Your next big thing: The Golden States

DNA 11 Inc. has sold to American consumers since it started six years ago. In fact, the custom art manufacturer has designed its e-commerce platform in such a way that the firm’s many buyers south of the border would be hard-pressed to know that DNA 11 (and its spinoff canvas-printing firm, CanvasPop Inc.) is based in Ottawa.

So, it’s easy to wonder why co-founders Adrian Salamunovic and Nazim Ahmed decided to open a production facility in Las Vegas earlier this year. On the precipice of what many expect to be a double-dip recession, one might think it foolish to invest in overhead and further enmesh a firm’s fortunes with those of an uncertain economy.

Yet, the pair say, it was a no-brainer. Manufacturing in Nevada “significantly reduces” the operating and shipping costs of serving the company’s growing U.S. client base, according to Ahmed. And, in recession-ravaged Vegas, they found cheap rent, plenty of skilled labour and a local government happy to lay out the incentives. “It’s been a big winner for us,” says Salamunovic.

The DNA 11/CanvasPop experience may appear anomalous to those who’ve read the headlines about the dire state of the U.S. economy, but it’s becoming more common. In fact, despite the shaky conditions—and sometimes because of them—many Canadian firms are finding that now is the ideal time to set up shop stateside through acquisitions, expansions or franchising.

“There is increasing investment from Canadian companies into the U.S.,” says Michael Hart, professor at Carleton University’s Norman Peterson School of International Affairs in Ottawa. “That’s not necessarily a new trend, but it is accelerating.” And for firms that already have established a solid presence in the U.S. through exports or virtual headquarters, this new wave of Canadian imperialism holds plenty of promise.

One reason to expand south is that it’s cheaper than ever to establish a physical presence in the U.S. To start, the high Canadian dollar gives Canucks better than average buying power. The difference between the current situation and the loonie’s run-up in 2007 is that now, in the wake of the 2008 crash, there’s a surfeit of both established companies and real estate available in many markets at attractive prices. “Costs are very subdued,” says Doug Porter, deputy chief economist with BMO Financial Group in Toronto. “Anyone who has medium- or long-term plans in the U.S. can invest now at a very reasonable price.”

Ivan Rebello knows this well. Six months ago, he bought a controlling interest in a Rochester, N.Y.-based company. Rebello’s firm, Toronto-based apparel and glassware maker Zenan Custom Cresting, was nearing its growth cap in Canada, and he wanted to increase his U.S. sales by taking over a U.S. firm that had fallen on hard times. He found many such companies for sale at bargain prices. “The Canadian dollar was slightly higher than the U.S. dollar,” he says, “so I got good bang for my buck.”

Another reason to expand stateside is the availability of skilled labour. On paper, the difference between the Canadian and U.S. employment rates (7.1% and 9.1%, respectively, as of September) is substantial enough; in reality, thanks to different reporting standards, says BMO’s Porter, the gap is even greater. For Canuck companies having difficulty manning the shop, there’s often a valuable trove of talent to be found south of the border. And the price is right: “In Canada, we pay $13 to $15 per hour for semi-skilled people,” says Rebello. “For the same price, I can get a highly skilled person in the U.S.”

Then, there is the issue of logistics: border-related red tape has become a major nuisance for many Canadian exporters since 9/11. Depending on the industry, geographical scope and product, some firms have discovered that it’s actually more cost-effective to manufacture U.S.-destined goods in the U.S. than it is to produce in and ship from Canada. In fact, the costs of clearing the border were a major driver behind the decision to open DNA 11/CanvasPop’s new production hub in Nevada. Already, says Salamunovic, “The shipping savings alone are paying our rent on the Las Vegas facility.”

Finally, for many firms, developing an on-the-ground presence in the U.S. circumvents mounting protectionist sentiment among American buyers. While it’s still unknown whether pending federal “Buy American” legislation will shut out Canadian suppliers, many feel that it doesn’t matter; whether it’s overt or unofficial, there’s a distinct sense of nationalism seeping into purchasing decisions—and not just at the government level. “The reality is, when you’re doing business in the U.S., it really helps to be ‘American,’” says John O’Rourke, whose Calgary-based engineering services and chemicals firm SIGIT Group Inc. recently opened a branch in Houston, Tex.

The same holds true for Go Bee Industries Inc., an experiential marketing agency headquartered in Hamilton. The company has sold into the U.S. since it opened in 2003. Its fortunes took a hit with the recession, but, president Steve Deighton says, all that changed 18 months ago, when it Go Bee hired a business development manager in Vermont to manage Go Bee USA Inc. That’s because buyers today love to see evidence that a foreign firm isn’t siphoning away profits, jobs and spinoff benefits. “They want to see that you’re creating jobs with legs, that you’re creating wealth in the U.S.,” says Deighton. “You need to show that you have a true interest in the U.S. operation.”

Of course, you can’t ignore the US$14-trillion elephant in the room: the U.S. has some very real economic challenges ahead, and business and consumer confidence are unlikely to improve significantly until measures are taken to get the country’s affairs in order. For that reason, unless you have a solid track record of selling into the U.S. from Canada, says Peter Hall, vice-president and chief economist at Export Development Canada in Ottawa, “You’re not going to have conditions that make your investment anything like a slam dunk.”

But if you do sell a product or service you know American customers are buying, there are very real opportunities to gain inroads via a U.S. outpost today. It goes to show that even in the shakiest of economic times, the potential of the U.S. market is impossible to ignore. “No matter how much doom and gloom there is today, you’re still talking about a market that’s 10 to 11 times larger than Canada’s,” says Deighton. “These days, we’re feeling very buoyant about our business in the U.S.”