Back at El Coronito in Mexico City, the sun’s white glare highlights the green flecks in Bruno Perron’s hazel eyes. It’s so bright, waiters scramble to unfurl a patio awning dusty with the accumulated detritus of a large, teeming metropolis. The Quebec native absent-mindedly brushes off the flakes of grit that drift down onto our table. He, like others who have ventured down here, has gotten used to seeing beyond the city’s smoggy veil.
At the age of thirty-eight, Perron now heads up his own multi-million-dollar import–export outfit with offices in Canada, Vietnam, Hong Kong, Shanghai and India. When asked what advice he would give his fellow Canadians, Perron contemplates his chili-spiked beer for a moment before taking a swig. “Wake up,” he says with an air of exasperation.
* Canada–U.S. trade represents the world’s largest cross-border exchange between any two nations, but trade between the United States and the European Union is larger.
* Barbados, Ireland and Bermuda hold the third, fourth and fifth spots respectively for top Canadian investment destinations, followed by France and the Cayman Islands in the sixth and seventh positions.
* Only Prince Edward Island and Nova Scotia fare worse.
* This calculation is based on the European Union being treated as separate countries rather than a single bloc.
† In 2004 Canada racked up a record trade deficit of $11 billion in automotive trade with non-NAFTA countries.
2 STEEL DINOSAUR
“ There is not a part of the country where people are not feeling the dramatic changes as a result of globalization. The question is, where does Canada fit?”
PERRIN BEATTY, PRESIDENT, CANADIAN MANUFACTURERS & EXPORTERS
WALKING DOWN Barton Street in Hamilton’s east end for the first time is like stepping into an old Star Trek episode in which the crew is beamed down to a lost civilization. Its once impressive structures are eerily vacant, slowly mouldering under the weight of eons of neglect. Everything appears frozen in time, as if the unsuspecting population had no warning before disaster struck. Once-luminous neon signs hang disconsolately, rusting and faded, while the door to an abandoned barbershop swings open. At one shoe store, the smell of mould is so strong it penetrates the glass storefront. The walls of the half-empty display cases are peeling, and the shoes, scattered at unnatural angles or hanging perilously from half-dislodged hooks, are covered in dust and discoloured by the sun. The only ostensible signs of modernity are fast-cash depots, numerous Tim Hortons shops and a few down-at-heel bargain-basement stores, one fittingly dubbed the “Last Chance Outlet.”
It wasn’t always like this. Barton Street used to be the swanky shopping district for the well-paid blue-collar workers who found jobs in the hundreds of factories that sprang up along the shores of Hamilton Harbour. At first a beachhead for textile mills and foundries started by waves of new immigrants, the border town with the best port on Lake Ontario soon became the capital of the country’s steel industry and a favoured spot for multinationals looking to set up branch plants in Canada.
By the 1950s, Hamilton was a boomtown. The heaving blast furnaces and black-plumed smokestacks were signature signs of progress that formed the bedrock of a thriving industrial hub. Railway freight cars criss-crossed the city’s east end, and the port hummed as factories churned out everything from agricultural equipment and household appliances to Studebaker cars and Life Savers candies. During the halcyon days, Steel Town, as it became known, was home to corporate heavyweights like Procter & Gamble, Westinghouse and General Electric and was the country’s uncontested manufacturing and industrial capital. It was a proud, can-do kind of place.
But in less than a generation, the steely foundation that girded the city to the country’s industrial engine seems to have crumbled like cardboard. The once-thriving east end looks more like a “war zone,” says Rolf Gerstenberger, a veteran steelworker who has watched as factory after factory closed up shop, their rusted-out, soot-stained remnants the only clue to the city’s former glory days. The gradual decline that began in the early 1980s continues inexorably to this day. In recent years, Camco, one of Canada’s few remaining appliance makers, Slater Steel and jeans manufacturer Levi Strauss & Co. have all closed their plants, shedding thousands of jobs.
“When I started thirty-two years ago, it was the industrial heartland,” recalls Gerstenberger. “There were probably twenty factories with over a thousand people in each one — Stelco, Dofasco, Firestone, Westinghouse, International Harvester, Otis Elevator. The kids just went from one factory to the other until they found one they liked.”
