In one magazine article, an American telemarketing company sang the praises of a cheap workforce in which 67 per cent of employees have a post-secondary degree. “You could still pay a Canadian less money [than an American] and have a college graduate, for God’s sake, doing the work for you,” enthused the company’s general manager. “You’re dealing with a far more intelligent person here in Canada that will do the job, versus the type of people that they will attract in the States.”52
Wayne Marston, the Hamilton labour activist, just shakes his head in wonder when he thinks of the country’s newest answer to foreign investment —a combination of cheap labour and low capital expenditure reminiscent of Mexico’s low-wage, assembly-for-export sector: “It’s minimum-wage jobs, transient workers and high turnover. To say call centres are a symbol of the future is idiotic.”
Add that to the tens of thousands of skilled immigrants forced to work as cleaners and cab drivers, the software engineer who makes $57,000 compared with an American making $125,000,53 while the Canadian cities with the highest family income— Oshawa, Ottawa and Windsor — are propped up either by American car makers or the government. Sweeten the pot with a number of important industries teetering on the brink, and the concept of an economy operating at full capacity becomes, well, relative.
Canada’s performance is even more questionable when one considers all the Canadians who have been forced to leave the country because the high-quality jobs they seek simply don’t exist. The lack of globally oriented firms means that the career path for many is confined to the domestic market while foreign multinationals are increasingly relocating their higher-end jobs abroad, limiting their Canadian presence to sales positions. Schulich Business School launched its international mba program in 1988 with the aim of supplying Canadian companies with internationally minded graduates, but as Dean Horváth quickly learned, there were no jobs waiting for them when they got out. “So many ended up going abroad and they are still abroad, and it’s not getting any better,” he says. David Pecaut, senior partner with the Boston Consulting Group in Toronto, can attest to the problem. “I can’t tell you the number of people I can think of right now who say they would come back to Canada if they could work in a company that’s truly global,” he says. “They can’t find the opportunities.”
Which is why Eamon Hoey, a Toronto businessman, is making sure his daughter doesn’t hit her head on the Canadian glass ceiling. “My recommendation to my daughter is to find another country. She’ll go to grad school in the U.S. or the U.K., and hopefully that’s where she’ll end up,” he says. “You can’t be proud of a country that truncates its youth, prevents it from accomplishing and sets up barriers and systems that create winners and losers.”
Glen Hodgson, chief economist with the Conference Board of Canada, admits he’s also concerned about his kids’ future: “The realist in me is worried. Are we going to go down as a country? Because if you look at the data and use China as a litmus test, we’re not succeeding; we’re actually seeing our presence in the world shrinking.” Canada’s long-term economic potential, he says, is “clearly fading.” According to a study by Global Insight released in 2006, Canada’s growth is forecast to lag behind almost every other major economy within the next twenty years, slipping to below 2 per cent and a far cry from the 3.25 per cent of the 1980s.54
So, will Canadians be spurred to action? Husky’s Robert Schad doesn’t think so. “The Romans didn’t wake up until Hannibal was right at the front gates, and the reports came in every day. He was getting closer and closer, and nothing changed until he was there.” Schad figures Canada’s embarrassment of riches can keep a Hannibal-like incursion by global markets at bay for some time to come. “If things get tough, we will just sell everything off to keep the status quo — just like when you sell your last jewels for a piece of bread,” he shrugs. “We can sell off the future for a long time. We can sit on the sidelines for quite a while.”
Maybe. Who knew that diamonds were buried beneath the Canadian tundra, or that Alberta’s tar-laden oil sands would pump out so many millionaires almost overnight? But while some have hit pay dirt, others are watching as their wells run dry. Just ask the residents of Kitimat, B.C. Founded more than fifty years ago, the picturesque town of ten thousand was supposed to be a model for the province’s industrial future. Neat housing subdivisions were carved out of the forest and rock along the northern coast, and industry was lured with the promise of government subsidies. Alcan built a massive aluminum smelter as well as a hydro plant. It was followed by a pulp and paper mill and a petrochemical complex operated by Methanex, the world’s largest producer of methanol.
