Why Mexicans Don't Drink Molson

by Andrea Mandel-Campbell

  Under such stultifying circumstances, the one-time national champion, turned shrinking violet, has pursued two parallel strategies, neither of which contributes much in the way of economic wealth or ensures that the company remains globally competitive. On the one hand, bce burned through millions of dollars investing in companies from TransCanada Pipelines to Quebecor in a bid to avoid the crtc yoke. On the other hand, it employs an army of lawyers and lobbyists in Ottawa to deflect further controls and ensure that its cozy cut of the market remains intact.

  Both approaches have ended up being a big waste of time; while other telecommunications carriers have extended their reach around the globe, Bell is no further ahead than it was a decade ago. If anything, it has fallen hopelessly behind — forced to cut thousands of jobs and sell off assets to counter declining profits and a shrinking share of the domestic market. In arguably the clearest sign of defeat, Bell parked its local phone lines and Internet accounts in parts of Ontario and Quebec into a regional income trust in 2006.

  But Bell is not unique; Canadian companies in general waste an inordinate amount of time either cozying up to bureaucrats, tied up in trade disputes or fighting what they see as an autocratic and unfair system. And that’s all in addition to the gauntlet of red tape and interprovincial trade barriers that cost the economy an estimated $8 billion annually. In a sad caricature of the old National Policy, each province has erected its own mini-barriers in a bid to protect its turf. Until recently, Ontario construction workers couldn’t work in Quebec, and B.C. logs couldn’t be exported to Alberta, while a truck can’t carry a load from one end of the country to the other without stopping to repack according to local provincial regulations. Each province insists on its own milk marketing board and even its own securities commission. According to the Royal Bank of Canada, the bank is subject to oversight from more than fifty financial services regulators across fourteen jurisdictions.

  Companies and individuals that want to succeed must learn to either milk or bilk the system, with dairy farmers trading in government freebies and media companies manufacturing schlocky Canadian-content productions so they can skim a cut of the U.S. advertising revenue that’s blocked at the border. It’s often hard to tell the difference between government and industry in the telecommunications sector, with former bce employees heading up the crtc’s telco division and the federal Competition Bureau— the former head of which now runs bce’s government-relations department.

  Those who can’t be bothered to court Ottawa either move their business to the United States or, at least until recently, sought tax-free status by converting their publicly traded companies into trusts, which avoid income tax by paying out all taxable income to their shareholders. The loophole triggered such a feeding frenzy, with just about every big-name company from Telus and Bell Canada to oil company Encana ready to sell their soul for a tax break, that Ottawa felt forced to finally intervene in late 2006 and throw away the loot bag before corporate Canada did itself some permanent damage. In a highly controversial move, Stephen Harper’s Conservative government, fearing Canada was “moving to an income trust economy,”94 held its nose and slapped a new tax on the trusts.

  The industry’s prolific popularity, however, left unchecked for so long, attests to the country’s state-sanctioned proclivity to trade in ambitious global dreams for a quick, easy buck. While other countries actively discouraged trusts, they were allowed to flourish as a made-in-Canada alternative to putting up a “for sale” sign when companies got too big for their Canadian crib. Their decidedly domestic structure discourages foreign takeovers, helping to ensure more Canadian offices than there might otherwise have been. But instead of overseeing dynamic, internationally competitive firms, these corporate headquarters often serve as a last redoubt for Canadian globophobes.

