The little growth engines that could

From mom and pop to young entrepreneurs, small and medium-sized enterprises help drive Canada's economy

VIRGINIA GALT
October 17, 2008

Vancouver produce importer Davis Yung more than doubled his warehouse space this year to handle growing volumes, and invested in the construction of new banana-ripening rooms.

Mr. Yung, co-founder and president of Fresh Direct Produce Ltd., is also planning to add to his fleet of 14 refrigerated trucks. "But now, of course, we have to look at more fuelefficient trucks than before."

Across the country, Charlottetown-based video game developer Other Ocean Interactive is expanding to St. John's, where it is opening a new studio - financed, in part, by profits from its role in codeveloping the hugely successful Super Monkey Ball game and backed by $2.4-million in funding from the Newfoundland government.

Over a five-year period, the company plans to create 62 jobs, and has started recruiting video game artists, designers, producers and programmers, Other Ocean's studio head, Deirdre Ayre, said in an interview from her Charlottetown office, which has grown to a staff of 50 since it opened two years ago.

The company has had a lot of success recruiting talented, creative people in their early 30s, to the benefit of the local economy, Ms. Ayre said.

"They're coming to this part of the world and they're really laying down roots. They're buying homes and having babies."

In Barrie, Ont., Southmedic Inc., which manufactures and distributes specialty medical equipment, expects to ride out the current economic downturn the same way it weathered other slowdowns in its 25-year history - by tuning out the bad news, to some extent, and focusing on factors it can control, Lee McDonald, president and chief executive officer, said in an interview.

"Honest to God, if you listen to CNN for any length of time or CTV or whatever, you want to go and hang yourself.

"But if you actually turn around and look at your own business and look at what you are doing, there is still an awful lot of opportunity," said Ms. McDonald, whose company now employs 100 people, including process engineers and research and development specialists recruited from Ontario's sinking auto industry.

In a faltering economy, Canada's small and medium-sized enterprises (SMEs) have been a bastion of stability, accounting for 38 per cent of all new job growth in the past year, according to economists.

And while the sector is not immune to the spiralling effects of the global credit crisis, "they will be the first to emerge when the recovery begins," Canadian Imperial Bank of Commerce economist Benjamin Tal said in an interview.

"For the first time in two decades, SME economic activity will outpace the rest of the economy during a period of economic slowdown . and by next year, as the economy begins to recover, SMEs in aggregate appear to be well positioned to resume their traditional role as the pioneers of the economic cycle," Mr. Tal wrote in an Oct. 6 research report.

Small and mid-sized businesses account for roughly 45 per cent of Canada's gross domestic product and 60 per cent of private sector employment, said Ted Mallett, vice-president of research and chief economist of the Canadian Federation of Independent Business. (The CFIB defines small businesses as those with fewer than 50 employees and mediumsized businesses as those with fewer than 500 employees.)

Credit concerns have accelerated, Mr. Mallett said, "but employment markets appear to be reasonably stable for now. While large employers are jettisoning employees by the thousands, "cutting back on employment is typically a last resort measure among smallbusiness owners."

These employees, of course, support the national economy through their consumer spending - as do the business owners themselves when they rent real estate, buy trucks, invest in new equipment or buy office furniture, Mr. Tal said.

As a result, Canada's retailers, information technology providers and telecommunications companies are turning their attention to the smallbusiness market as a source of potential sales growth.

"There are only so many big banks and very large Canadian companies they can sell to, so we now see all kinds of big brands trying desperately to get at the SME market," said Mark Healy, a partner at Toronto-based Torque Customer Strategy, a marketing consulting firm.

At Fresh Direct in Vancouver, Mr. Yung scrimps on furniture- he picks up second-hand items at auctions.

"But when it comes to trucks, when it comes to the building of a banana room, we want the state of the art, because that's what makes the money and that's what helps us provide the best-quality product for our customers. I am not too concerned about the desk I am sitting at right now, but I am very concerned about the trucks going out and delivering to my customers," Mr. Yung said. He and business partners, Albert Lum and Kam Chiu Lee, started the company five years ago with two trucks, 11 employees and "pretty much an empty warehouse."

Fresh Direct now has 85 employees, 50,000 square feet of warehouse space and a growing clientele for the 45 million kilograms of fresh fruit and vegetables it imports and distributes every year, serving both conventional and Asian grocery markets in Canada.

Small and medium-sized businesses often serve niche markets, so they tend to be less affected by a general downturn than larger companies, said Beth Wilson, Canadian managing partner of KPMG Enterprise, which advises small and medium-sized businesses.

"Also, I think the nature of entrepreneurs is that they are more bullish, they're more optimistic, there's a lot of strong perseverance there," Ms. Wilson said. They are also more flexible and able to adapt more quickly to changing market conditions, she added.

Ms. McDonald, a critical care nurse who founded Southmedic in 1983, said her firm has grown consistently year after year, and now exports its products to more than 60 countries. There is always a need for medical equipment in good times and bad - "there is always going to be a need to look after patients."

The company's conservative growth strategy has also served it well, Ms. McDonald said.

"We have always had enough profitability to invest our own capital to move forward . we are quietly developing new products, but we are not in a position now where we are hand-to-mouth. We're on fairly safe ground."

Mr. Healy said smaller companies "are much, much more prudently managed" than larger firms, often by necessity, because it has always been tough for firms with annual revenue of under $10-million to get lines of credit or loans from the major chartered banks.

In Charlottetown, Ms. Ayre is aware of the global economic crisis, but more focused on more immediate business considerations.

Other Ocean Interactive, founded by her brother Andrew, is on a roll. It develops licensed and original games for some of the industry's major distributors, and recently joined forces with Sega Corp. to adapt the Super Monkey Ball video game for the Apple iPhone.

The order book is full and Ms. Ayre, a Newfoundlander who returned to Atlantic Canada after graduating from Toronto's Ryerson University with a degree in radio and television, is hoping to lure other expatriates back home as well. So, too, is Newfoundland Minister of Business Paul Oram.

The provincial government "is pleased to support the establishment of this new and exciting business opportunity, which will result in the creation of many well-paying, skilled jobs in the province," Mr. Oram said last month in announcing the game developer's expansion to St. John's.

"Other Ocean . is a successful firm in a leading-edge, knowledge-based industry with significant potential for growth in North American and global markets - a welcome addition to our dynamic technology sector and just the kind of innovative, growth-oriented company that we want to attract to Newfoundland and Labrador."