There are good reasons why Canada is Minnesota’s biggest trade partner — and why your company should be trading there, too
Among international markets, Canada is certainly not one of the most exotic. As Minnesota's familiar neighbor to the north, it might lack the mystique and glamour associated with some more distant ports of call. But Canada does have a number of well-documented traits that make it a very desirable place to do business: a large, well-educated population, a diverse and historically stable economy, vibrant cities, and more.
Those traits, along with proximity, a shared language, and a similar culture, make Canada a great starting point for growing Minnesota companies hoping to gain a foothold in international trade, according to global commerce experts.
For Minnesota companies expanding into international markets, "Canada is often the first easy ‘win,'" says David Edmiston, a Minneapolis-based senior international trade specialist with the U.S. Commercial Service. "Canada is a great market where many Minnesota companies have had success."
Trade officials representing Canada agree.
"Canada is a wonderful place for new companies to start their export experience because of the similarities in business culture and the opportunities there," says Michael Flaherty, senior trade commissioner with the Canadian Consulate-General in Minneapolis.
Canada is Minnesota's largest export market, accounting for 29 percent of foreign sales for the state's companies. Total Minnesota-Canada trade adds up to about $19 billion per year, according to the Minnesota Trade Office.
Canada consistently ranks among the Top 10 in the annual "Best Countries for Business" survey by Forbes magazine. After a first place overall ranking in 2011, Canada slipped to fifth place last year, but it still ranks "among the best countries in the world when it comes to trade freedom, investor protection, and ease of starting a new business," according to the survey.
Moreover, in 2011 the World Economic Forum ranked Canada's banking system the soundest in the world. In addition, Canada was the first country in the G20 (the group of finance ministers and central bank governors from 20 major economies) to create a tariff-free zone for industrial manufacturing. Tariffs on all manufacturing inputs will be eliminated by 2015.
Still, it's important to recognize that, in spite of its similarities with the U.S., Canada is a foreign market, with all that implies, Flaherty says. There are some differences from province to province in regulations affecting commerce. (Product safety standards are one example.) And, there are two predominant languages, with French being the official language in the province of Quebec. "But those are not major obstacles," Flaherty says. "Canada presents tremendous opportunities, especially for small companies. It's almost an extension of the domestic market."
Crossing the Canadian border adds a few extra steps to the process of marketing and selling goods, and getting them to customers, Edmiston notes. As in any market, serving Canada requires dependable supply chains and local representatives who understand the needs and expectations of local markets. Fortunately, he adds, "there are a lot of government resources out there to help you understand those steps and make sure the process is seamless and efficient."
One of the first steps is developing an understanding of the North American Free Trade Agreement (NAFTA) regulations. Among these are "specific rules related to product origin that must be met to qualify for duty-free status under the NAFTA rules," says Barbara Mattson, international trade rep with the Minnesota Trade Office. Under NAFTA, most U.S. exports are exempt from Canadian tariffs, unless they contain parts or components manufactured outside the U.S. (Specific rules vary by industry, and there are different requirements for some agricultural products and commodities.)
As in the U.S., companies locating facilities north of the border can obtain economic development loans and grants, and other incentives, from federal, regional, and local agencies in Canada.
For example, Plymouth-based BioAmber received $35 million in grants and loans to build a plant in Sarnia, Ontario, in partnership with Japan's Mitsui & Co. BioAmber has developed an eco-friendly alternative to petroleum-based succinic acid, which is used for making plastics and other polymers. It obtained support from the Ontario Ministry for Economic Development and Trade, the Sustainable Chemistry Alliance, and the Sustainable Development Technology Canada foundation.
There is abundant government support for some types of research-based industries, such as IT and medical devices, notes Richard Raymer, a Toronto-based attorney with the Minneapolis law firm of Dorsey & Whitney.
"For example, the province of Quebec offers generous R&D credits to high-tech firms; as you go west across the country, you'll find different industry focuses," he says.
Finance is one of the dominant sectors in Toronto, while Quebec and southern Ontario have broad-based manufacturing sectors.
At first glance, the size of the Canadian market may seem intimidating, as it was for entrepreneur Alicia Overby, founder of Cambridge-based Baby Elephant Ears. But, with the help of the local U.S. Commercial Service team and the Minnesota Trade Office, the firm has found Canada to be a receptive market for its infant headrests, blankets, and bibs.
Overby created her first headrest several years ago to provide spinal and neck support for her then two-month-old son. In 2009, she began marketing the headrest at a major trade show, where she received orders from U.S. and Canadian buyers.
Later, Overby contacted the Minneapolis office of the U.S. Commercial Service, which is the trade promotion arm of the U.S. Department of Commerce's International Trade Administration. The service conducted an international "partner search," analyzing about a dozen demographic data-points: birth rates, average income, disposable income, and so on. After the analysis identified Canada as one of the most promising markets for Baby Elephant Ears, the USCS worked with the Canadian Consulate to identify retailers and distributors north of the border that might be good fits.
