Why Mexicans Don't Drink Molson

by Andrea Mandel-Campbell

  “China is a time bomb,” says Jim Stanford, economist with the Canadian Auto Workers union. “There is no way we will be able to compete once they get the infrastructure. They will be able to export vehicles and sell them for half the price.”

  While Chinese car manufacturers, still grappling with design and quality issues, have been forced to temper their export ambitions, not so for the auto parts industry. China is looking to become the world’s low-cost parts producer, with a stated goal of exporting us$100 billion in parts by 2010, up from us$5.6 billion in 2004.34 The country’s largest manufacturer, the privately owned Wanxiang Group, which counts GM and Ford among its customers, has built up an international supply chain with stakes in more than one hundred companies, including dozens of overseas parts makers in the United States, United Kingdom, Germany and even Canada. At the same time, Germany’s Volkswagen announced plans in 2006 to increase its exports of Chinese-made car parts from just us$100 million to us$1 billion, while Ford announced that it was set to double the value of components it sourced from China to us$3 billion in 2006. “There will be a permanent shift of certain component manufactures,” says Felix Pilorusso, a Toronto-based auto industry consultant. “It’s already happening.”

  The inevitable tug towards lower-cost areas of production is even uprooting the natural-resource industries, supplanting Canadian salmon with Chilean sea bass and softwood lumber with Latvian spruce and Brazilian loblolly pine. Massive new pulp mills in South America, Eastern Europe and China are not only tapping into fast-growth forests and low-cost logging but are fundamentally changing traditional trading patterns, says Clark Binkley, a forestry industry expert and former dean of the University of British Columbia’s Faculty of Forestry.

  Until very recently the forestry industry was segregated into three regional trading blocs, which flowed north–south. Canada supplied the United States, Scandinavia sold to its more southerly European neighbours and Russia exported to Japan and Korea. But as production ramps up, particularly in the southern hemisphere, new “variegated” trade patterns are developing, says Binkley. New Zealand is now supplying the United States with wood, and Brazil is selling pulp to Europe and the United States. “Global trade is emerging,” he says, “and there’s a lot more opportunity for somebody else to be the lowest-cost producer.”

  Canadian softwood lumber producers learned that lesson the hard way when the U.S. government, under pressure from its domestic industry, slapped import quotas on Canadian wood. Both the Americans and the Canadians assumed the quota would constrict supply, pushing prices up to the benefit of both sides, says Binkley. Instead, it opened up a window of opportunity for a slew of imports from Brazil to Estonia. The newcomers managed to grab a chunk of the market, keeping prices down. And even though the original quota system is gone, the newcomers are not. European imports, virtually non-existent a decade earlier, reached record highs in 2005, accounting for nearly 5 per cent of U.S. sales,35 while Canada’s share of the U.S. forest products market dropped from 69 per cent in 2000 to 62 per cent in 2004.

  “They’ve gotten in and they aren’t going to go away,” says Binkley. “We don’t have any exclusive access to the U.S. Wherever the wood is the cheapest, it’s going to come in. And it’s gotten more competitive.”

  In fact, Canadian industry is slowly waking up to the fact that what it thought was a lifetime warranty under NAFTA actually has an expiry date. Among the hardest hit has been the Canadian furniture sector, which had successfully transformed itself from a sluggish, domestically oriented industry before free trade into the number one exporter to the United States. After out-competing American furniture makers, its hard-won but short-lived leadership was quickly usurped by China, which now commands 50 per cent of the U.S. wood bedroom furniture sector, up from just 4.8 per cent in 1996.

