Strategy

China: Eastern promises

Canadian companies may capitalize on transportation and agribusiness.

With the West mired in recessionary gloom, enterprising Canadians look to the still-expanding economies of the East as the ticket to new growth in 2009. Yet cracking Asian markets isn’t easy: language barriers, opaque accounting standards and, especially in the case of China, labyrinthine bureaucracies conspire against an intrepid business person’s best efforts.

But according to John Shou, managing director of the Canada China Business Council’s Beijing chapter, a number of Canadian companies are well positioned to capitalize on China’s promise — particularly in light of the US$570-billion domestic spending package and land reform initiatives the central government announced late last year. Of these, Shou singles out agribusiness, as well as transportation firms already operating in the country.

Transportation is estimated to represent about 45% of China’s domestic stimulus package. Calgary-based Canadian Pacific Railway Ltd. (TSX: CP) and Canadian National Railway Co. (TSX: CNR) of Montreal both stand to benefit indirectly, courtesy of subsidiaries they operate in China that offer consulting services on supply chain logistics. As CP spokesman Mike LoVecchio explains, increased Chinese demand for construction materials and commodities like coal should also translate into increased freight revenue in Canada.

But the big Canadian winner, Shou believes, should be Montreal-based rail transport and aerospace manufacturer Bombardier Inc. (TSX: BBD). According to Bombardier representative David Slack, the company has yet to receive new contracts as a result of the Chinese stimulus package. But with 3,000 people at three Chinese joint ventures and three wholly foreign-owned enterprises on the ground, Bombardier’s prospects look good — particularly in light of last year’s results, in which much of the Canadian company’s growth was due to new infrastructure spending in Asia. “Transportation revenues were US$7.8 billion globally for the fiscal year that ended Jan. 31, 2008,” Slack explains. “Operations in the Asia-Pacific region accounted for 17% of that revenue, which was driven largely by new investment in China.”

The other area of opportunity that Shou identifies is agribusiness. Much of China’s land is not fit for agriculture, meaning farmers must work usable land harder. Such conditions make fertilizer essential, and a key ingredient of some fertilizers is potash. This helps explain why two Canadian firms, Calgary-based Agrium Inc. (TSX: AGU) and Potash Corp. of Saskatchewan Inc. (TSX: POT), have made significant investments in their China strategies in recent years.

“Agrium has just set up an office here, and plans to expand elsewhere in the country,” Shou says. Meanwhile, Potash Corp. is tapping the Middle Kingdom without putting so much as a sales rep on Chinese soil.

How does that work? Together with Agrium and one othercompany, Potash Corp. sells its products to Asia through Canpotex Ltd., a Saskatoon-based marketing consortium it co-owns. But Potash Corp. also owns a 22% stake in a Beijing-based company, Sinofert Holdings Ltd., which imports the raw material and distributes it throughout China. Owning a part of Sinofert gives Potash Corp. direct access to the Chinese market — and some influence on the means of production. To date, the strategy has worked well, making China one of Potash Corp.’s most important markets.

Granted, Potash Corp. has not escaped the economic downturn. In December, the Saskatoon-based company announced it would lay off 940 workers temporarily. Spot prices for potash reached a peak of US$872.50 a tonne over the summer and have stayed there, but shipment volume is down sharply, sparking concerns of future oversupply.

However, according to Scotiabank’s Patricia Mohr, who writes a monthly report on commodity prices, that is part of an effort by Potash Corp. to cut production by 20% in 2009 and manage supply — thus ensuring potash prices bounce back. If so, both Potash Corp. and Agrium should be well positioned to cash in on Chinese opportunity in the Year of the Ox.