October 30, 2008 / 6:12 PM / 10 years ago

Cash crunch latest blow for Canadian manufacturers

TORONTO, Oct 30 (Reuters) - A few weeks ago, Peter Jeffrey was looking to hire four or five more employees to keep up with the busy workload at FormaShape, a composite fiberglass company in Kelowna, British Columbia.

That was before a major customer in the United States called to cancel a big order that would have kept the molding company busy for a year. Jeffrey, who’s president of the company, has put any expansion plans on the shelf for now.

Canada has so far has felt little direct impact from the cash crunch that has frozen credit in many parts of the world and fueled fears of a deep global slowdown. Even so, as the experience of FormaShape illustrates, Canadian manufacturers are starting to feel the pinch as their customers struggle to make payments on time, or cancel orders altogether.

“What we’re hearing is that American customers in particular are delaying payments because of problems obtaining credit, and what we’re also hearing right now that a number of orders are being canceled,” said Jayson Myers, president of the Canadian Manufacturers and Exporters trade group.

Manufacturing is a C$600 billion ($494 billion) business in Canada, employing nearly 2 million people and accounting for 15 percent of the country’s economic output.

But the sector has seen difficult times since the value of the Canadian dollar started rising from its low point of 62 U.S. cents in 2002, with about 400,000 jobs lost.

The currency has recently dropped sharply against the U.S. dollar, but that has not translated in gains for Canada’s long-suffering manufacturers. The cash crunch is the latest blow to the sector.

To make it through the tough times, FormaShape is focusing more of its efforts on winning contracts from companies in sectors such as oil and gas, where cash is more readily available.

But even customers that are normally flush with cash are starting to look vulnerable, said Mel Svendsen, president and CEO of Calgary-based Standen’s Ltd, which makes vehicle suspension products, as well as industrial, agricultural and automotive components.

“We typically are dealing only with what I call gold-plated accounts, but in today’s world, even the best may not be capable of paying timely,” he said.

One way to protect against late payments is to get insurance. With banks reluctant to back accounts receivables based on U.S. customers, Ottawa recently increased Export Development Canada’s borrowing capacity to C$6 billion from C$4 billion.

Svendsen said Standen’s looked at the idea of getting insurance from EDC years ago, but decided against it because it would drive up costs for customers.

“Somebody has to pay that premium.”

Due to the tightness of credit nowadays though, Svendsen said he is concerned that some of Standen’s very large U.S. customers “are sort of backed against the wall,” so insurance is something the company is revisiting.

The credit squeeze is being felt abroad, as well. Svendsen said he’s seen a big decline in orders from the Pacific Rim.

Other companies have been noticing similar trends.

Jake Tamminga, president of JAY-LOR, a feed mixer manufacturer based in Orton, Ontario, said he has had cancellations of orders from Mexico, and that orders from Australia and New Zealand are down.

“We’re feeling it all over the place, right across the world,” he said, adding that the U.S. agricultural sector, which JAY-LOR supplies, is doing better the U.S. industrial sector because of the recent boom in commodity prices. But those prices have moderated, and he is preparing for a dropoff.

“I figure another three or four months and it’s going to slow down drastically.”

He said he does not plan on getting EDC insurance, as he has prepared for a slowdown by putting cash away, investing in securities, diversifying his product range, and expanding the number of countries he exports to. ($1=$1.22 Canadian) (Reporting by John McCrank; Editing by Peter Galloway)

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