Why Mexicans Don't Drink Molson

by Andrea Mandel-Campbell

  For Scotia and its confrères, it’s not just about missing out on lucrative advisory fees and underwriting commissions in New York. The big U.S. banks are now moving in on corporate Canada, as the Big Five, limited by their scale and lacking the expertise of a bulge-bracket investment bank, are less able to handle major mergers and acquisitions or take Canadian companies global. In 2003, for example, foreign banks accounted for 43.4 per cent of investment banking fees paid in Canada, taking leading roles in the country’s biggest corporate transactions, from the overhaul of Air Canada and Stelco’s restructuring to Alcan’s us$4.6 billion purchase of France’s Pechiney.

  In perhaps the most telling example, the Canadian government hired Merrill Lynch, together with rbc and CIBC , to sell its remaining 19 per cent stake in oil company Petro-Canada to the stock market. “Here is a Canadian asset, sold by the Canadian government, and it went to Merrill Lynch to get it done. It was sold in Canada to Canadians,” says Waugh. “It’s mind-boggling. It has implications for international competitiveness, for head offices and for talent.”

  Faced with the banks’ limited scope, the CEOS of Canadian companies opt to live close to U.S. financial centres, says Hartt. He reels off the names of Canadian companies now headquartered in the United States: IPSO , Moore-Wallace, Laidlaw, NOVA Chemicals and Thomson Corp. The American-born heads of CN and Cott also reside stateside, making periodic trips to their Canadian offices. “Why are they there? Because they want to be near where the deal flow is and where the decisions are made,” says Hartt. “When Bombardier, jds Uniphase, Manulife, Alcan and cn go abroad and buy foreign companies and become world leaders, they all turn to international financial institutions because Canadians are not there to help. When foreigners target Canadian companies, with their international bankers and advisers, it eventually leads to the hollowing out of corporate head offices.”

  Not everyone agrees that the banks need to join forces to be competitive. In 1984 the Australian government deregulated its banking industry by allowing foreign banks to compete domestically (although the foreign ownership of local banks remained restricted). The decision triggered a radical makeover, with local banks slashing costs, expanding abroad and specializing in high-end niche sectors. *

  Macquarie Bank, Australia’s principal investment bank, began acquiring real estate, energy and infrastructure projects around the globe as part of a unique business model it developed that bundles assets into funds that clients can invest in. Its us$110 billion in assets (including debt) under management include Korean toll roads, Italian airports and Taiwanese cable operators. Its Canadian holdings include the Ontario elder-care centre Leisureworld, container terminals in Halifax, the Edmonton Ring Road and mortage lender Cervus Financial. Macquarie even made a us$2.6 billion hostile bid for the London Stock Exchange, which it was later forced to abandon. The bank, which makes money not only on the assets themselves but also on fees from underwriting related ipos and managing the funds, enjoyed fourteen successive years of record profits as of 2005. “We had to be innovative in order to survive,” says Nicholas Hann, managing director of Macquarie’s North American division, based in Vancouver. “The foreign competition made the Australian banking market much more competitive and innovative than the Canadian banking market.”

  When HSBC decided to embark on a global expansion in the 1980s, it had only us$47 million in deposits and was the world’s twenty-fourth-largest bank. rbc, in contrast, boasted us$65 million in deposits and was number twelve globally. Instead of mega-mergers, HSBC opted for a “string of pearls” strategy and between 1998 and 2003 acquired eighty-six companies valued at us$43.4 billion. One of its earliest forays was into the Canadian market, where it had established a local subsidiary and in 1986 was allowed to buy the failing Bank of British Columbia after every other Canadian bank refused to buy it. In 2004 it pioneered foreign investment into Chinese banking by taking a 19.9 per cent stake in the country’s fifth-largest lender. With us$1.5 trillion in assets and ten thousand branches in seventy-seven countries, HSBC is now the world’s fourth-largest bank by assets. As outgoing chairman Sir John Bond was quoted as saying in 2005, “ HSBC is resolutely international, and ‘international’ is a mindset.”86 It seems to be a mindset that eludes Canadian banks. “ HSBC woke up and saw the writing on the wall,” says business consultant John Gruetzner of HSBC ’s decision to buy the Midland Marine Bank of Buffalo in 1980. “If none of the five major Canadian banks can drive to Buffalo and buy a bank, then what hope is there to amalgamate and be competitive?” Says Alan Middleton, an executive director with York University’s Schulich School of Business: “They basically played with themselves behind the 49th parallel. Not one of them saw themselves as a significant player outside Canada, and for all the wrong reasons.”