  Calgary-based Precision Drilling is a case in point. Previously one of the world’s leading contract drilling companies, in 2005 it sold its international division to an American rival for us$2.3 billion in order to qualify for trust status. Precision founder Frank Swartout argued that he had no choice if the company’s stock was to compete against other trusts’ richer shareholder returns. Eric Reguly, a columnist with the Globe and Mail and a harsh critic of the trust stampede, lamented the loss of “one of Canada’s few global champions” and the epidemic of navel-gazing it provoked throughout corporate Canada. “Months and months have been spent devoted to the pursuit of gaming the tax system, not building the company, hiring top talent, making strategic decisions and all other ingredients of competitiveness,” he wrote. “The cost is impossible to measure, but it’s there.”95

  Thomas Courchene has calculated the cost, at least to taxpayers, for the myriad of failed policies and development schemes aimed at propping up Atlantic Canada’s sagging fortunes: $1 trillion. But this was not enough to save Newfoundland or the fishery, still mired in a petri dish of poverty and missed chances. At the height of the have-not province’s bloated make-work bonanza, it boasted more than two hundred mostly government-funded fish-processing plants, dispersed among its tiny population of 500,000. Many of these plants were no more than plywood sheds operating two months a year — just enough time for workers to qualify for year-long unemployment insurance.

  Each community was given a quota of fish to process, and any attempts to close unproductive operations or introduce new labour-saving technology were vigorously opposed. While Iceland was building state-of-the art trawlers that could flash freeze whole fillets on-board, Newfoundlanders insisted on using pitchforks to unload their catch, destroying the value of the fish and ensuring they could only be sold in chunks to fast-food outlets. “Atlantic Canada was perfectly positioned, like Iceland, to export to the world, but because of incredibly stupid government policies, we couldn’t produce the quality fish the world demanded,” says Fred McMahon, a director at the Fraser Institute. “Iceland went into high-quality fish processing. We tried to preserve every traditional job that ever existed.”

  These days, Iceland has to import labour from Europe to work at its booming processing plants, which operate year-round and pay out annual salaries of $40,000 to $50,000. Its large processing companies are now expanding into China. As for Newfoundland, the cod moratorium has largely destroyed the fishery, yet there are still 139 plants and an estimated twelve thousand fishers, many eking out a living between a few months of fishing and their welfare cheques. “You can’t build an economy when half the population is off work half or two thirds of the time,” says Peter Fenwick, an industry commentator and mayor of the hamlet of Cape St. George. “We’ve been poisoned by a social policy so badly designed it’s just destroyed us.”

  And therein lies at least part of the problem. Whether it’s the fishery, forestry or financial services, resources in Canada are viewed as a public utility whose prime purpose is to dole out jobs and insulate Canadians from the harsh realities of the marketplace. By buying up and selling the wheat produced by every Canadian farmer, guaranteeing the price of milk and handing out timber licences, the government has attempted to remove the risk from doing business while, whenever possible, retreating into the safety of make-work projects rather than facing the uncertainty of entrepreneurism.

  That same search for security and stability is reflected among Canada’s corporate class, which all too often is a willing accomplice in the government’s ambitious safety net. “Canadian CEOS much prefer getting restricted entry into a restricted market rather than having to really compete,” says Eamon Hoey. The consultant attributes the trait to Canadians’ “fundamental belief that competition is destructive.” But rather than issuing from some kinder, gentler wellspring, the belief is a byproduct of a less appetizing trio of idiosyncrasies, a deep distrust of change, laziness and fear— fear of failure, fear of success and fear of not making the grade.

  That fear is manifestly obvious in the other defining characteristic of most government policies: their flagrant anti-Americanism. More than keeping Canadian companies in
Canadian hands, ownership restrictions on everything from cable companies to bookstores are an attempt to keep Americans out. According to a representative of the Canadian Wheat Board, a repository of anti-American rhetoric, without the state trading agency, “Americans would take over the grain industry and we’d have no say as Canadian farmers, no say as the Canadian government. It’s a sovereignty issue.”

  More than an indictment of American economic imperialism, the board’s rationale is a telling admission of just how little Canadians think of their own abilities. For some reason, we need all these protections and supports, because without them our ability to fend for ourselves is so fragile that it would crumble like a house of cards. If we were allowed to strike out on our own and fail — even once, the reasoning goes — we risk losing everything. More importantly, wouldn’t it prove something we’ve suspected all along? That somehow we’re just not good enough to compete on an equal footing with the Americans?