  Until now, Canadians have comforted themselves with the idea that somehow the Canadian and Chinese economies were “complementary”: China was poor in natural resources, which Canada could happily supply. But while that assumption is true, it leaves out a crucial part of the equation, not to mention entire swaths of the economy. Not only are the Chinese manufacturing increasingly sophisticated products, from bicycles and barbecues to handsets and pharmaceuticals, that compete directly with Canadian goods, but foreign multinationals, Americans in particular, are moving to China to manufacture. “The U.S. companies are going to China big time, and we need to be there to support our U.S. clients, whether it’s in the auto industry, banking, whatever. We need to be there because we are part of the North American fabric,” explains Neil Tate, a special adviser to the Bank of Montreal on Asia. “We need to do that to protect ourselves, to survive, to increase our business not only in China, but in the U.S. and to increase our two-way trade between Canada and the U.S.”

  Yet we don’t seem to be doing it. Canadian companies, large and small, have been slow to sign up for the new game in town: global supply chains. Canadians have lagged behind their peers in offshoring and outsourcing, thus betraying a reluctance to tap into lower-cost markets as sources of cheap components or manufacturing bases. While the world’s stock of foreign direct investment expanded a hundredfold between 1990 and 2002, Canada’s increased just 4.4 times36 — an indication that Canadian companies are neither creating their own global supply chains nor becoming part of someone else’s.

  According to a 2004 survey conducted by Canada’s Automotive Parts Manufacturers’ Association (APMA) of its members, Asian facilities accounted for a minuscule 0.29 per cent of their production and Asian suppliers represented less than 5 per cent of inputs. Perhaps not surprisingly, 71 per cent of the respondents admitted that one or more of their major customers had threatened to switch to overseas suppliers in the previous three years.37

  During apma’s 2005 annual convention in Hamilton, a GM vice-president warned that Canada’s decades-long decision to rely on a sixty-five-cent dollar instead of increasing competitiveness was costing billions in new business. GM was expected to award just $200 million in new supply contracts to Canada in 2005, down from $2 billion in 2003, he said.38 “China is nipping at our heels, and standing still is a recipe for disaster,” says Gerry Fedchun, apma’s president. “A lot of companies in our industry say, ‘I’m all right Jack.’ But it’ll catch up to them, and they will not be around. If you don’t think you have to change, you’re screwed.” The proof is in the pudding: with a slew of auto parts makers in bankruptcy protection, Canada recorded a deficit in automotive trade in the second quarter of 2006 — the first since 1991.

  With some 60 per cent of all Chinese exports produced by foreign multinationals, putting the nation on track to become the world’s largest exporter by 2010, billions of dollars’ worth of foreign investment pouring into Brazilian steel capacity from China, South Korea and Europe, and more going into building India’s back office to the world, opting out of the loop is akin to the “kiss of death,” says Lorna Wright, associate professor of international business at York University’s Schulich School of Business. “The world is getting more interconnected. If you are not careful, if you cut yourself out of the chain, you’re dead.”

  Howard Balloch is willing to bet money on it. The former ambassador who now runs his own investment boutique headquartered in Beijing says it’s only a matter of time before the Chinese are producing higher-quality parts more cheaply than they can be made in Canada. And those parts won’t just be put into the cars coming off assembly lines in Shanghai — they’ll be in the vehicles rolling out of Detroit and Oshawa.

  “The auto parts companies that come to China establish themselves early, bring technology and, because they have a head start, end up owning the Chinese production facilities — they win,” says Balloch. “Otherwise Chinese companies are going back to Canada and buying up what’s left of our industry, and that’s as inexorable as the tides.”

  THE ANTI-BRANDERS

  An old Chinese parable explains Canada’s place in the world, says David Fung, a Hong Ko
ng–born self-made millionaire who now makes his home in Vancouver. It goes like this: A fox meets a tiger in the forest. The fox says to the tiger, “Don’t eat me because I am really powerful. If you don’t believe me, follow me around the forest and you’ll find everyone bowing to me.” Sure enough, everywhere the tiger and the fox went, all the animals bowed. “Well, of course, everybody was really bowing to the tiger,” says Fung. “In Canada, we take the U.S. to be our tiger.”