Yet there is growing unease in Kitimat as the population continues to decline and property values plummet. The town is slated to become the port terminus for an ambitious pipeline project that would transport crude oil from Alberta’s oil sands to the B.C. coast before being shipped to Asia. But a lack of Chinese buyers for the oil has forced pipeline builder Enbridge to put the project on hold until 2014.* In the meantime, the community has been locked in a decade-long struggle with Alcan to upgrade its aging smelter. In 2006, Alcan finally agreed to go ahead with a us$1.8 billion modernization project on the condition that it be allowed to sell excess electricity from its nearby hydro dam — to the tune of $97 million a year — to B.C. Hydro. It’s a bitter pill for Kitimat, which argues that the aluminum maker was given privileged access to cheap electricity in return for providing smelter jobs. Instead, new efficiencies at the upgraded smelter would cut the workforce by 30 per cent.* But according to the company, Kitimat, with its high labour and construction costs compared with places like Cameroon and Brazil, is lucky to be getting any new investment at all. As Michel Jacques, head of Alcan’s primary metal group, noted, without a deal to sell its surplus electricity, “[i]t makes no economic sense for us to build a new smelter in B.C.”55
Methanex, the community’s other economic anchor, has already cut town. Too fed up to fight with municipal officials over high property taxes and increasingly gouged by the high cost of natural gas (a key ingredient of methanol), the company closed its two plants in November 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 work
ers 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 with Canadian resources, the next rung in the ladder for Canada should be as a global go-between in the tradition of Switzerland or Hong Kong. Neither location has much in the way of natural resources, yet both are international arbitrageurs par excellence, parlaying financial and managerial expertise into global might.
“The Swiss are smarter then we are. They manage to use our resources to make money for themselves,” says Fung. “Fortunately or unfortunately, we are spoiled by our own wealth. The hope is, more people will realize we don’t need to hack trees down to make a living. We can use our brain power.”
According to Amos Michelson, we already do. Former CEO of the Vancouver-based digital printing company Creo, Michelson argues that Canadians have superb technical skills and are relatively more productive than their American counterparts. He notes that while Canadians work 75 per cent of the hours of someone in, say, Silicon Valley, they are paid half as much. The upshot is a “cost performance that is much better in Canada than in North America overall,” he says. “And you get great people.”
The country’s real weakness, he says, lies elsewhere. Unfortunately it is the key to unravelling our own Gordian knot. Michelson, who navigated Creo’s ballsy breakout from $20 million in sales in 1995 to becoming an $800 million challenger to global leaders like Agfa and Fuji before being bought out by Kodak in 2005, doesn’t believe Canada has the raw material necessary to produce high-tech successes like, for example, his native Israel does.
The war-torn, desert-parched spit of land of 6.3 million people is a hotbed of technological innovation, with more high-tech listings on New York’s NASDAQ exchange tha
n any other country except the United States. While Canada is flush with all kinds of advantages that other countries might only dream about, it lacks the one thing Israel has in abundance: drive. “Israelis are enormously aggressive in their desire to achieve something. The U.S. is somewhere in the middle, and Canadians are at the other end of the spectrum,” says Michelson. “We’re nice. But business and nice don’t work. Some people do whatever it takes to win, and other people just stop. That’s why there are not a lot of important companies in Canada— people are not willing to walk the distance because it’s not important to win.”
THE ROAD LESS TR AVELLED
Newton, Ontario, is just two hours northwest of Toronto, but it might as well be five centuries away. Horse-drawn buggies kick up dust on the shoulder of quiet country roads while boys in overalls and girls in floppy bonnets and flower-print dresses wait patiently for the school bus to pass. If Hamilton seems a Dickensian relic of the Industrial Revolution, then this small Mennonite community is a portal to a time before the steam engine or the spinning jenny were invented.
Yet the town, which has largely eschewed the trappings of industrial modernity, is a testament to the newest global revolution. Just past the smattering of buildings that line the main street sits the nondescript, aluminum-sided headquarters of Mitchell Mill Systems. A shiny new silver Cadillac is parked outside, a sure sign that company owner Paul Mitchell is in town from Beijing for one of his shotgun visits home.
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