“Well, that is all gone,” he says. “I don’t know what the kids are going to do — McDonald’s or something — because there’s no place else to go.”
Even the mighty steel industry, the city’s heaving heart and last hope, is a hollowed-out shell of its former self. At one time, Stelco and Dofasco, the two big steel companies, employed more than thirty thousand people in their hulking steelworks overlooking the bay. But in the past two decades, financial crises and downsizing have whittled the workforce down to twelve thousand. In 2004, Stelco filed for bankruptcy protection and, after a $100 million provincial bailout, emerged much downsized and largely owned by New York hedge funds. Dofasco now has European minders, the concession prize in a high-stakes tug-of-war for global steel domination.
Although the two companies were very different — one profitable, one not — neither could avoid the whirling juggernaut that has laid waste to so much of Hamilton: globalization. In its latest incarnation it is convulsing the steel industry through a combination of massive new capacity in low-cost countries like Russia, Brazil and China and the creation for the first time of global behemoths in the historically fragmented steel sector. The new paradigm, which redefines the winners and losers in the industry, is dictated by size, low cost and global scope. On each count, the Canadians came up short.
China alone now represents more than a quarter of worldwide steel capacity, adding the equivalent of Canada’s entire production every year.29 This unprecedented ramp-up coincides with the mega-mergers of several steel industry leaders. The Netherlands-registered Mittal Steel, headed up by Indian-born billionaire Lakshmi Mittal, emerged from obscurity to become the industry kingmaker, acquiring U.S. steel assets before making a stunning us$38 billion hostile bid for its number two rival, Europe’s Arcelor SA. The merged powerhouse, Arcelor Mittal, is far and away the world’s largest, representing 10 per cent of global steel production. As part of the deal, Mittal was to offload Dofasco, which was in the midst of being acquired by Arcelor, to a rival contender for the Hamilton company, ThyssenKrupp AG. At the time of writing, however, the sale was being blocked by Arcelor shareholders and Dofasco’s fate remained unclear.
It’s a stunning reversal of fortune for the two Canadian industrial icons that enjoyed a privileged position supplying steel to the United States, the world’s largest automotive market. The two were arguably well positioned to be players instead of pawns in the global steel shakeout, yet both failed to capitalize on their advantage. While Dofasco carved out a lucrative niche as a value-added steel producer, it, along with its more commodity-oriented cousin, Stelco, never dared venture far from home. Other than Dofasco’s minor incursions into the United States and Mexico, the two were decidedly domestic, each rolling out five million tonnes of steel annually, a drop in the bucket compared with Mittal’s 115 million tonnes, furnished by furnaces from Indonesia to Kazakhstan.
“If you were going to name a Canadian national champion, the steel industry would definitely be one. It is one of the few industries in which Canadian producers, taken together, were actually stronger than American producers,” says Peter Warrian, a senior research fellow at the University of Toronto’s Munk Centre and an expert on the Canadian steel industry. “But they didn’t conceive of anything beyond the North American market. It was a failure of imagination.”
It’s not as though Canadians didn’t have the chance to expand abroad. In the 1980s
, Stelco turned down a sweetheart deal to buy a bankrupt Chinese steel company, Maanshan, for next to nothing. “They thought it was too far away and they would have had to manage it,” said a person familiar with the deal. Maanshan has since been restructured and is the world’s twenty-sixth-largest steel producer, with a production capacity nearly double that of Stelco. “They could have bought Maanshan, revived their technology division and been one of the world leaders in steel production if they’d kept going,” said the source. “We had the world’s best steel industry from the point of view of technology and quality. Why is it a bunch of guys from Korea or India ended up being the world leaders?”
Brazilian manufacturers, who have yet to get their domestic automotive industry off the ground, definitely recognized Canada’s competitive advantages. Considered among the world’s most antiquated steel industries less than two decades ago, Brazilian producers are now among the most modern, led by the likes of Gerdau sa. That company’s first foray outside of Brazil was into Canada, where it acquired a steel mill in Cambridge, Ontario, which was followed by another in Selkirk, Manitoba, in the late 1980s. Now with operations in seven countries, Gerdau has gone from being the world’s 54th-largest steel company in 1997 to 14th in 2006, surpassing 51st-placed Stelco. In Canada, its Gerdau AmeriSteel subsidiary ranks as the country’s 75th-largest company. Stelco is 131st.30
The decision to stay home, however, is costing more than just a few rungs in the corporate rankings. The failure to retool Hamilton’s fading industrial and manufacturing muscle is reflected in the lifeless shop windows along Barton Street. A metaphor not only for the dwindling fortunes of Steel Town but for much of Canada, the strip is a relic of times past, an almost miraculous effort to stave off decades of changing tastes and trends.