  The problem is, as global supply chains weave their way around the planet, companies consolidate and free-trade agreements are thrown out like so many nets into the sea, the tiger may find better things to do than follow a fox around the forest. Shorn of its protector, the fox falls prey to the law of the jungle. And Canada, like the fox, has very little in the way of natural defences to shield it from the ferocity of global markets. In fact, on closer inspection, this fox, with its puffy tail and pointy ears, begins to resemble an overgrown squirrel.

  The first telltale sign of Canada’s vulnerability is in its companies. In an era where size matters, the country has precious few multinationals. Despite laying claim to the second-largest proven oil reserves in the world, Canada has no “super-majors” like Exxon Mobil or British Petroleum. Few countries are carpeted with such vast tracts of trees, yet there is not a single tier-one forestry company to rival those of the Scandinavians or the Americans. Canada’s mining companies have traditionally been the most international, but only two — Barrick Gold and Teck Cominco — still have Canadian head offices and are pipsqueaks compared with behemoths like Anglo-American of the United Kingdom, Brazil’s cvrd and Anglo-Australian miner bhp Billiton. Aluminum maker Alcan is perhaps the most global Canadian company, but with us$20 billion in sales it is considered small by international standards (the newly merged Arcelor Mittal steel giant has sales of us$77.5 billion) and is an increasingly likely takeover target.

  As for Canada’s blue chip banks, they are irrelevant internationally, dwarfed by multinational monoliths like Citigroup and Holland’s ing Group and even outgunned by Australia, where poisonous animals outnumber the population.* According to the Fortune 500 list of the world’s biggest companies in 2004, Canada’s leading entry was George Weston Ltd. at 240. But while Weston has grown fat plying Canadians with baked goods and President’s Choice brand foods at its ubiquitous Loblaws and Superstore chains, French grocer Carrefour is in an entirely different weight class, with a global empire that includes more than two hundred stores in China alone.†

  Canada’s lack of global girth exposes an even softer underbelly. While Sweden has Ikea, Finland has Nokia and Italy has the fashion triumvirate of Armani, Gucci and Prada, Canada does not have, nor has it ever had, a single global brand. Even landlocked and impossibly mountainous Switzerland boasts a swath of high-altitude names, from banks and Rolex watches to Nestlé chocolate, Nescafé instant coffee and pharmaceutical giants Novartis and Roche.

  In contrast, Canada is almost anti-brand. In a country without a lot of large companies, an inordinate number of them are generic manufacturers or outsourced contractors hired to make other companies’ products. The no-name club includes Cott, which is now the largest private-label soft drink manufacturer in the world; Celestica, a contract electronics manufacturer; Apotex, a generic drug manufacturer; Patheon, a leading contract drug maker; and Peerless Clothing, which manufactures men’s suits under licence for upscale brands like Calvin Klein and Ralph Lauren. Even Montreal-based Gildan Activewear, one of the largest T-shirt makers in the world, is no Fruit of the Loom.

  Some say its because we’re just too darn nice and middle-of-the-road to put our imprint on anything and duke it out for world domination. Finns, despite their socialist leanings, are definitely not soft and cuddly, say those who have dealt with them. The Australians, descended from convicts exiled to a distant island, are ballsy adventurers who travel the world over. And while Bern may rival Ottawa as the world’s most boring capital city, the Swiss are “calculating, regimented and disciplined. They know what they want and are fantastic negotiators,” says Jeff Swystun, the Toronto-based global director for the branding company Interbrand.

  “It’s a problem of our marketing aggressiveness. When has Canada ever conquered another country? We are a country that’s never had a revolution, never had a civil war,” says Swystun. “Unfortunately marketing is all about scrapping it out — for market share, for share of mind and share of wallet. That means being aggressive day in and day out. And that just doesn’t appear to be in our character. It would mean taking a stand, and that’s something we are loath to do.”