  It wasn’t always this way. The Bank of Montreal had a spectacularly successful merchant banking operation in New York in the second half of the nineteenth century and was at one time the largest incorporated bank in North America. The precursor to CIBC financed the bulk of U.S. cotton exports and was the principal banker to the U.S. government during its occupation of the Philippines in the early 1900s. The Bank of Nova Scotia followed the British rum trade to the Caribbean, while the Royal Bank went into Havana after the 1898 American victory over the Spanish in Cuba, eventually controlling 94 per cent of U.S.–Cuban trade and opening 121 branches worldwide.

  The banks were, along with the nation’s life insurers, Canada’s most international institutions. During the late 1890s and early 1900s intrepid Canadian life insurance salesmen roamed the world; two thirds of Sun Life Financial’s policy holders were outside Canada, and the company was the largest foreign insurer in Japan. Manufacturers Life (now Manulife Financial) sold insurance from Chile to Sumatra. As historian Michael Bliss noted in Northern Enterprise, “the sun did not set on either the British empire or Canadian life insurance salesmen.”87

  The insurers retrenched after the world wars, and in 1958 Prime Minister John Diefenbaker backed a move to mutualization — the private ownership of insurers by their policy holders — in a bid to protect them from foreign takeover. In 1999 Ottawa approved the first in a wave of demu-tualizations, as insurers went public in search of fresh sources of investment capital. Though still protected from foreign takeover, they have since expanded aggressively into Asia, with Sun Life rebuilding its historic presence in India and Manulife moving into China, Indonesia and Japan. In 2004 Manulife bought Boston-based John Hancock for $14.1 billion, the largest cross-border acquisition in Canadian history. It is now the second-largest insurer in North America and fourth in the world, based on market capitalization. Interestingly, neither Manulife CEO Dominic D’Alessandro nor Sun Life’s Duncan Stewart was born in Canada.

  Meanwhile, Canadian banks are still waiting to see whether they will be able to merge. In 2002, a Senate banking committee recommended that mergers be allowed, noting that “[i]n seeking to determine the ‘public interest’ . . . the paramount consideration should be the prosperity and competitiveness of the national economy.”88 Paul Martin’s short-lived Liberal government, however, seemed to have no interest in explaining that to Canadians. John McKay, parliamentary secretary to Finance Minister Ralph Goodale, was quoted as saying, “It’s up to the banks to convince Canadians that the public interest will be protected in any bank merger proposal.”89

  But while Ottawa may have abdicated what is arguably its real job — to provide Canadians with leadership in the quest to maintain and enhance the standard of living — global economic realities may soon trump any options that Canadians may have had. That Canadian banks can buy into the United States and Mexico, whereas banks from those countries cannot make acquisitions in Canada, is strikingly inconsistent — and Ottawa will eventually have no choice but to lift the ownership restrictions, says Waugh. “Why can TD buy Banknorth, why can we buy Inverlat, and Citigroup can’t come up here and buy? Eventually it’s going to happen because they are going to want reciprocity . . . and
then we’re all gone.”

  Canadian banks will have little defence against global giants like HSBC that have the firepower to buy the entire domestic banking system if they wanted. For Citibank, it will be like adding another state to their network, says Waugh. Head offices, with all their costly overhead and six-figure salaries, would be closed. For David Bond, a former chief economist at HSBC , it’s already too late. “The train has left the station and it’s not coming back. Within ten years Toronto will be as important as Des Moines, Iowa.”

