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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 much 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.

“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 Kong–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.”

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.

A group of Danish scientists, however, were not bothered by similar concerns. On hearing of the Canadian breakthrough they immediately got to work producing insulin, and in 1923 — just two years after the initial discovery— they launched a company and began treating patients. That company, Novo Nordisk, is today a world leader in diabetes treatment, employing twenty thousand people in seventy-eight countries.

Canada, in comparison, while having made world-leading advances in diabetes and stem cell research, is nowhere on the pharmaceutical industry map, according to Mendlein. It has been outmanoeuvred by everyone from Sweden and Denmark to India. “If you look at where you are on the level of research and biological science, you are probably in the G3,” he says. “But Canada doesn’t even make the G8 of pharmaceutical countries. It’s tragic.” While small towns like Indianapolis, Indiana, and Thousand Oaks, California, have spawned world leaders like Eli Lilly and Amgen, Toronto, which is home to Canada’s largest cluster of biotech firms, has failed to produce a single stand-alone biotech company or blockbuster drug.

Canada doesn’t even boast an insulin manufacturer; the original University of Toronto laboratory where diabetes was discovered was spun off into Connaught Laboratories, which busied itself with maintaining a domestic monopoly while handing out international licences to the likes of Eli Lilly and Novo Nordisk. It eventually lost its ability to even supply the Canadian market, and was taken over by the federal government in 1972 before being sold to a French pharmaceutical firm. Absorbed into the massive ranks of the world’s number three drug company, Sonafi Aventis, the “Connaught campus” in north Toronto is the only remaining vestige of Canada’s contribution to diabetes treatment.

“Canada has some software and electronics companies, a little aircraft, but no consumer goods, or cars, and it’s not really happening for computers or pharmaceuticals,” says Mendlein. “You could be the Norway in North America and rely on commodities, but you are not going to be Sweden, which is home to the top-selling drug in the world and probably the car you drive. The question is, where does Canada, which is a much bigger and much more powerful country, fit in?”

It’s a good question. To answer it, I asked four related questions about the largest supposedly “Canadian” companies to the gauge the country’s entrepreneurial drive and managerial capacity — the basic requirements for creating globally competitive companies:

1. How many companies were founded by immigrants?

2. How many had American or other foreign management?

3. How many were actually subsidiaries or spin-offs of foreign companies? (to be dealt with in Chapter 3)

4. How many, despite a listing on a Canadian stock exchange, had a CEO and/or a head office located south of the border?

The answers lead to an astonishing conclusion: an economy on cruise control, with foreigners and foreign-born Canadians at the wheel, while native-born Canadians snooze in the back seat. To begin with, almost every significant high-tech firm to come out of the Ottawa area, known in better times as Silicon Valley North, was started by a clutch of British entrepreneurs. The list includes Cognos, Corel, Zarlink Semiconductor, Mitel Networks, Tundra Semiconductor and Newbridge Networks. The exception — JDS Uniphase — was started by the beret-wearing Slovak, Josef Strauss.

Hungarian-born Peter Munk founded Barrick Gold, while compatriot Frank Hasenfratz heads up Linamar, Canada’s second-largest auto parts company. Only Magna, the parts giant founded by Austrian-born Frank Stronach, is bigger. Two Germans, Klaus Woerner (now deceased) of ats Automation Tooling Systems, a maker of manufacturing equipment, and Husky’s Robert Schad, round out Canada’s contribution to the tool and die industry. Says Schad of the preponderance of European immigrants:

“We had a good technical education and then flourished in this country because there was no competition.”

The field was equally unencumbered for brash and innovative entrepreneurs like Isidore Philosophe, who emigrated from Beirut, turning a basement business into Cinram, the world’s largest manufacturer of cds and dvds; Aldo Bensadoun, the Moroccan-born owner of the Aldo shoe chain; Karl Kaiser, the Austrian co-founder of award-winning Inniskillin wines; Peter Nygärd, the high-flying Finn who launched a textile empire from Winnipeg; and Robert Friedland, the American hippie turned promoter behind the Ivanhoe energy and mining ventures. Moses Znaimer, the architect of the Toronto-based CITY TV media group, was born in Tajikistan, the son of holocaust survivors. Saul Feldberg also survived the war in Poland and went on to found the Global Group of Companies, one of the world’s largest office-furniture manufacturers. German-born Stephen Jarislowsky, the flinty-edged octogenarian heading up the multibillion-dollar investment boutique, Jarislowsky Fraser & Co., escaped from France just as the Nazis invaded in 1941. Even Galen Weston, the grocery scion, was born in Britain, whereas Mike Lazaridis, co-founder of the country’s high-tech darling, Research in Motion, was born in Turkey.