Sadly, the once-modish facades are not monuments to former glory days. Boarded up and decrepit, they have become the most visible signposts of the entrenched poverty and gritty hopelessness that is gripping what was one of the country’s most vibrant cities.
Wayne Marston’s eyes well up with tears as he recalls the scores of immigrant families holed up in tiny apartments on the city’s dilapidated northern fringe. The president of Hamilton’s Labour Council, Marston describes how the overcrowded living conditions force children to sleep in discarded refrigerator boxes. Unlike the newcomers who came before them, these immigrants don’t have well-paying factory jobs. They are forced into low-wage jobs cleaning offices, driving taxis or working in fast-food restaurants.
Unable to make ends meet, these newcomers have swelled the ranks of the working poor and pushed the city’s social services to the brink. The use of food banks in Hamilton has skyrocketed, and homelessness has more than doubled. Hamilton’s inner-city core is among the poorest in the country. In some areas, like Barton Street, two thirds of the residents live below the poverty line. As teenage pregnancy, high-school dropout rates and illiteracy reach critical levels, the city is staring down the intractable barrel of generational poverty.
“We have been bleeding jobs continuously, and replacement jobs have not been the rewarding ones,” says Marston. “Fifteen years ago people thought the food banks were a temporary institution. Now it’s not just the unemployed who use them, but the working poor— they can’t make it.”
From the looks of things, the situation isn’t going to improve soon. A quick perusal of the city’s top fifteen employers shows that the overwhelming majority of jobs — three quarters of them — are in the public sector, either in hospitals or schools or in the municipal, provincial or federal governments. Outside the two steel companies, there is scant evidence of any real wealth creation. According to Paul Johnson, director of the city’s recently created poverty task force, some of the biggest job growth has been among welfare support services and, of course, Tim Hortons, which now has more than four hundred employees in the city.
“We are just buying time,” says Johnson. “What happens to Hamilton when another recession hits? We’re treading water, and yet we’re in the best economic times we can remember. The only thing we know for sure is, it will come to an end.”
CHINA CHANGES THE WORLD
Bolton is not far from Hamilton, maybe fifty kilometres north, one more watermark in the sprawl of featureless highways and cookie-cutter housing developments that ooze from Toronto like an oil spill that can’t be contained. Once an expanse of farmers’ fields, this suburban enclave is home to Husky Injection Molding Systems, the biggest game in town and a rare gem among the sparsely populated ranks of homegrown manufacturers.
Tucked in behind a thick wall of vegetation, Husky’s leafy compound couldn’t be more different from the heaving industrial miasma of Hamilton. To encourage environmentalism as well as efficiency, the company provides a fleet of yellow bicycles to commute between each of its well-manicured manufacturing complexes. Instead of entering a stuffy boardroom, visitors are led into the “Imagineering Room,” a bright, sky-lit space, adorned with woodsy paintings and country-style furniture meant to encourage creative thinking.
The architect of this carefully constructed sanctuary is Robert Schad, a German-born entrepreneur who came to Canada in 1951 to escape war-ravaged Europe. A toolmaker by trade, Schad turned his garage tinkering into a world-beating company. Husky is the leading manufacturer of high-end equipment used to make plastic mouldings for everything from pop bottles to auto parts. With sales of more than $1 billion, Husky has offices in almost thirty countries and factories in Canada, Luxembourg and Shanghai.
But while Schad built his empire on an unflagging credo of “automate or die,” a recent trip to China convinced him that that credo is not nearly merciless enough. “China changes the whole world. The drive for speed, the quick decision-making, it’s really a very ruthless business approach,” he said during an interview in the Imagineering Room before retiring as Husky’s chief executive officer in 2005. “If you don’t compete in China, you will not compete globally. It’s a benchmark now of global competition.”
