North American Partners: US vs CA Industries

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1 January North Follow American on head on Partners: Master US page vs ACA Industries May 2014 North American Partners: US vs CA Industries By Darryle Ulama Accelerating media fragmentation and burgeoning consumer markets abroad will continue to influence North American industries Emerging consumer classes in developing countries have affected many sectors in North America The United States and Canada share a range of qualities that allow for close economic integration and sectorial similarities. Both are considered to be highly industrialized, service-oriented countries; both have high levels of human capital and abundant natural resources; and both exhibit significant levels of consumption. Still, a confluence of factors arising from differences in labor, demography, industry structure and downstream demand creates unique industry experiences between the North American countries. The following provides a comparative analysis of the agriculture, manufacturing, information and construction sectors in the United States and Canada through the lens of specific industries. These comparisons aim to illuminate critical differences between US and Canadian industries that are often merged into a single discourse. Key trends and underlying factors that have impacted industry performance are highlighted, with a focus on the outlook period between 2014 and US vs CA Industries Industry (US) Corn Farming in the US $62, $50, Auto Parts Manufacturing in the US $55, $67, Movie Theaters in the US $14, $16, Oil & Gas Pipeline Construction in the US $45, $54, Industry (Canada) 2014 Revenue (millions) 2019 Revenue (millions) Annualized Growth (%) Corn Farming in Canada $2, $2, Auto Parts Manufacturing in Canada $6, $7, Movie Theaters in Canada $1, $1, Oil & Gas Pipeline Construction in Canada $30, $39, SOURCE: IBISWORLD info@ibisworld.com

2 January Agriculture: Canadian corn producers seek to diversify Agriculture is expected to account for less than 2.0% of GDP in both the United States and Canada. Nevertheless, because the United States and Canada are considered two of the world s largest exporters of agriproducts, agriculture remains an important sector in both North American economies. Trade is vibrant between the United States and Canada, and both offer attractive export markets for agricultural goods, augmented by favorable trade conditions under the North American Free Trade Agreement (NAFTA). The United States is Canada s largest agriculture trade partner, accounting for 67.0% of Canadian agricultural exports and 60.0% of agricultural imports in 2012, according to Farm Credit Canada. Due to product homogenization, geographic proximity and close economic integration, agricultural trade between the United States and Canada is largely dictated by demand in the much larger US market. According to Farm Credit Canada, the United States held a $62.5 billion trade deficit with Canada as of July An evaluation of the export portfolio of the United States and Canadian Corn Farming industries (IBISWorld report and 11115CA) demonstrates the high trade levels between these two countries in addition to their mutual dependence on and the central role of the US market. In 2014, the Corn Farming industry in Canada is expected to generate $2.4 billion, less than one-twentieth of its US equivalent, which is valued at about $63.0 billion. Canadian corn exports are overwhelmingly channeled into the US market; in 2014, the United States is expected to claim 100.0% of the industry s exports. Meanwhile, corn produced in the United States is exported to a diverse range of countries, including Mexico (26.3% of exports), Japan (25.4%), China (18.0%) and Venezuela (4.9%). In an effort to mitigate their dependence on US demand, Canadian corn producers are anticipated to diversify their export portfolio during the next five years; for example, strong demand from emerging markets, such as China and India, offer lucrative opportunities. In China, rising income levels and government targets to increase agricultural productivity present opportunities for Canadian operators to sell products in addition to farming methods and crop genetics. Coupled with rising demand for ethanol biofuel, Canada s Corn Farming industry is expected to grow at an average annual rate of 2.5% during the five years to During this period, US corn producers will experience an annualized revenue decline of 4.4%, as a result of expired government subsidies that will precipitate lower overall prices. Nevertheless, farmers in the United States will continue to dominate the global corn market over the next five years, competing with Canadian farmers for fruitful emerging markets. Manufacturing: The rebirth of manufacturing in the United States Globalization of production activity has eroded the manufacturing base of many advanced economies as companies relocate production to countries that offer more competitive labor and production costs, proximity to inputs and attractive tax incentives for multinationals. The offshoring trend is observed across a range of industries, from simple consumer goods such as textiles to durable products such as vehicles and household appliances. Additionally, emerging consumer classes in countries that are experiencing high economic growth have encouraged manufacturers to relocate overseas in an attempt to capture these new markets;