  TO MILK OR TO BILK

  Or Winnipeg. At one time touted as “the Chicago of the North,” the modest prairie mid-cap town is a monument to arrested development, cut down in its prime and slowly left to moulder under the stifling weight of government paternalism. Winnipeg’s short-lived reign as a thriving metropolis and gateway to the West is an ode to what might have been. Its wide avenues that famously intersect at the corner of Portage and Main are now pockmarked with derelict buildings and strewn with garbage, its stunted skyscrapers forever denied from reaching greater heights.

  Relics of the city’s former glory can still be found in the crumbling warehouses and abandoned bank offices that litter its historic downtown core, known as the Exchange District. Once covering forty city blocks, the area is named for the Winnipeg Grain Exchange, an impressive ten-storey Italian palazzo-style office building that was at one time the largest in the Dominion. Built in 1906, it was the foundation of the city’s prodigious wealth and burgeoning commercial class, drawing merchants and traders from around the world to buy, sell and speculate on the future of “prairie gold.”

  Second only to Chicago for commodity trading in North America during its heyday, the Winnipeg Grain Exchange’s first setback came with the 1914 opening of the Panama Canal, which made it easier to transport grain from Vancouver than through Winnipeg, the hub of Canada’s transcontinental railway traffic. But it continued to grow, surviving two world wars, the Great Depression and no less than six government-sponsored royal commissions, called on the urgings of farmers’ groups suspicious that speculators on the exchange were manipulating the price of wheat.* The Tory federal government of R.B. Bennett eventually capitulated to popular pressure, forming the Canadian Wheat Board, a state trading agency, and gave it a monopoly in 1943 to market wheat and other grains. It was, as Peter C. Newman has observed, the “decisive blow” for the exchange.90

  In his book The Acquisitors, Newman wrote: “With the federal government intrusion into the business through the Canadian Wheat Board . . . many of the great grain families of Winnipeg dropped from prominence.” With a few exceptions, he noted, “these family grain businesses have all vanished as if they never existed.”91 The Richardson family, the most prominent of the scattered survivors, controls the country’s largest privately owned network of grain facilities, but its operations remain limited to Canada. George Richardson, the family patriarch, recalled the early effects of the board on the industry in an interview in the 1980s: “One regulator after another became stifling on the grain trade and there appeared to be a very limited future. There were mergers, people became discouraged and eventually went out of business.”92

  The Canadian Wheat Board and the tattered ruins of the Atlantic fishery are perhaps the greatest testaments to the destructiveness of ill-conceived government policy and regulation. But, as we have seen, there is barely a corner of the Canadian economy that is not in some way hobbled by interventionist policies that stifle entrepreneurism and condemn Canadians to being inward-looking commodity producers. The proof is all around us, from the lag in adopting technology and the lack of globally relevant companies to, in some cases, entrenched poverty. Most disturbing of all is the almost wilful blindness to the systemic failures and the refusal to acknowledge the real source of the problems. Canada continues to cleave to policies and institutions rooted in a different economic and technological era in the name of some misguided nationalism that has only served to weaken its economic sovereignty.

  Beer is a case in point. Unlike some things, Canada’s reputation for brewing superior beer is not unfounded. The Prairie provinces boast ideal growing conditions for barley, beer’s main ingredient, and are home to over two thirds of North American acreages. Yet as of 2006 the last three malting mills were built in the United States, even though it costs up to 50 per cent less to manufacture malt in Canada. But while Western Canada is arguably a more cost-effective location, what’s even more imperative to maltsters, and ultimately brewers, is the ability to tailor the barley to their own specifications. They prefer to contract directly with farmers to get the protein content they want and to have the ability to trace crops for the purposes of food safety. In Canada, they can’t do that — they have to buy directly from the Wheat Board. As a result, an industry study for the Alberta government concluded, the Canadian malting industry lost an estimated us$400 million in new investment as well as some us$30 million in annual operating expenditures that the new capacity would have generated.93

  But that’s not all they lost. Canada exports roughly 70 per cent of its malt, half of which goes to the United States — an export market that will be increasingly eroded by the new U.S. capacity. And since most Canadian-based maltsters are owned by U.S. multinationals anyway, they risk being phased out of the United States entirely by their freedom-loving parent companies, banished to Canada and any offshore business they can drum up. However, their biggest customers, the Canadian brewers, may just decide to relocate their processing facilities south of the border. The brewers, rather than having a competitive advantage in barley, actually pay higher malt prices than their U.S. rivals because of the Wheat Board monopoly and quotas on imported barley that ensure a captive market. Now that the two major brewers are foreign owned, they may not feel the same inclination to pay higher prices in the name of patriotism.