In perhaps the most telling example of all, Canada’s most iconic brand, Roots, was started by two Americans from Detroit. In the seemingly rare instances in which companies spring from Canadian-born loins, they are rarely managed by Canadians. Scratch beneath the surface of many a Canadian company and you will likely find an American. The elite fraternity oversees such national icons as Air Canada,* CN Rail, Saskatchewan Wheat Pool,† and, until 2006, Canadian Tire.‡ Other alumni include oil company Suncor Energy, electronics manufacturer Celestica, forestry firms Abitibi-Consolidated, Tembec and West Fraser Timber, Magna International and Nortel. Our southern cousins also oversee the mining interests of Cameco, Potash Corporation of Saskatchewan, and INCO, until it was acquired by the Brazilians. Even Stelco, since emerging from bankruptcy protection in March 2006, is run by the American-born former CEO of International Steel. British-born executives run McCain Foods and Talisman Energy, while an Australian headed up Ontario’s Hydro One, the government-owned electrical utility, until resigning over a scandal involving expense accounts in December 2006.

Some companies are even double dippers. CN, Cott,* Lions Gate Entertainment, NOVA Chemicals, Brookfield Properties (which built the iconic Montreal Forum) and Thomson Financial are not only American-run, but their CEOS all live in the United States. ati Technologies, one of the world’s largest 3d-graphics-chip designers, has the distinction of being a triple dipper. Founded by Kwok Yuen Ho, the son of a wealthy Chinese family dispossessed by the communists, ati’s top management is American, including CEO David Orton, who commutes to work from California.† It seems only fitting, then, that the Canadian Council of Chief Executives, the country’s leading corporate organization, is headed by American-born Chairman Rick George.

‡ To foreigners this is striking. “Canadians don’t have confidence in their own abilities. They often bring in Americans to run their companies,” says Boris Rousseff, a European trade consultant to Canadian firms. “It’s an issue of corporate culture. Canadians try to pretend they are not who they are.”

And therein lies the root of the dilemma. Canadians are ensnared in a kind of Gordian knot: because their economy is essentially run by foreigners, they necessarily downplay or underestimate their own abilities, and by extension their own Canadian brand. And the fact that there are no Canadian brands reinforces Canadians’ suspicions that they have no value. Why is it, asks Andrew Stodart, vice-president of marketing and business development for Diamond Estates Wines and Spirits, that uniquely Canadian brands like Coffee Crisp candy bars and Molson Canadian beer were never marketed around the world? “Canadians abdicate brand building,” he says. “It comes back to the great Canadian inferiority complex.”

Sadly, it becomes a self-fulfilling prophecy. Without the premium and protection that brands afford — not to mention the estimated 30 per cent boost they bring to a company’s stock market price — the only other option is to be a commodity. “You are condemned to be second rate,” says Stodart, competing on price instead of market position. And in today’s global market, “there’s always somebody cheaper.”

Even the Chinese realize it’s a losing proposition. Their national champions have begun acquiring internationally recognized brands like rca televisions and IBM’s personal computer division. China’s leading car maker, Nanjing Automobile Group, has bought the design rights to the United Kingdom’s bankrupt MG Rover Group and plans to make its own high-end brand sedan, which it will sell in Europe and the United States. In 2006, a Chinese brand (telecom giant China Mobile) ranked, for the first time, among the world’s most valuable brands,* coming in fourth after Microsoft, GE and Coca-Cola. Its estimated value: us$39 billion. Beijing-based Longfa Decoration Corp., in an attempt to copy the American franchise model, launched its own furniture retailer, Mermax, in the United States. “We want to provide a full service and create a brand,” said Yan Shihong, the enthusiastic Chinese store manager of its first Chicago location. “It’s the American way, right?”⁴⁰

Canada, in contrast, seems to have turned the normal evolution from low-cost manufacturer to value-added brander on its head. “We are a component nation,” says Jeff Swystun. “We are a bit like China in the last century going into this century. We’ve flipped it on its head. But China is sick of playing that game. And we need to get real sick of playing that game real fast.” While the no-name, behind-the-scenes nuance may be part of the Canadian character, says Swystun, “it’s not going to allow us to win on the global business playing field.” Instead, it will brand us as “the economy that stands for nothing,” a squirrel in a menagerie of tigers, dragons and elephants.