After the service provided a list of about 10 prospective distributors and retailers in Canada, Overby eventually contracted with a major Quebec-based distributor. With several retailers on board, Baby Elephant Ears' Canadian sales have built steadily, as the growing startup's total revenue reached the $2 million mark for 2012.
The USCS assistance "helped us realize that Canada doesn't pose a lot of hurdles for us," Overby says, and indeed Canada proved to be a good international launching pad for Baby Elephant Ears. The company now exports to more than a dozen countries, including Japan, China, South Korea, Australia, and Denmark.
SJE-Rhombus, a Detroit Lakes–based manufacturer of pump and motor controls for the water and wastewater industries, has been selling its products in Canada for nearly 30 years, according to chief marketing officer Melissa Lage.
Since the 310-employee firm is located only 250 miles from the border, entering Canadian markets was a logical move. In the pre-Internet era, the company's owner assigned a student intern to gather information on Canadian industry trade shows and other useful intel, with the help of the U.S. Commercial Service.
SJE-Rhombus used "Rep Wanted" signs at a few major trade shows to recruit its Canadian sales partners. Today, the firm has five rep agencies representing its product line from coast to coast. They're "effective extensions of our company" whose knowledge of regional and local markets has helped the firm gain loyal distributor-customers, Lage says.
The company sells to both wholesalers and manufacturers that use its switches in their pumps. Over the last three decades, consolidation among distributors has led to fewer, larger distributors in Canada, as in the U.S., Lage notes.
On the subject of getting goods to customers in Canada, Lage emphasizes the importance of "working with a great freight-forwarder." SJE-Rhombus relies heavily on Federal Express and UPS, "although we've learned over the years some customers want us to use their truckers."
Tariffs are another issue. Even though NAFTA established Canada and the U.S. as a free-trade zone, tariffs may apply to some products containing foreign-made components. Says Lage: "Don't make the assumption that because of NAFTA you are going to get in ‘free' - that isn't always the case."
It's also necessary to stay abreast of fluctuations in currency-exchange rates - and adjust prices accordingly when necessary - to stay competitive with Canadian manufacturers, Lage points out. If the U.S. dollar is worth significantly more than the Canadian dollar at a given time, "they may not be able to afford your products."
Of course, the most important regional difference within Canada involves language. To serve customers there, Lage says, it's essential to provide French-language versions of sales and marketing and other written materials.
For Minnesota companies considering the Canadian market, Lage suggests contacting firms in similar industries who are already doing business there: "People love to tell their story, and if you ask, they can be very helpful. They can help you avoid mistakes."
She also suggests taking advantage of informational tools, such as Minnesota Trade Office seminars.
Today, Canadian customers account for about 10 percent of SJE-Rhombus' annual sales. Minnesota's northern neighbor has proven to be a good springboard for overseas growth, Lage says. Today, the firm does business in 27 countries.
Right on target
For Minneapolis-based Ryan Companies, a longstanding client relationship has recently provided an entry point into Canadian markets. The firm is overseeing the development of several distribution centers in Canada for the Minneapolis-based retail giant Target, which has been a Ryan client since the 1960s.
In 2011, Target formed its Target Canada subsidiary to oversee its Canadian operations. The company plans to open its first 24 stores in March and April, all in Ontario, and then 125 stores in nine provinces by year's end.
To comply with Canadian trade law, Ryan set up its own Canadian-based subsidiary to do business in Toronto, Edmonton, Calgary, Vancouver, and other cities chosen by the retailer, according to Brian Teeters, a division vice president. Ryan recruits respected local contractors and tradesmen to do the construction work under joint venture agreements. Due to the solid local workforce, the company hasn't felt a need to open a facility north of the border.
When it comes to developing construction projects in Canada, Teeters emphasizes the importance of using as much local labor as possible: "We can bring strategic or special construction expertise to the local players, who have good knowledge of the local jurisdictions, contractors, suppliers, and the marketplace in general. It's much easier than trying to go into a new market ‘cold.'"
Differences between provinces in construction licensure requirements, labor laws, permitting, inspection, and other workplace rules are another reason it's important to have well-versed local representation, Teeters says.
To find the right partners on the ground, Ryan reps have invested plenty of time since 2010 networking in each market. Teeters says that rather than "just making cold calls, we do as much face-to-face interviewing as we can, to develop mutual understanding of each other's strengths and weaknesses" north of the border.
Teeters has been impressed by Canada's dynamic and resilient economy, noting that construction activity continued at a relatively healthy pace even through the recent downturn. He appreciates its "very high-quality workforce," although he says labor shortages can be an issue in some less populated areas. Another plus is that most of Canada's key metropolitan markets are located within 100 miles of the border.