  In 1948, C.D. Howe thought the best way to cure Canada of a balance-of-payments crisis was by way of a reciprocity deal with the United States. The confident, U.S.-born cabinet minister assumed that Canadian manufactured goods would succeed if they had access to the vast American market. His boss, Prime Minister William Lyon Mackenzie King, flirted with the idea, but eventually balked. As King wrote in his memoirs, the idea of a Canadian selling manufactures to an American was “absurd.”96

  The same lack of confidence spurred the government of Pierre Trudeau to nationalize large swaths of the Canadian economy and introduce the Foreign Investment Review Agency to monitor foreign takeovers of domestic companies. In an interview, Donald MacDonald, finance minister under Trudeau, explained that the policies at the time were motivated by an inferiority complex. “We felt we couldn’t take on the big boys south of the border — the notion of opening the market as a whole seemed inconceivable.”

  It’s a fear that still haunts us today and is embodied in the prevalence of quasi-monopolies, from bce to rbc, trapped in their gilded cages, too big for Canada, too small for the world. It’s why so many Canadians feel most comfortable being employed by someone else, rather than striking out on their own, and why so few are prepared to step outside the safe confines of Canada to compete internationally. “They underestimate us,” said one Saskatchewan farmer of the Canadian Wheat Board. “And in turn, we underestimate ourselves.”

  Luckily, not everyone believes that as Canadians they have to settle for second best. Increasingly, farmers like Chris Birch are challenging supply management, in some cases all the way to the Supreme Court of Canada. In the West, they are willing to go to jail for their right to sell their wheat to whomever they choose. The Prairie Pasta Producers aren’t giving up either; they are looking to harvest a new variety of wheat that is not patented in Canada and therefore doesn’t fall under the Canadian Wheat Board’s monopoly. It’s a move reminiscent of the Winnipeg Grain Exchange (now known as the Winnipeg Commodity Exchange), whose members, in an effort to find new niches outside the Wheat Board’s control, were instrumental in developing a crop that has become synonymous with Canada: canola.

  Despite the Exchange’s best efforts to diversify into beef and even gold, it remains a shadow of its former self and now operates from the fourth floor of one of the city’s colourless mid-rises. As of 2001, the exchange even gave up selling seats on the bourse, which used to go for $30,000 in the 1930s. In contrast, Chicago, building on its beginnings as a commodity trader, is home to one of the world’s largest financial markets, with seats on its Chicago Board Options Exchange auctioning in 2006 for a record us$1.5 million. As for wheat, the acreages continue to shrink and prairie gold now makes up less than 40 per cent of farmers’ incomes, compared with 78 per cent in 1950.

  A century ago, when the exchange unveiled its stately new headquarters, the Winnipeg Free Press described it as “a lasting monument to that produce that has made Winnipeg famous throughout the world.”97 It echoed the confident pronouncements of the visionary railway builder William Van Horne, who, during an 1892 visit to the new Gateway to the West, declared: “I regard the great future of Winnipeg as certain as sunrise, and I do not know any place on this continent with such magnificent prospects ahead of it.”98

  Sadly, the sun is setting, and the once-grand Winnipeg Grain Exchange is only a faded monument to what might have been.

  * British Columbia finally removed its appurtenance clause, which links cutting rights to mills, in 2003.

  * A government decision banning Australia’s big four banks from merging is still being vigorously challenged by the banks. Unlike Canadian banks, however, they are allowed to buy insurance companies.

  * No evidence of wrongdoing was ever found.

  * Canada has the ignominious bragging rights to the most restrictive barriers to foreign investment in the telecommunications sector of any oecd country.

  * In November 2006, Stephen Harper’s Conservative government took the unusual step of reversing the crtc’s decision. In December, Industry Minister Maxime Bernier unveiled plans to free the big telcos from the most prohibitive regulations by as early as mid-2007.

  5 WHY MEXICANS DON ’ T DRINK MOLSON

  “Canadian business is very naïve. They think they are very self-sufficient; they have this ‘We know what to do’ attitude. Then they get into big trouble.”