CALL CENTRE NATION

It’s hard to get your knickers in a knot when the economy is firing on all cylinders. For most of this decade, Canadians have basked in the glow of the best economic conditions of the past fifty years, with unemployment at historic lows, companies posting record profits and skyrocketing oil and commodity prices bringing a new sheen of respectability to the loonie. So what if we don’t have brands or that we suck as salespeople? So what if we’re not the Americans’ number one trade partner or that our companies are decidedly domestic? Our gdp per capita is higher than that of Finland, a nation that is supposedly more innovative and competitive than we are, and a shot of vodka will only cost you five dollars here, compared with fifteen dollars in Sweden.

“Who cares,” asks Andrew Sharp, Canada’s resident productivity guru, if Canada does not have a single bank among the world’s top thirty, or that Scandinavian pulp and paper mills are “five times” more productive than Canadian ones? Pointing to a United Nations survey of world values, the economist noted that Canadians are among the “happiest” people on earth. And who wouldn’t be? Thanks to a combination of sheer luck and relatively little effort, Canadians are among the wealthiest people on the planet. But while most blithely shrug their shoulders and go about their business, some have glimpsed the future; and they are scared.

“Unfortunately, today I’m nervous,” says Deszö Horváth, dean of York University’s Schulich School of Business. “Canada, by default, not by design, again became raw-materials-oriented as China’s demand for raw materials and energy has created a total dislocation in the world. We can live on raw materials and oil and gas, but it’s going to go down one day, and unless we develop an alternate corporate structure here, we’re not going to be a very successful nation in the future.” Alvin Segal, the chairman of Montreal’s Peerless Clothing, was less sanguine. “We’re a make-believe country, and our make-believe country is falling apart. We can’t compete with the world — we have nothing to offer,” he says. “We’re going on American coattails. We have space galore, we’re too liberal and we’re spoiled.”

The telltale signs of the country’s stealthy slide, say observers, are all around us. Despite years of respectable, at times enviable, economic growth, foreign investment into Canada has virtually dried up. Dubbed the “canary in the mineshaft” by the Conference Board, Canada’s share of world FDI has more than halved over the past twenty-five years to 3 per cent in 2003— levels not seen since the Great Depression of the 1930s.⁴¹ “No one seems to care (about Canada),” admits a puzzled John Klassen, assistant deputy minister of International Trade Canada’s investment branch. In contrast, the United States remains atop the global charts, second only to the United Kingdom. Its share of NAFTA-bound investment, along with Mexico’s, has grown at the expense of Canada, which has watched its continental take decline by 30 per cent over a decade.⁴²

For Chris Lindal, executive vice-president of Ontario homebuilder Viceroy Homes, the most damning proof of Canada’s waning allure is China, where a torrent of foreign money has glossed over rampant corruption and political oppression to build gleaming, modern cities that would put Toronto to shame. “This is hugely serious,” he says. “Resource-wise and freedom-wise, we are one of the best countries in the world. So why aren’t we attracting mammoth amounts of capital investment? We are not. Shanghai is. The rest of the world is passing us by in leaps and bounds, and we don’t even realize it.”

What many Canadians don’t realize is that the dearth of new investment is having a direct effect on their wallets, says Lindal, by helping to hold down wages and sucking the life out of what should be steadily rising living standards. While wages have recently been creeping up on the back of Alberta’s oil boom, Canadians’ take-home pay has been “stagnating” for years under the twin weights of high taxes and low salaries. Personal disposable income has dropped from 80.5 per cent of U.S. levels in 1985 to 67.7 per cent in 2003, according to the C.D. Howe Institute.⁴³ “The economic well-being of the average Canadian,” concluded the td Bank in 2005, “has barely advanced in 15 years.”⁴⁴ Not surprisingly, Canada has gone from having the fifth-highest gdp per capita in the world in 1990 to tenth spot today, surpassed along the way by Ireland, Denmark, Norway, Australia and Austria. Of course, it hasn’t been all downhill — to keep up appearances, Canadians have racked up the highest level of personal indebtedness in their history.

The relative decline in prosperity is a harbinger for the country’s other major Achilles heel: productivity, or output per worker. A synonym for competitiveness and a driver of living standards, productivity hinges on investment in things like technology, machinery and equipment, research and development, and human capital. Without it, output per worker drops, and so do wages.

