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COLUMN

Three words lead to success: diversify, diversify, diversify

By Roslyn Kunin

The real estate world has three words that lead to success: location, location, location. For the economic world of the 21st century there are also three words that lead to success: diversify, diversify, diversify. And these three words apply to Canada’s West. The repetition is not only for emphasis. There are at least three areas where diversification is essential if economies are to thrive over the long run.

These are products, customers and human resources. With respect to putting all one’s eggs in one basket, one wag once said that this was an acceptable thing to do if you watched the basket very carefully. He was wrong, especially if the one “basket” relied on anything that is or could be a commodity. We define commodity as any good that is widely available in significant quantities, fairly homogeneous and thus substitutable, with relatively low value added. Canada’s West has relied very heavily on commodities such as wood, wheat and oil. Commodities come closest to meeting the economic textbook standard for a perfectly competitive product. This means that—over the long run—the price tends to drop to the point where it just covers the cost of the lowest cost producer.

A strong market may temporarily mask the commodity effect and result in profitable prices, but this often leads to trapping regions or countries into becoming excessively economically dependent on the commodity and being left hung out to dry when the price inevitably falls or the market is lost. Tariffs have already hijacked BC’s lumber market. Even oil markets could fall victim once new, energy saving technologies become widespread.

Western Canada needs to minimize this risk by diversifying its economic base to include many different commodities as well as many different non-commodity sources of wealth and jobs, either by adding value to commodities produced here or by developing other new industries such as technological applications and high level services. In addition to diversifying the products that are produced, Western Canada also needs to diversify its customer base.

While we are more dependent on commodities than Central Canada, we do have the advantage of being less dependent on one customer—the United States. Nevertheless, the less your market is tied to one customer or region, the less likely you are to be devastated by a single event, be it a bumper crop in Russia, an unexpected US tariff or an Asian economic melt down.

Therefore, Western Canadian producers should work on growing their markets by adding to their customer base and increasing the countries, regions and companies to which they sell. When markets of major customers slow as they did in Asia five years ago, many producers in Western Canada tended to sit back and wait for those markets to come back.

They did not stay close to their traditional customers nor did they aggressively seek out new ones. European companies were often much more into customer and market diversification. Even though times were tough, they pushed into our Asian and even US markets. When those economies rebounded, our markets didn’t. Product diversification and market diversification are not independent of each other. For example, if Western Canada’s lumber industry is to diversify its customer base from the US to China and other growing Asian markets, they will have to diversify their products.

Selling 2x4’s won’t work, as relatively few wood frame houses are built in Asia. However, there are well over a billion Asians hoping for better housing and their apartments will need doors, door frames, window frames, flooring, furnishings and other products that can and often will be made of wood. Yes, Western Canadian companies will have to do a lot of homework to learn what kind of products to sell to these new markets and how to sell them.

It will take some doing especially if we are looking, as we should be, at Latin America and other markets at the same time. But it is the only way that we can ensure our economies move from their traditional “hog cycles” of boom and bust to a steadier path of ongoing employment and economic growth. Finally, we cannot diversify our products or our markets unless we also diversify our human capital: improving the skill sets of the people who make it all happen. Western Canada will not be able to prosper if most young people limit their education or limit themselves to a few special fields.

We need well trained people in many areas including technology, marketing, languages, medicine, commerce, technical applications and especially the skilled trades to do all the hard work that will help Western Canada diversify its economic base and continue to thrive.

Roslyn Kunin is president of Roslyn Kunin and Associates Inc, an economic consulting firm, and is on the board of the Calgary-based Canada West Foundation.

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