  JAMES MOHR-BELL, EXECUTIVE DIRECTOR OF

  THE BRAZIL– CANADA CHAMBER OF COMMERCE

  DAN O’NEILL NEVERtired of warning his staff at Molson breweries about the perils of doing business in Brazil. “We are dealing with very tough people— they are tigers,” he’d repeat ad nauseam. The former brewery chief came by his opinions honestly; unlike most Canadian executives, O’Neill had international experience, having spent four years in Rio de Janeiro working for consumer-products company S.C. Johnson. He was even fluent in Portuguese. “You guys in Canada think you have something to teach the Brazilians; you think that they are not as developed, not as sophisticated as you are,” he’d admonish. “You can’t imagine how much you have to learn from them.”

  Unfortunately, Molson had more to learn than even O’Neill realized. It would be a lesson the brewer would never forget.

  Like the deceptively lethal Venus flytrap, the exotic promise of the Brazilian market had lured more than one Canadian company to its death. In the 1990s, Bell Canada International (BCI), enticed by the state sell-off of phone and cable licences, spent millions before going belly-up, effectively putting an end to its global ambitions. Telesystem International Wireless (TIW), the brainchild of Quebec entrepreneur Charles Sirois, quickly followed suit in a spectacular misadventure replete with thuggery and backroom machinations that all but decimated the company. That Molson would so quickly join its luckless compatriots in the growing graveyard of failed Canadian ventures in Brazil continues to confound analysts and shareholders alike.

  Less than four years after buying Brazil’s number two brewery, Cervejarias Kaiser, for us$765 million, Molson’s Brazilian illusions crumpled like an aluminum beer can. Despite O’Neill’s warnings, the venture imploded, almost on impact, as Molson helplessly watched Kaiser’s market share tumble from nearly 17 per cent in 2002 to 7 per cent when it sold the venture for a meagre us$8 million and us$60 million in debt. Along the way, North America’s oldest brewery seemed to commit glaring sins of omission that left it incapable of getting a handle on its marketing and distribution, two ingredients as basic to beer as barley and hops. The question is, who’s really to blame? The murky Brazilian market or Molson?

  The trail of Canadian corporate blood would seem to point to the market’s man-eating tendencies. In 2003, for example, the owner of Brazil’s third-largest brewery, Schincariol, was shot dead as he drove out of his garage. Five members of the Schincariol family were arrested in 2005 on charges of defrauding the government of some us$254 million in annual taxes. The Canadian beer market is positively collegial in comparison. “Let’s face it, Brazil is pretty corrupt. You have to kn
ow who to bribe,” says Michael Palmer, president of Veritas Investment Research in Toronto. “Molson was way out of its depth. It’s like a bunch of little kids playing with sharks. They knew dick about Brazil and they didn’t have a fucking clue what they were doing.”

  But to believe that Molson was unprepared for the complexities of Brazil is obviously not the whole story. The fact that three substantial Canadian companies would all fail so spectacularly speaks to fundamental flaws in the way Canadians approach foreign markets. More to the point, it underscores how the internal corporate structures and mindset indigenous to many of them are anathema to global expansion. In each case, the companies not only underestimated the sophistication of the market they were in, but overestimated their own abilities. They were arrogant. Operationally, their goals were usually short term, opportunistic and focused on making a quick buck. And in the words of one Molson executive, when it came to making the necessary investment, they were “cheap, cheap, cheap.”

  “They come with the wrong attitude and the wrong strategy, and they make bad business decisions. And then they leave, blaming Brazil as a difficult market to do business in,” explains James Mohr-Bell, executive director of the Brazil–Canada Chamber of Commerce. “It has nothing to do with Brazil and being corrupt. It’s just mismanagement and poor strategy. Canadians don’t have a very professional approach to doing international business.” In Molson’s case, the company blithely ignored repeated warnings that the key to selling beer successfully in Brazil was a strong distribution system. Says Mohr-Bell: “You cannot be so naïve.”