Tags: Canada | jobs | Buffett | Heinz

Buffett Closing Plant Shows Loonie Drop No Canada Jobs Panacea

Monday, 10 March 2014 10:53 AM

Derek Friesen thought he would be following in his father’s footsteps when he became the third generation of his family to work at H.J. Heinz Co.’s tomato processing plant in his hometown of Leamington, Ontario.

That plan ended six months into his job, when Warren Buffett’s Berkshire Hathaway Inc. and 3G Capital Inc., the ketchup maker’s new owners, announced in November the 105-year-old plant would close.

“You could just feel yourself sinking,” Friesen said of the moment he was told he’d lose his job. “It’s literally the center of town,” said the 24-year-old, who helped pack 1,000 cans of tomato juice an hour. “Everyone either works there or knows somebody that works there.”

Local investors have stepped in with a plan to keep part of the plant running, which could save 250 of 700 jobs in the city known as Canada’s tomato capital. Friesen says he doesn’t think he’ll be among the lucky ones. Instead, he’ll join more than 36,000 Canadians who lost manufacturing jobs since the start of 2013 as companies from Heinz to Kellogg Co. to Novartis AG announce plans to shut plants.

The job cuts have come despite a pick-up in global growth and a 13 percent drop in the Canadian dollar since September 2012, raising concern that Canadian factories will struggle to compete with plants in China, Mexico, and even the U.S., where the much-touted manufacturing renaissance has been fueled by declines in real wages and two-tier pay scales that mean less money for new employees.

“The tomatoes are going to go to the plants that have the low production costs,” Buffett said in November at an event in Detroit. “It’s really a question of having an unprofitable plant and concentrating production in a more profitable plant.”

Consolidating Operations

Pittsburgh-based Heinz closed the Leamington plant, along with two other facilities in the U.S., to consolidate operations and get rid of excess capacity, spokesman Michael Mullen said in a Feb. 18 e-mail. The closures are needed to keep the company efficient and competitive, he said.

Such moves aren’t quickly reversed, said Avery Shenfeld, chief economist with Canadian Imperial Bank of Commerce in Toronto by phone. “We won’t bring back the dead until new plant decisions are made over the coming decade.”

After rebounding from 2009 through 2011, Canadian factories have seen shipments stall, falling 1.3 percent since the start of 2012 even as the global economy has gathered momentum. The Federal Reserve’s index of U.S. manufacturing production is up 4.5 percent over that period.

Factory Employment

Canadian factory employment has fallen by about 24 percent over the past 10 years, and is little changed after hitting a trough of 1.74 million in August 2009. The surge in the country’s currency to a peak of more than $1.08 in 2007 eroded competitiveness, helping to drive up unit labor costs in U.S.-dollar terms 94 percent since the end quarter of 2002, compared with a 12 percent rise in U.S. unit labor costs.

Manufacturing has been among the biggest drags on Canada’s growth since the middle of 2012, and was the only major industry to see output decline last year. Had manufacturing not contracted in 2013, Canada’s economy would have grown by about 2.4 percent last year rather than the 2 percent reported by Statistics Canada Feb. 28.

There are economic links that suggest the recent drop in the Canadian dollar should ultimately help manufacturers. Over the past 30 years, the level of the currency and factory employment three years in the future have been closely correlated. Data compiled by Bloomberg show a correlation of 0.91, where 1 reflects perfect predictability and zero means no relationship.

No Guarantee

There’s no guarantee that relationship will hold in the future. The global manufacturing industry is more competitive than in the 1990s, when Canadian factories benefited from a weakening dollar and the new North American Free Trade Agreement, which helped push manufacturing’s share of the economy to near the highest levels since the 1950s.

In the past 15 years, Canada’s share of world exports has fallen to about 2.5 percent from about 4.5 percent, Bank of Canada Senior Deputy Governor Tiff Macklem said in an October speech, the second-largest decline among Group of 20 countries.

“One of the most telltale signs of whether it’s a competitive jurisdiction is looking at the scoreboard,” Reid Bigland, Chrysler Group LLC’s head of U.S. sales, said in a Feb. 12 interview.

Canada received less than 5 percent of the $42 billion invested in the North American automotive industry in the last five years, Bigland said. IHS Automotive estimates that Mexico will top the country as the biggest exporter of cars to the U.S. by 2015.

‘More Competitive’

“Some of these other jurisdictions, Mexico in particular, and the U.S., have become significantly more competitive,” he said.

Governments meanwhile are racing with new subsidies to help manufacturers. Canada’s federal government said last month it would provide a C$250 million loan to help Montreal-based CAE Inc. develop new flight-simulator technology. Finance Minister Jim Flaherty set aside an additional C$500 million in the federal budget on Feb. 12 to top up a fund subsidizing the auto industry.

While Chrysler announced last week it would proceed with plans to develop new minivans and other models in Windsor, Ontario, it abruptly dropped a request for Canadian and provincial loans, leading Jerry Dias, national president of Unifor to question the automaker’s commitment to Canada.

“What they announced is obviously the next generation of minivan, but what they didn’t announce is the far more significant piece, and that’s the longevity of the plant,” Dias said in an interview. Unifor represents workers at the largest U.S. automakers in Canada.

Local Investors

Ontario’s provincial government helped set up meetings between Heinz and Canadian investors to keep the Leamington plant alive, said Pradeep Sood, one of the investors who formed Highbury Canco Corp., a consortium of investors that announced Feb. 27 they’ve signed a letter of intent to operate the plant as a subcontractor for Heinz. Sood said in an interview in Bloomberg’s Toronto newsroom that while the company will apply for provincial grants if the deal goes through, at this point it isn’t considering asking the province to make an investment.

While President Barack Obama has hailed a manufacturing resurgence that has led to four straight years of U.S. factory employment gains, the advance has been fueled by wages that are falling in real terms, posing a new competitive challenge to Canadian plants.

Falling Wages

U.S. factory pay has declined 1 percent when adjusted for inflation between August 2010 and December, compared with a 1.9 percent rise in Canada, according to Bloomberg calculations using data from the U.S. Bureau of Labor Statistics and Statistics Canada.

Stockholm-based Electrolux AB, the maker of Frigidaire ovens, is moving production from a factory near Montreal, where it employed 1,300 workers, to Memphis as part of efforts to consolidate its operations in Tennessee, where it is receiving financial assistance. Factory workers in Tennessee earned almost 10 percent less in 2012 than the U.S. average, according to Bureau of Labor Statistics data.

Bank of Canada Governor Stephen Poloz has so far counseled patience.

“I’d certainly expect at least a couple of years to pass before you had seen the full effects” of the weaker currency on factory shipments, Poloz said in a Feb. 22 interview. “That’s basically because it’s not a pinpoint decision.”

John Ball, chief financial officer of Velan Inc., a Montreal-based maker of steel valves with 16 plants around the world, agrees.

Currency Movements

“You don’t all of a sudden re-jig all of your investments” because of short-term currency movements, Ball said. “It’s probably pretty close to a year before you start seeing direct impact on companies, financial results, investment decisions and that sort of thing.”

Friesen in Leamington said he’ll be running for town council to make sure closures like Heinz don’t occur again.

“It wasn’t Heinz that built Leamington,” he said. “It was Leamington that made Heinz what it was.”

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Derek Friesen thought he would be following in his father's footsteps when he became the third generation of his family to work at H.J. Heinz Co.'s tomato processing plant in his hometown of Leamington, Ontario.
Monday, 10 March 2014 10:53 AM
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