  Sadly, it’s the farmers who are the big losers. A shrunken Canadian malting industry means less demand for barley, while increased U.S. reliance on its own farmers means fewer exports to the United States at a time when barley-producing giants like Russian and Ukraine are increasingly competing in international markets. At the same time, because U.S. malt producers can’t buy directly from Canadian farmers, there is no price competition, so the barley often ends up as lower-priced feed. “The Prairies should be the malting barley and beer capital of North America,”

  says Rolf Penner, a Manitoba barley farmer. “We have this great opportunity, but we can’t capitalize on it.”

  It’s the same story with flour milling and the pasta industry. Leading Italian pasta makers actually advertise the fact they use Canadian durum wheat right on the box. So where are the Canadian manufacturers? From pasta brands Catelli and Lancia to flour miller Robin Hood, it’s all American-owned. The Wheat Board has argued that it is precisely because of the American hegemony that farmers need it to defend them against massive U.S. conglomerates. In reality, the board has helped ensure that there would never be a Canadian industry to rival the Americans.

  It’s not as if Canadians haven’t tried; in the late 1990s a group of some two hundred farmers from all three Prairie provinces got together in the hopes of starting up their own pasta-milling enterprise. Calling themselves the Prairie Pasta Producers (ppp), they were hoping to join forces with a farmers’ co-operative in neighbouring North Dakota, which had become the third-largest pasta producer in the United States. The ppp planned to supply the North Dakotans with specialized wheat varieties in exchange for becoming members and owners in the multi-million-dollar endeavour.

  The deal never happened. According to Wheat Board rules, farmers must first sell their wheat to the agency, which in turn will sell it back to farmers at its pooled price. The price was so high that it didn’t pay to resell the wheat. The farmers tried negotiating with the board for years, but after continuous stonewalling they finally gave up in 2005. “We are not allowed to innovate,” says Wally Mieli, a farmer from Moose Jaw, Saskatchewan, and the ppp’s grimly res
igned chairman.

  Innovation has also proved strangely elusive for corporate giants like Bell Canada Enterprises (BCE) and an industry that is supposed to be on the leading edge of technological innovation. According to some accounts, Alexander Graham Bell invented the telephone in an Ontario farmhouse, yet when it comes to taking advantage of the latest gadgetry, Canada trails most of the developed world. It lags in the introduction of third-generation mobile phone systems, which combine high-speed mobile services with Internet access, as well as in rolling out cellular digital networks, coming in twenty-eighth out of thirty countries in cellular subscriptions per person, according to the oecd. Among industrialized nations, Canada ranks twenty-sixth in the modernization of its telecommunications industry.

  BCE and others have been slow to invest in new applications, and consumers have been slow to buy them, because of a deeply flawed regulatory regime that has mistaken carving up the market between coddled oligopolies for true competition, says Eamon Hoey, a Toronto-based telecommunications consultant. With ownership restrictions keeping foreigners at bay,* government regulators handed the domestic wireline monopolies, bce and Telus, cellular licences. Unlike an independent cellular company, which would have no choice but to grow, the carriers, buoyed by their perennially profitable wireline business, have little incentive to invest in the much more capital intensive cellular market. “The only way to be profitable is by not spending,” explains Hoey. “They don’t want to grow too fast, because then they would have to invest more.”

  In an ostensible bid to foment competition, the Canadian Radio-television and Telecommunications Commission (CRTC) has compensated by tying down the carriers with regressive regulations. bce has been loaded down with all manner of price caps, price floors and bizarre decrees that limit the discounts it can offer and bar it from calling back clients it has lost to rival carriers. In 2005, the crtc imposed a price floor for what bce could charge for VoIP (Voice over Internet Protocol), which uses the Internet to make long-distance calls, making Canada the only country except for Singapore to regulate the newly emerging technology.*