and more in over 40 countries. “It’s going from Brazil, Argentina, Chile and Colombia to South Africa, Ivory Coast, Angola and Mozambique,” says CEO Nicholas Walker. “We also sell goods from Argentina into China, and Chinese fish into Colombia and Peru.”
BWI is one of only about 100 agricultural product brokers who collectively do half a trillion dollars in trade every year. It’s a poster child for how Canadian businesses can tap into the surging growth in South-South trading—trade between developing nations—one of the biggest growth opportunities in 21st-century global commerce.
Mindful of the growth in Latin American disposable income and a proliferation of bilateral trade agreements in the mid-1990s, Walker used his experience in the Mexican market to expand into brokering agricultural trade to Third World nations that were newly industrializing. “We figured, if this is how it works, maybe we should start looking at Africa as well,” says Walker. “Our philosophy is that, if we’re going to sell to a country and invest the time, money and energy to establish and maintain these relationships, we might as well try to find ways we can add further value by buying product from these countries as well.”
In the world marketplace, there are three major types of two-way trade. First is North-North, or trade between developed western nations, such as Canada, the U.S. and Europe. Next is North-South trade, which is between developed and emerging markets, such as Canada and China or Germany and Brazil. Then there is South-South, or trade between the emerging markets themselves, such as China and India. The first two kinds directly involve Canada as a trading partner, while the third does not. But if we don’t get involved, we’ll miss out on one of the main engines of growth over the coming years. More than 80% of global GDP growth in 2012 is expected to come from emerging markets. South-South trade is projected to double between now and 2030, from 13% of global trade to 26%. According to the IMF, North-South trade is growing by about 15% a year right now, compared to 21% growth for South-South trade. The global trade pie is getting bigger, but Canada’s slice could get thinner if we don’t take measures to invest more in the trade between emerging markets.
In the 20th century, the two most influential trade powers were Europe and the U.S., from which the bulk of innovation and major push behind every industry emerged. Things have changed. “If you look where the markets of scale in terms of growth, innovation and productivity are now, they’re largely in the emerging world,” says Rana Sarkar, president and CEO of the Canada-India Business Council (C-IBC). “And the relationships between these countries are not going to be through us. They’ll be doing it amongst each other, so we have to work hard to intercede and find where we can add something to those relationships.”
According to Export Development Canada (EDC) chief economist Peter Hall, Canada’s trade growth with traditional partners such as the U.S. has been lacklustre over the past decade. Our trade with emerging markets—North-South—has grown by 12%. However, our foreign-affiliate sales (sales by Canadian company subsidiaries in emerging markets) has grown even faster, at a rate of 13%. An EDC study last year found that Canadian foreign affiliate sales reached $508 billion in 2008 and surpassed Canadian merchandise exports to all major world markets except the U.S. “The foreign-affiliate sales we’re doing in emerging markets are three times the export North-South trade we’re doing there,” says Hall. Foreign-affiliate sales don’t directly reflect South-South trade, But it’s a strong indicator of how much Canada has invested in emerging markets and the potential for it to be leveraged in trade among these fast-expanding economies.
There are a few ways Canadian companies can participate in South-South trade. The first, and most direct, is to set up operations in an emerging market and use it as a hub for trade. Bombardier has operations in more than 60 countries, with 70,000 employees and 76 production and engineering sites among them. In 2008, the company built its most recent Indian plant in the city of Vadodara, making it the first multinational with the capacity to manufacture complete railway cars in India. The plant has built subway cars for New Delhi and is poised to serve Southeast Asian markets.
The automotive industry has been a leader in supply-chain innovation and its potential for South-South trading. Canadian auto component manufacturing corporations such as Magna International, Martinrea and Linamar boast vast operations and trade networks around the globe. In China alone, Magna has a headquarters and 31 manufacturing and engineering facilities with more than 7,000 employees.
Another strategy is to act as facilitator between trade partners. This includes using our North-South and North-North experience to help others negotiate South-South. There has been significant growth in preferential trade agreements between developing nations over the past 15 years, growing from 150 in 1995 to 290 in 2010. “We’re seeing a push for more inter-regional trade agreements between countries like Japan, Korea and India,” says CIBC’s Sarkar. “Where Canada can play a role is to help countries like Japan and Korea with their India strategy, for instance.”
This isn’t just a game for the Magnas and Bombardiers of the world. Small and medium-sized enterprises should look at getting involved. Yet a recent KPMG study reported that 60% of Canadian companies have no emerging-market strategy. EDC’s Hall says that smaller companies can take a staged approach, perhaps starting with a joint venture or partnership in an emerging market, expanding to a fully owned operation and then looking into trade options from there. “It’s about establishing a beachhead inside a southern market that’s trading with other southern markets to open yourself up to the entire region,” he says.
Toronto-based Samco Machinery has done just that. For the first 35 years of its existence Samco stuck close to home. As recently as 2005, 90% of sales for its metal roll forming business came from the U.S. Around that time, company founder Joe Repovs read Thomas Friedman’s book on globalization, The World is Flat, and became convinced that Samco had to look beyond North America. So Repovs and his son Bob, the company’s president and COO, got on a plane and went to India.
“We picked India over China because of India’s British-based legal system and English-speaking population,” says Bob Repovs. “Also, a number of our key employees here in Canada are originally from India, so having operations there makes it easier than in China.”
Samco’s India strategy has gone through three stages. First, the company integrated Indian suppliers into its supply chain. Phase 2 was establishing a joint manufacturing venture with an Indian partner in 2006. Soon after, the company landed a key contract with Tata Motor to produce the chassis for its Nano car. In 2008, Samco bought out its partner and became sole owner of its Indian operation, which now has about 50 employees.
While the company has only started to realize the potential of its Indian operation, Bob Repovs recognizes the geographical advantage for future trade. “Saudi Arabia is right there,” he says, “and China is close by, so there are promising options.”
For businesses wondering how and where to take the first step, Walker says the most important thing is to get out the door. “You can’t just sit behind a desk and make phone calls, you have to get to the marketplace,” he says, suggesting Canadian consulates and trade missions around the globe as an excellent place to start. “Get in front of everybody’s face and ask a lot of questions.”
Sarkar says it’s key to Canada’s growth that companies become more involved in global supply chains. “It means getting Canadians abroad, tapping into our diaspora networks and working with our major companies like Bombardier as torch bearers to help promote our prowess in a whole variety of areas.”
For many, fear of the unknown—particularly when the unknown can be very expensive—holds them back from developing an emerging-market strategy. So for Walker, the key was making the unknown known. “You have to do your homework, even before you contact the Canadian consulates or embassies,” he says. “You can get all the contacts you want, but if you don’t understand the dynamics of the market, you’re going to lose a lot of dough. Everyone has a learning curve, but the more you know the shorter it will be.”