3 May furthermore, international competition is accelerating, most notably from Asia. As a result, the manufacturing sectors in Canada and the United States have significantly declined during the past decade. Recent trends in the United States suggest that the US manufacturing sector is poised for a comeback during the next five years. A 2013 study by the Boston Consulting Group (BCG) found that high worker productivity (a measure of the output of goods and services per unit of labor), low wages and the influx of cheap natural gas have strengthened the competitiveness of US manufacturing. Although China remains the number one destination for manufacturing, the country s grip on global manufacturing is swiftly declining due to rising wages, higher transportation costs and lagging productivity. BCG projects that, by 2020, the United States will capture $70.0 to $115.0 billion in annual exports from other countries, mostly in transportation equipment, machinery, and computer and electronic products. Unfortunately, the potential for a manufacturing renaissance in Canada is bleak, as wage costs remain high and productivity lags that of its neighbor. A comparison of the Canadian and US Auto Parts Manufacturing industries (IBISWorld report and 33639CA), which produce a variety of motor vehicle parts and accessories, reveal the influences behind US competitiveness. In 2014, the average industry wage stood at $48, in the United States and at $55, in Canada, representing a 16.6% difference in wage costs between the two countries auto parts manufacturers. Additionally, during the five years to 2019, industry wages for Canadian auto parts manufacturers are expected to increase at an annualized rate of 3.5%, slightly higher than the forecast 2.8% annualized growth in wages for US auto parts manufacturers. As a result of more competitive labor costs, the Auto Parts industry in the United States is expected to outperform its Canadian equivalent. During the five years to 2019, industry revenue is expected to grow at an average annual rate of 4.1% in the United States and an annualized 4.0% in Canada. Moreover, foreign automakers will increase their US presence during the next five years, capitalizing on the country s production capacity and wider consumer base. In 2014, average industry profit margins are expected to account for a higher proportion of revenue in the United States as compared with Canada, accounting for 4.8% and 4.5% of revenue, respectively. Information: Cineplex dominates the Canadian silver screen The rise of digital media and the rapid adoption of mobile devices have created an increasingly fragmented media environment in both the United States and Canada. Entire industries in the information sector are rushing to secure their places in an ever-changing media landscape, whereby consumers have a wider range of platforms and channels to feed their appetites. For example, the rise of online streaming platforms, such as Netflix, Hulu and Amazon Prime, has created a significant external threat for the Movie Theatres industries in both the United States and Canada (IBISWorld report and 51213CA), both of which have experienced declining attendance and ticket sales. During the five years to 2019, revenue for the Movie Theatres industry is anticipated to increase an annualized 1.4% in the United States and 1.0% in Canada, totaling about $16.0 billion and $1.8 billion, respectively. In response to anticipated weak revenue growth during the five-year period, movie theatre operators will shut down unprofitable establishments and focus on capturing additional revenue streams. In the United States, major operators such

4 May as AMC have invested in expanded concession offerings, including alcoholic beverages and hot food items. Other US operators have invested in upgraded facilities that have lowered each auditorium s total capacity, with the intent of enhancing the moviegoing experience for attendees. Canadian movie theatre operators are also slimming their physical presence and investing in wider concession menus to offset declines in box office sales. However, the Movie Theatre industry in Canada is experiencing remarkable market concentration at the hands of Cineplex, which is expected to claim 75.0% of industry revenue in Cineplex currently operates more than 134 theatres, with an excess of 1,450 screens across Canada, and has undertaken a series of strategic acquisitions to secure its dominance. For example, in 2013, Cineplex completed the acquisition of 24 theatres from Empire Theatres, formerly the industry s second-largest player, for $194.0 million. Although Canada s Competition Bureau approved the acquisition, Cineplex s vast presence suggests that the Canadian movie industry is approaching a monopolistic market structure, a trend unobserved in the United States. Regal Entertainment Group, AMC Entertainment Inc. and Cinemark Holding vie for US moviegoers, and no single operator claims more than 21.3% of the industry s market share. Construction: Oil and gas pipelines expand throughout North America Energy infrastructure is vital in transmitting the necessary inputs that power economic activity throughout North America. In 2014, the Oil and Gas Pipeline Construction industry (IBISWorld report and 23712CA) is expected to generate $45.7 billion in the United States and $30.2 billion in Canada. Both industries are set for healthy revenue growth during the five years to Over this period, US operators are anticipated to enjoy annualized revenue growth of 3.5%, while Canadian operators are expected to outpace their US counterparts with forecast annualized growth of 5.4% at the end of In the United States, natural gas consumption and production for domestic, industrial and power generation will drive industry growth. The recovery in housing investments will spur demand for the construction of additional pipeline infrastructure and distribution hubs during the next five years. Additionally, the price of natural gas is expected to increase at an average annual rate of 6.9% during the five-year period, encouraging additional investment in pipeline infrastructure. Regulatory oversight will also accelerate pipeline replacements, particularly in the Midwest and Northeast regions of the country. The increasing popularity of natural gas in the United States, augmented by a dramatic increase in shale gas production, will strongly determine industry performance for pipeline operators during the next five years. Meanwhile, the Oil and Gas Pipeline Construction industry in Canada is more dependent on activity in downstream oil production. Alberta boasts the world s third-largest proven oil reserves, behind Saudi Arabia and Venezuela. Canadian operators are expected to fill the infrastructure deficit in regions such as the Northwest Territories, and link

5 May About IBISWorld Inc. Recognized as the nation s most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of unique information and analysis on every US industry. With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions. Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide. For more information, visit or call oil fields in Western Canada to refineries and shipping terminals in Eastern Canada. Although demand for natural gas is quickly rising, crude oil will continue to account for the largest share of global energy consumption during the five years to Since Canada s rich oil reserves are poised to meet this demand, pipeline operators in Canada are expected to experience more accelerated revenue growth than the United States during the five years to However, the world price of crude oil is forecast to slowly grow at an annualized 0.2% during the five-year period. This factor will temper demand from downstream oil extraction and limit even higher revenue growth for Canadian industry operators. Conclusion Broad trends, such as accelerating media fragmentation and burgeoning consumer markets abroad, will continue to push and pull North American industries during the next five years. However, both Canadian and US industries will continue to be shaped by context-specific factors arising from their respective countries unique economic, political, social and regulatory environments. Comparatively high wage costs in Canada, for example, could mean the permanent exit of certain manufacturing industries. Manufacturing operators that remain may focus on product innovation and differentiation to compete with those of their southern neighbor. In another example, greater media fragmentation will play out differently in the United States than in Canada, where the media and information sector is notoriously concentrated in the hands of a few dominant operators. Finally, the relative strength of the Canadian and US dollars during the next five years will dictate trade performance between the North American partners. Contact: Media Relations media@ibisworld.com IBISWorld Sales & Subscriptions Phone:

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