  So instead of being scrappers, we are skimmers. Whether it’s the big banks that sit at home counting their billions, logging companies content to hew two-by-fours instead of manufacture tissue paper, or manufacturers churning out generic products rather than innovating, Canadian companies scoop the cream off the top rather than milk their products and services for all they are worth. Why go through the painful and risky process of building brands, expanding internationally and adding value when there is relatively easy money to be made carving up homegrown monopolies, cutting down trees and turning out component parts?

  “The Americans phone us and say ‘We need wood’ and we sell it to them, and they sell it back to us as a cabinet,” says Drury Mason, Alberta’s assistant deputy minister of economic development. “And we’re happy to do it because we made money on the wood.”

  That kind of inward-looking comfortable complacency has taken a toll on the country’s entrepreneurial drive. The lag is reflected in a reluctance to invest in new technology, a reliance on cheap labour and a yawning productivity gap between us and the United States. Canada’s investment per worker in machinery and equipment is about 60 per cent of U.S. levels, its companies spend less than half as much on research and development as the Americans do, and we are twenty years behind our neighbour in our stock of information technology.39

  It’s why, when I was in the Arctic, I was surprised to learn that all of Canada’s fleet of Coast Guard icebreakers are powered by Finnish-made engines, and why Quebec, traditionally the largest source of aluminum for Alcan, doesn’t have a single aluminum auto parts maker. It’s also why, despite manufacturing cars for forty years as part of the Auto Pact, an automotive free-trade agreement between the United States and Canada, Canadians are essentially still assembly-line workers.

  Not surprisingly, Canada continues to slip in the World Economic Forum’s annual rankings of the world’s most competitive countries. Its overall business competitiveness sank from sixth place in 1998 to fifteenth in 2006, largely due to a weak track record on innovation. According to the survey, Canada ranks thirty-second out of 125 countries in its propensity to compete based on unique products and processes. When it comes to the degree to which exporting companies go beyond the simple resource extraction and are involved in product design, marketing sales and logistics, it ranked a dismal forty-sixth. In contrast, Finland, Sweden and Denmark have topped the charts year after year, thanks to a private sector that according to the forum “shows a high proclivity for adopting new technology and nurturing a culture of innovation.”

  That’s not to say that Canadians never come up with innovative technologies or ground-breaking inventions. They do. In fact, they do it quite often. The problem is that they seem to have a hard time making the leap from the laboratory to the marketplace. When a Canadian product does make it to the store shelves, it’s usually because an American company made it happen. “What Americans are good at is taking a commercial venture and getting people excited about it,” says Nizar Somji, owner of the Edmonton-based technology firm Matrikon. “We are not only unable to commercialize, but we are unable to get people excited.” Adds Interbrand’s Jeff Swystun: “We don’t have a marketing mindset in this country at all. We’re bad at making the finished product shine, and there’s a real void in marketing talent, in aggression, in boldness of claim. It’s truly a void in the business world.”

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p; The story of IMAX Corp., the iconic big-screen movie company, is the Canadian conundrum writ large. In the late 1960s, a group of Canadians developed a revolutionary technology for large-format film. The technique became a staple at science centres and museums, but eventually it stumbled on drab content and limited growth. Two Americans picked up the floundering company in 1994 and gave it a new lease on life. No longer merely a vehicle for documentary and educational films, imax now features Hollywood blockbusters using a technology it developed to convert conventional films to its format. The new owners, a pair of New York investment bankers, have signed licensing agreements with theatre operators around the world. There are now 366 big screens running in thirty-six countries, from Russia to Kuwait, while China is the company’s biggest market outside the United States, with twenty-five theatres set to open by 2008.

  John Mendlein, an American biophysicist and lawyer who spent four and a half years working in the Toronto biopharmaceutical sector, traces Canada’s limp salesmanship back to another duo: Fredrick Banting and Charles Best. In 1921, the two Canadian doctors discovered insulin, the lifesaving secretion used to treat diabetes. The Nobel Prize–winning find is one of the greatest medical discoveries of the twentieth century, yet the two doctors never attempted to cash in on their work, considering it “culturally unacceptable,” says Mendlein, to commercialize science.