Canada’s productivity has fallen off dramatically over the past half century, sliding from its third-place ranking among developed countries in 1960 to seventeenth in 2004.* Between 2000 and 2005 it grew just 6.7 per cent (and actually contracted in 2006), while in the United States output per worker expanded by a phenomenal 21.7 per cent. The cumulative effect is a Canadian business sector only 74 per cent as productive as that of the United States — its poorest showing since the mid-1950s and a dramatic drop from 1999, when it registered a comparative productivity of 82 per cent.⁴⁵ The lacklustre performance can be measured in dollar bills. The Institute for Competitiveness and Prosperity calculates Canada’s growing income gap with the United States at $8,700 per person or an additional $12,100 in after-tax disposable income per family.⁴⁶ In 1981 the gap was less than half that, and at the current rate of decline Canadians are expected to earn 50 per cent as much as Americans within twenty-five years.⁴⁷

Some argue that the U.S. “productivity miracle” is a chimera that obscures the cost of competitiveness. In its bid to innovate, offshore and outsource, the United States cut 3.3 million manufacturing jobs between 1998 and 2003, while Canada’s employment swelled as business substituted capital with cheap labour to bolster output. But what was thought to be the triumph of a kinder, gentler alternative is turning out to be a pyrrhic victory.

The combination of China’s ascendancy and the sudden rise in the Canadian dollar after two decades as a bottom feeder effectively pulled the rug out from under the well-trodden path of least resistance. Between 2003 and 2006, some 300,000 manufacturing jobs were lost as the forestry, furniture and automotive industries hemorrhaged jobs. The number could reach 400,000 by 2007, as close to seven hundred manufacturers went bankrupt in 2005 alone, squeezed by a high dollar, skyrocketing energy prices and shrinking shipments to the United States. The sudden decline had economists busy slashing optimistic growth forecasts for 2007 as Ontario, hit with the bulk of the job losses, flirted with a recession.

With the sector teetering dangerously on the brink, many manufacturers see little choice but to move south of the border to remain competitive. Celestica, Gildan Activewear, Distinctive Designs Furniture, Grant Forest Products, Exco Technologies and E.H. Price, among others, are shifting production south of the border. “If we don’t get the productivity, then we’ll just switch our production to the U.S.,” warns Jim Pattison, whose vast holdings include timber, fisheries and food packaging.⁴⁸ As Gerry Price, CEO of Winnipeg-based E.H. Price, explains: “All our plants are highly productive. However, the reality is that all of the niche products we build in Winnipeg could be made even more profitably in Phoenix.

There’s no economic reason to continue operating in Winnipeg, other than it’s my home.”⁴⁹ This is not to say that jobs aren’t being created. In 2006, new jobs, particularly in the higher-paying professional and managerial ranks, were springing up like weeds on the back of the Alberta oil boom. But for the most part, Canada has largely been churning out temporary McJobs while relying on self-employment and government to pick up the slack. Between 2000 and 2004, job growth was driven by restaurant work and new security personnel, clerical and retail sales jobs, which both grew by 15 per cent.⁵⁰

One of the big winners has been the telemarketing industry. According to Site Selection Canada, a company that helps American outsourcers set up in Canada, six thousand call centres have been established here over the past decade, creating 400,000 jobs. The jobs pay on average $12.45 an hour and have been portrayed as the magic bullet for towns from Sault Ste. Marie to Red Deer, all struggling with shuttered industries and declining populations. And it’s not just small towns that are jumping on the call centre bandwagon. In Ottawa, considered to be Canada’s high-tech hub, research-intensive jobs at companies like Corel and jds Uniphase have quietly migrated south, replaced by the call centre operations of the likes of U.S. computer giant, Dell.⁵¹

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 workers 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 than 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.

An affable fifty-six-year-old with greying hair and ruddy cheeks, Mitchell got his first taste of China in 1989. His company, which manufacturers and installs grain and animal feed–handling equipment, was asked to participate in a project in northern China. Mitchell was immediately struck by the inferior quality of Chinese equipment and thought he could scoop up a share of the market with his superior product while helping to improve China’s grain-handling system at the same time.

It was the beginning of a fifteen-year odyssey that Mitchell admits would test his belief in himself and come at great personal cost. He moved to China in 1994 but, unable to afford the astronomical rent that most foreign companies paid to keep their employees in comfort, moved into a rundown flat with bad heating that cost just one hundred dollars a month. “I lived pretty rough for a long, long time,” says Mitchell, who also taught himself Mandarin. “I wouldn’t do it again if I knew how tough it was. But I was pretty stubborn — I wasn’t going to give up now.”