Convinced of China’s pre-eminence, Schad pulled his twelve-year-old son out of Toronto’s prestigious Upper Canada College so that he could be home-schooled in Mandarin. Yet, despite Husky’s international reach and its reputation as the Cadillac of its class, the company’s revenue plunged 15 per cent in 2004.31 Schad admits that Husky will be able to maintain its technological leadership “only for so long.”
With the company’s carefully tended garden ruffled by the rumble of competition half a world away, the salad days of after-work massages, a company fitness facility and a daycare centre are numbered, warned Schad. “There’s a certain entitlement attitude here. We’re going to close some things down, make it tougher,” he said of plans to introduce rigorous performance evaluations. “We can’t afford to live in an oasis here and let things go by. We have to compete.”
What Schad is up against is a daunting combination of technology, transportation and hundreds of millions of hard-driven people willing to work twelve hours a day, six days a week, assembling everything from toys to televisions for pennies an hour. The promise of low-cost production and global reach has lured the world’s leading multinationals to China’s shores while awakening the Middle Kingdom to its own global aspirations.
The one-time sleeping giant is now flexing its muscle, building homegrown multinationals like Huawei Technologies, an electronics equipment maker, which can afford to employ thirteen thousand highly educated Chinese engineers, roughly equivalent to Nortel Corp.’s own r&d staff, but paid one third the salary. The company, which didn’t exist before 1988, is scooping up multi-million-dollar supply contracts from Oman to Brazil and has quintupled in size since posting sales of us$1.8 billion in 2000. In 2005, Huawei racked up revenues of us$8.2 billion, including us$4.8 billion in exports, and at its current rate of growth is on track to surpass the once mighty Nortel in a matter of years.*
This new template, being forged by the likes of Huawei, Gerdau and Mittal, turns on its head the groundings of muc
h of the world’s economic compass. It redefines the concept of what is a commodity, reconfigures global trade patterns, blows away comparative advantage and defies the idea that proximity to market, a long-cherished Canadian advantage, matters. “The world is small and the world is flat,” says Jack Gin, chief executive of Vancouver-based Extreme CCTV , which exports surveillance cameras around the world. “It’s scary. It’s scary if you’ve got kids.”
The future, many believe, is looking decidedly grim for Canada, still sleepily ensconced in its makeshift domestic haven. Branding itself as the world’s cheapest industrialized country,32 Canada has opted to compete as a low-wage alternative to the United States, instead of capitalizing on scale, scope or innovation. As a result, all its advantages — from its cherished car industry to its storied natural resources — are now in the direct line of fire from China and other ambitious upstarts such as Mexico, Brazil and India.
Take the $100 billion automotive sector, the bread and butter of Canadian industry. The Big Three vehicle manufacturers, General Motors (GM), Ford, and DaimlerChrysler, on which the Canadian industry overwhelmingly depends, have been hemorrhaging money and jobs in recent years as they struggle to compete against more popular imports and more efficient rivals. But while massive plant closures and job cuts were announced in the United States and Canada in 2005 and 2006, China is attracting investment by the buckets— including from GM , which admitted that its Chinese unit was the only bright spot on the company balance sheet. China, a nation that once produced fewer cars than Australia, is expected to account for half of all new global vehicle-making capacity in the coming years. Already ahead of Canada, which since 1999 has slid from being the world’s fourth-largest vehicle producer to the eighth spot today, China is set to overtake Japan as the globe’s number two manufacturer by 2010.
The vehicle makers, along with a host of upstart domestic manufacturers, are drawn not only by the hundreds of millions of carless Chinese but by the country’s potential as a global export base. In 2005, Honda delivered its first made-in-China cars to Germany. DaimlerChrysler quickly followed suit, inking a joint venture with China’s Chery Automobile Co. to export Chinese-made subcompact cars to Europe and the United States by 2008. In what the Financial Times described as “the start of an unstoppable shift in the global automotive sector,”33 China’s Geely, which already ships cars to thirty-four countries in the Middle East, Africa and South America, will begin exporting hundreds of thousands of cheap compact cars to the United States sometime between 2009 and 2011. For Canada, which ships 92 per cent of its domestically manufactured cars and parts to the United States, the implications are huge.
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