Volume 14, Issue 8- October 2013


Comparing Notes
How Does U.S. Stack Up with its Northern Neighbor?

With the Win-door North America show fast approaching, it is a good time to consider the Canadian door and window market, compared to the United States. When the U.S. was in a major downturn these past few years, Canadian window manufacturers, wood and vinyl alike, were churning out consistent bottom-line profits and cash flow, and were excited about the opportunities ahead of them. They must be forgiven for having a few chuckles at this country’s expense. They had watched our runaway real estate market with a sense that it would end badly that only seems to be endowed upon those not entirely swept up in a given market.

Escaping the Bubble
If Canada continued to do well while the U.S. market hit the phase inevitable to all market bubbles, what prevented a bubble in Canada as well? There were areas that exhibited, and to an extent continue to exhibit, bubble-like pricing. The areas blessed with energy reserves as well as the anchor cities of Vancouver, Toronto and Montreal saw and continue to see strong price appreciation. One of the factors most often cited for the avoidance of the bubble in Canada is the conservatism of the Canadian banking system. Our bubble was caused by, among other things, the extension of mortgages like the one chronicled in Michael Lewis’ brilliant “The Big Short,” which had a loan value of more than $700,000 and was extended to a migrant worker earning $15,000 per year. Meanwhile, lenders in our northern neighbor remained stubbornly committed to concept such as only extending mortgages to people who could afford them and even requiring a down payment to get a mortgage. They have reaped the rewards of that conservatism.

Leader in Exports
Today, Canadian manufacturers are the top fenestration exporters to the U.S. They exported $527 million in doors and windows in 2009, a figure that declined roughly 14 percent by 2012. By contrast, Chinese exports of doors and windows to the U.S. increased by 30 percent over the same period, from $206 million to $268 million. If this growth rate continues, China will eventually surpass Canada as the number one foreign supplier of doors and windows to this country, even if Canada returns to its historical growth rates.

Sales of Canadian building products to the U.S. are aided by the abundance of natural resources in Canada, especially wood. Also, the Canadian currency tends to fluctuate against the U.S. dollar in long, slow-moving cycles with plenty of time for adjustment. Shipping distances between Canada and the U.S. are brief in comparison to any other major world market. Thus, there is no doubt that Canada will remain a key trade partner in the door and window industry, despite the rise in prevalence of Chinese imports in this segment.

Like U.S., Highs and Lows
There are mixed reports from door and window manufacturers in Canada. Some, in the busier areas that we mentioned previously, report that business is strong. For example, there are nearly 190 high-rise tower projects underway in Toronto at present, more than New York City and Mexico City combined. Given the highly technical nature of commercial products, these flourishing projects represent opportunities for commercial door and window manufacturers located in adjacent parts of the U.S.

Other companies that serve the wide expanses between Canada’s booming cities report slower sales. There is a sense that Canadian consumers are pausing for breath and making careful decisions regarding building and remodeling homes. In other words, their market was slow and steady when ours was whipped into a froth of excess. Our market is now in recovery and the Canadian market is doing well in pockets and rolling along slowly in others. That sounds like the makings of an excellent hedge against a pure exposure to the U.S. market. Manufacturers on both sides of the border would likely find that reaching across to serve customers in the adjacent market would not only result in an interesting pollination of product trends and marketing methods, but it would provide a lower overall volatility to earnings. These two highly intertwined markets send clear signals as to the opportunities for growth in each. Manufacturers can assess the two markets in rolling six-month cycles and decide where to commit their resources in the coming months in order to maximize opportunities.

Michael Collins is an investment banker and a partner in Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.


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