But, he acknowledges, he almost did. Not long after he first ventured into China, he sat on his bed in a hotel room, his bags packed, resolved never to return. He had “hit the wall,” his nascent joint venture with a Chinese partner had dissolved in acrimony, and he was exhausted by the relentless price gouging and unenforceable contracts. That night, three employees came to visit him and begged him to stay, offering to pick up their families and follow him wherever he went.

Mitchell took them up on their offer and built his own factory outside Beijing. In the end, despite all the hardship, it has paid off. Mitchell estimates that manufacturing component parts in China has made the company 30 per cent more competitive while its presence there has opened up vast new business opportunities. Multinational giants are now knocking on his door to build dozens of feed mills in China, while in Canada, says Mitchell, you are lucky if one mill gets built.

“We never would have gotten these connections just being in Canada,” he says. “Being in China has been so beneficial to the company. So many people have contacted us because we are there. We’re recognized more as an international company.”

The company, in turn, has grown by leaps and bounds, with more business than Mitchell knows what to do with. In the past decade, the workforce has expanded from thirty to eighty people and sales have increased tenfold. And like a stream that flows downhill, it all trickles back to Canada. “All the profit comes right back here,” he says. “The business is growing, so I hire more people, I buy more equipment from here [for the Chinese operations] and I can hire more salespeople here. Everybody is benefiting from us being in China.”

Yet despite finally reaping the rewards after years of struggle, Mitchell sold the Chinese subsidiary in 2006. His two sons, who both work at the Newton factory, live on sprawling acreages outside of town. They saw what expanding into China cost their father, and they are not willing to make the same sacrifices. Nor do they have to. Mitchell, a farmer’s son, immigrated to Canada at the age of nine from England. His family lived hand-to-mouth, eating a lot of vegetable soup and crackers and maybe, if they were lucky, meat on Sundays. He remembers, at fourteen, vowing he would never be poor.

That conviction, and “a pioneering spirit,” is what he believes compelled him twice in his life to take the road less travelled. The first time was when, at the age of just sixteen, he signed up for the navy. The second was when he was twenty-nine, with three kids and two mortgages, and he decided to forfeit a steady paycheque and strike out on his own.

In both cases he started out with a Canadian-born companion, and both times he was abandoned at the last minute, left to make the risky journey alone. Just as he was about to board the train for Halifax, the high school friend who had enlisted in the navy with him backed out. When it came time to start his own business, his would-be partner changed his mind, opting to keep his job at their old place of work. Mitchell eventually went on to hire his former co-worker. “He used to tell me,” says Mitchell with a smile, “that it was the biggest mistake he ever made.”

* In 2006, Huawei landed a five-year, twenty-one-country contract to supply Vodafone, the world’s largest wireless operator, with handsets based on third-generation technology.

* Australia has three banks in the world’s top fifty, according to the Fortune 500 list of the world’s biggest companies (2006), compared with one Canadian bank.

† Carrefour rings in at number twenty-one on the Fortune 500 list, with an annual revenue of us$90.4 billion, compared with George Weston’s us$23 billion.

* American-born Robert Milton was chief executive of Air Canada before taking the helm of its parent company, ace Aviation, and British-born Clive Beddoe heads up WestJet; now, both of Canada’s major airlines are run by foreign imports.

† The Saskatchewan Wheat Pool was originally founded as an anti-corporatist co-operative by prairie farmers.

‡ Canadian Business magazine named Canadian Tire’s Virginia-born Wayne Sales as Canada’s top CEO in 2005. Sales stepped down in 2006.

* Cott’s American CEO , John Sheppard, stepped down in May 2006 to be replaced by another American, Brent Willis.

† Orton may no longer need to commute, since Advanced Micro Devices ( AMD ), the California-based microprocessor manufacturer, announced in July 2006 that it would acquire ati for us$5.4 billion.

‡ George moved to Calgary in 1991 to head up Suncor, and in 1996 he proudly took up Canadian citizenship.

* According to a ranking by brandz, a list compiled by London-based market research firm Millward Brown.

* Between 2000 and 2004, Canada’s productivity performance ranked twenty-fourth out of twenty-nine oecd countries.

* In contrast, Australia has signed 20- to-30-year energy supply deals with China worth some $30 billion.

* In December 2006, the British Columbia Utilities Commission rejected Alcan’s electricity agreement with British Columbia Hydro and Power, arguing it was not in the public interest. As a result, Alcan threatened to scrap the project.

* Interestingly, the only two major miners still headquartered in Canada, Barrick Gold and Teck Cominco, are both run by Canadian CEOS .