Shufflin' Off To Buffalo

For years, prosperous Canadians sneered across the border at Buffalo, N. Y., whose idle factories and aging downtown epitomized the U. S. Rust Belt. But these days, Buffalo's image up north is getting a buffing. Canadian manufacturers fleeing high labor costs and taxes at home are moving there in droves. Since 1987, some 85 Canadian companies have set up shop in Buffalo, and hundreds more have feelers out for a move.

Canadian business leaders are sounding the alarm. "Our underlying ability to compete in the world marketplace has been falling," says Finance Minister Michael H. Wilson. Most major business groups are issuing similar warnings. "Our standard of living is at stake," says Ronald C. Morrison, president of Kodak Canada Inc.

SCRAMBLE TO RESTRUCTURE. Canada is reeling from its first recession since signing a sweeping free-trade agreement with the U. S. in 1988. Economic growth has declined for four straight quarters, and unemployment now stands at an ugly 10.2%--far above the U. S. rate of 6.5%. In previous recessions, Canadian manufacturers could at least rely on the buffer of high tariffs. But with those tariffs now falling and the Canadian dollar at sky-high levels, they are scrambling to restructure in order to survive in what is becoming a wide-open North American market.

The $40 billion food business is a prime example of the changes ripping through key Canadian industries. A third of what had been the 15 largest producers have already been swallowed up in mergers by Canadian, American, and British companies, yielding much larger players with the economies of scale now required for competitiveness. In one of the biggest of the deals, Britain's Hillsdown Holdings PLC acquired Canada Packers Inc. last summer and merged it into Maple Leaf Mills Ltd. to create a $3 billion-plus colossus.

The shotgun marriages will create a far more efficient industry--but one with fewer companies and workers. Other Canadian industries, including textiles and furniture, are being forced through similar wrenching changes.

Many companies are considering whether to keep operations in Canada at all. A recent Canadian Manufacturers Assn. study of 635 Canadian companies found 313 already looking into the comparative costs of operating in the States. The U. S. holds the edge. Canadian manufacturers' unit labor costs have risen a staggering 52% faster than U. S. labor costs since 1985, according to Royal Bank of Canada (chart, page 47). Manufacturers also face interest rates far higher than those in the U. S. "I am really concerned that a lot of production will be located" outside Canada, says Don Eastman, manager of commercial research for Dofasco Inc., Canada's largest steelmaker.

The $13 billion Canadian auto parts industry, which sends 80% of its products to the U. S., will likely see a lot of jobs move south, including some to Mexico. Three dozen parts plants have closed in the past year. More losses are coming. Tridon Ltd. will this summer shift its production of windshield wipers, turn signals, and other products to Tennessee, chopping 550 jobs in Ontario.

'ANEMIC RECOVERY.' As the parts plants close, the beleaguered Canadian steel industry is losing even more of its customer base. Heavy losses and debt have forced Stelco Inc., Canada's second-largest steelmaker, to suspend dividend payments. Dofasco's Algoma Steel Corp. unit--which employs 6,000 in Sault Ste. Marie--is hanging by a thread and may close unless Dofasco can restructure its debt.

Continued plant and job losses will hamper the recovery most economists expect to begin in the second half. Already, 307,000 jobs have been lost, and only about half of those are likely to be regained. "We expect a very anemic recovery by historical standards," says James Frank, chief economist for the Conference Board of Canada.

The price will be steep. Small companies are the most likely to disappear. But with corporate profits running at half their 1988 levels, even such big players as the Bronfman family are feeling the pinch. On Mar. 21, the debt of four of the top companies in their Edper Enterprises Ltd. was put on rating alert by a major Canadian rating agency.

For all the gloom, Canadian industry still has some strong players, which may become even more dominant. Canada's energy and mining industries--restructured in the 1980s--are blessed with immense natural resources. The big Canadian banks find themselves with much healthier balance sheets than their American counterparts and are even eyeing U. S. acquisitions. And, ultimately, the shakeout that's transforming much of Canadian industry will yield more companies capable of competing in North America.

William C. Symonds in Toronto

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