Why Mexicans Don't Drink Molson. Andrea Mandel-Campbell
2005. It is now embarking on plans to build a us$500 million complex in Egypt. “Our experience in Kitimat has been pretty sorry,” says Bruce Aitken, Methanex CEO . “Globally we are doing very nicely, thank you very much. But if we were dependent just on our plants in Kitimat, the company wouldn’t exist anymore.
“I don’t think the government goes out of its way to understand the dynamics of what it is doing to industry in the province,” he adds. “Our companies will put up with it for a while, but eventually we will shut the plant down, and that’s it.”
Sadly, the writing has been on the wall for Kitimat — and Canada — for quite some time. Michael Porter, the Harvard University professor and competitiveness guru, warned of the country’s “gentle drift downward” in a 2001 report he co-authored with Roger Martin, dean of University of Toronto’s Rotman School of Management.56 The conclusion followed Porter’s watershed assessment of the Canadian economy a decade earlier, entitled “Canada at the Crossroads.” At the time, Canada had two options: either blaze a new trail based on innovative and globally competitive companies, or continue along the path of least resistance. “Canada,” Porter and Martin wrote ten years later, “took the lesser path.”
As a result, Canadian companies that show potential will continue to be cherry-picked by Americans, depriving Canada of all-important head offices and the means to acquire global management skills.* When it comes to Canadian biopharma companies, says John Mendlein, “they are just going to get acquired by U.S. companies. Full stop.” Either that, or they will be overlooked altogether. According to a 2004 Conference Board of Canada survey, three quarters of foreign executives who responded felt that Canada’s business environment was “not favourable” for investing, citing, among other things, the slowness of companies to adopt technology and the poor quality of employees.57 “They see Canadian workers in general as too often undereducated and lagging behind other workers in productivity,” wrote board president Anne Golden.58
Even China, which is scouring the planet for new investments, seems a bit circumspect. Despite initial panic that China’s Minmetals Corp. would acquire Canadian miner Noranda, negotiations trailed off in 2005. Not long after, the Chinese sealed a us$2 billion deal with Chilean copper giant Codelco, and they have invested billions more in Russian housing projects and Australian mining. More than six hundred Chinese-funded companies have set up in Africa over the last decade, investing in Angolan oil, Zambian copper and tropical timber from Congo — all “at the cost of Canada,” says BMO’s Neil Tate. In 1995, Canada was the leading destination for Chinese outward investment. Today, it doesn’t rank among the top ten.
“Canada will just become a nice, pleasant country to visit,” says Fred Lazar, of the Schulich School of Business. “We’ll have resources and some large companies coddled by government. More and more, foreigners will wonder why they even bother, and the relative standard of living will continue to decline.”
THE TIES THAT BIND
The thing about Gordian knots is they are virtually impossible to unravel. When King Gordius of Phrygia tied the first one, in homage to the god Zeus for making him monarch, the mass of woven bark did not reveal a single exposed end. The intricacy of the knot became a thing of wonder and eventually prompted an oracle to prophesy that the first to untie it would be the next ruler of Asia. The knot remained intact until the arrival of Alexander the Great, who promptly unsheathed his sword and sliced through the bundled fibre. The rest, as they say, is history.
The answer to Canada’s own conundrum could be just as deceptively simple. It’s not about coming up with convoluted “innovation agendas,” productivity perks or even tax-relief schemes tied to the next election. It’s about breaking the ties that bind and getting out of our Canadian comfort zone. “What’s missing is a bit of moxie,” says Interbrand’s Jeff Swystun.
“The biggest question facing Canada is, do we want to be a player?” Adds federal trade commissioner Bill Johnston, “At the root there has to be ambition, and it comes from having a passion in the first place. The question is whether as a people we have that passion.”
If the answer is yes, then the surest way to enter the big leagues is, well, to join them. Trade and foreign investment, in particular, are crucial to being globally competitive. By outsourcing, offshoring and manufacturing abroad, companies can lower costs and boost productivity, resulting in higher profit margins and higher wages. Foreign exposure not only allows companies to access new markets and new technologies, but it hones competitive skills, driving innovation and nurturing managerial know-how.
According to Stephen Poloz, senior vice-president and chief economist at state-run Export Development Canada, “foreign investment by Canadian companies is the biggest factor pointing to productivity gains.”59 A study by td Bank shows that trade-oriented Canadian firms increased their productivity from 5 to 12 per cent between 2001 and 2004, whereas firms geared solely to the domestic market suffered a decline of 0.4 to 10 per cent.60 Outward-oriented companies, as numerous studies have shown, are not only more productive, but enjoy higher growth and a better return on capital.
Canadian Manufacturers and Exporters, as part of an action plan to confront what it describes as a “crisis” in Canadian manufacturing, is recommending that Canada not only dramatically increase the share of exports directed outside the United States, but also double the annual growth of outward investment to 16 per cent by 2020. The two goals are highly complementary. Every dollar spent on foreign investment generates on average two dollars in future trade. For fast-growing developing countries, the return is even higher — between three and six times the initial investment.61 Foreign investment creates “trade bridges,” says Poloz, “and once they are built you can’t help driving on them.”
The economy as a whole also benefits from repatriated profits and the redeployment of the domestic labour force to more sustainable high-value-added jobs. “There is always this agonizing debate about those people who lose their jobs, and nobody talks about the fact the whole growth curve moves outward and makes everything better,” says Poloz. “Everyone is better off in this thing, and we know it.”
Just look at the United States. Over the past fifty years, U.S. manufacturing output has increased by a factor of six while its share of the workforce dropped from 31 per cent to 11 per cent, says Poloz. And while millions of manufacturing jobs were lost between 1998 and 2003, close to six million new service-sector jobs, mostly professional and high-paying, were created. (A further 5 million non-manufacturing jobs were added from 2003 to July 2006.) Many of the job losses and much of the concomitant surge in productivity, he says, can be traced to investment abroad, with U.S. offshore subsidiaries representing 37 per cent of all U.S. imports and generating $3 trillion in annual sales.
If Canadian companies want to compete in the United States they will need to follow suit— and not only to service their American customers. The real competition is coming from the South Koreans, Taiwanese, Japanese and others who are harnessing China’s cheap manufacturing might, says David Fung. A single Taiwanese facility, Shenzhen Foxconn, a subsidiary of Hon Hai Precision Industry, shipped us$8.3 billion in exports from China in 2004. “Everyone is using the competitive Chinese manufacturing infrastructure to take over our American market. By the time we figure it out, it will be a bit late,” says Fung. “If we are willing to fight with one arm tied behind our back, it’s our choice. The Asian train is coming down the track. We can stay on the track and get rolled over, or we can steer the train.”
The difference between being in the driver’s seat and becoming a casualty of the commodity aisle is the ability to source people, materials and technologies internationally, says Michael Novak, executive vice-president of SNC–Lavalin. It allows companies to keep their head offices in Canada and to focus on value-added components, such as design, branding, intellectual property and managerial knowledge, that keep them one step ahead of the competition. “We have to see ourselves as managers of a global supply chain, and we have to keep moving up that chain,” says Novak.
For Fung, who has made his fortune stitching together international projects that might, for example, marry European technologies and Chinese venture capitalists