While the Canadian projects account for less than 5 percent of its total revenue, Ryan Companies expects that to grow over time, Teeters says: "We definitely want to keep those relationships in place, build on what we've learned there, and look for new opportunities."
A passion for hockey
Minneapolis-based Sport Resource Group's product line makes it a natural fit for the Canadian market. Founded in 2007, the company's first product was safety padding for the support posts that surround hockey rinks. Now its Fusion Safety Pads are used in more than a dozen National Hockey League arenas, and company founder and president Chris Guertin wants to supply them to the more than 6,000 community ice arenas in North America.
SRG's biggest seller is its Pro-Wall line of portable containment systems (made of molded plastic components) for a number of recreational activities, including mini-football, floor or street hockey, go-kart racing, and equestrian training.
Guertin has found shipping goods to Canada by either rail or truck to be relatively cheap: "Just about every major shipping company here in the U.S. goes into Canada, or partners with somebody who does," he notes.
In addition, traffic congestion is less of a problem when delivering goods to eastern Canadian markets, entering through the Ontario border, than it would be in the major U.S. population centers such as New York and New Jersey, Guertin points out. Customs "paperwork" - including certifying that any necessary tariffs have been paid - is handled electronically, in advance of moving goods across the international border. Companies like SRG hire experienced customs brokers to handle those details.
Guertin says that, all things considered, crossing the border does not add much time or hassle to the process of shipping goods to Canadian customers. For example, SRG recently shipped a hockey rink enclosure to a client firm in Concord, Ontario, on a Thursday, and it was received there the following Monday.
In entering Canadian markets, one of the most important steps is to find a partner in your industry who is already working there, Guertin says. After some cursory research, SRG connected with Woodstock, Ontario–based Riley Manufacturing, a large-scale distributor of components for hockey, baseball, and a number of other sports that has several decades of experience. Riley has been SRG's Canadian distributor since 2007.
Canadian sales currently account for about 15 percent of SRG's total revenue, which has been growing steadily. In 2010 the company experienced a 55 percent year-over-year leap in its revenue, then about 15 percent growth in 2011, and about 20 percent in the year just ended.
SRG has not yet pursued selling to Canadian retailers, but it has had success with direct consumer sales. The advent of NAFTA made it easier by removing product duties, "so we are selling on the same price basis as our Canadian competition," Guertin explains.
What does Guertin like most about doing business in Canada? "Their passion for hockey. So far, we see ourselves selling to professional sports teams, nonprofit organizations, and minor/youth hockey teams."
Guertin's advice for other entrepreneurs hoping to cross the border: "Canada is an immense market, but don't be afraid to take the leap. Find someone locally (in Minnesota) who is already doing business there and chat with them. You can find someone to handle distribution in Canada while you get your feet wet."
Rules and regulations
Ready to trade with Canada? Keep these legal and tax considerations in mind
Canadian legal and regulatory requirements are very similar to those in the U.S., but there are some differences in application, according to Richard Raymer, a Toronto-based attorney with the Minneapolis law firm of Dorsey & Whitney. Labor laws, for example, vary somewhat from province to province.
"None of them are overly onerous, but there are differences, so U.S. companies need to think about how they set up their employment policies," particularly those pertaining to severance and workforce reductions, Raymer says.
In Canada, regulations applying to workforce reductions and certain other terms of employment are generally "much more structured and formalized" than in the U.S., Raymer says.
Regulations to protect intellectual property are comparable to those in the United States, he adds.
There are also tax considerations for companies and individuals doing business in Canada, says Eric Loff, managing director of the Minneapolis office of Global Tax Network, an international affiliation of CPA firms specializing in expatriate tax consulting.
The United States and Canada have an income tax treaty that provides for a potential exemption from Canadian income tax for U.S. business travelers who earn less than CA$10,000 there, or who are in Canada for limited periods and subject to specific criteria.
"Still, having U.S.-based employees who are soliciting business in Canada can generate reporting and withholding issues both from the corporate and the individual side," Loff says. "So you really need to think about who is traveling there and track travel and project durations in advance. That will minimize problems down the road, avoiding administrative hassles and additional tax costs."
Description: Construction and real estate development
Revenue: $994 million
Leaders: Pat Ryan, CEO; Tim Gray, board chairman; Brian Murray, CFO
Headquarters: Detroit Lakes
Description: Manufacturer of pump and motor controls for the water and wastewater industries
Revenue: Not disclosed
Leaders: David Thomas, CEO; Melissa Lage, CMO; Nathan Fetting, CFO
Sport Resource Group
Description: Manufactures sports pads and containment systems.
Leaders: Chris Guertin, president; Maria Guertin, general manager
Revenue: Not disclosed
Baby Elephant Ears
Revenue: About $2 million
Leaders: Alicia Overby, president