Why Mexicans Don't Drink Molson

Rescuing Canadian Business From the Suds of Global Obscurity

Andrea Mandel-Campbell

• Publisher: Douglas & McIntyre
• Year: 2009
• Print ISBN:
  9781553654063
• eBook ISBN:
  9781926685922
• Topic: Business
• Subtopic: International Business
• Index: Business

Canada has all the makings of a global leader, yet it has opted to become a laggard, frittering away its jackpot of rich resources rather than building viable multinationals that are ultimately the country’s best defence in a globalized world. Andrea Mandel-Campbell interviews some of Canada’s leading executives and behind-the-scenes movers and shakers to reveal the hidden challenges to Canada’s global success and the perils of continued complacency.A lively and authoritative compendium of never-before-heard tales of Canadian companies abroad, Why Mexicans Don’t Drink Molson is also a hands-on guide for innovative competitiveness, helping readers to identify the nation’s previously underestimated assets and abilities.

PART ONE

WHY WE CAN’ T COMPETE ABROAD,
OR WHAT HAPPENED TO OUR
COJONES ?

1 TIME TO WAKE UP

“Canada is the most comfortable country in the world. You are nice people, but you are not a trading nation.”

BORIS ROUSSEFF, EUROPE AN TRADE EXPERT

IT’S 3 PM and the patio of El Coronito restaurant in downtown Mexico City is quickly filling up with businessmen in dark suits and open-necked dress shirts meeting for lunch. The smog that normally hangs over the Mexican capital like a dusty grey-brown shroud has temporarily lifted to reveal a cloudless, azure sky. A bright white sun beats down on tables cluttered with bottles of pale beer and tequila shots, its rays refracting in the mass of glass and crystalline liquid, creating a dazzling glare.

Bruno Perron orders his usual michelada, a Mexican beer doused with chili and a squirt of lime, before reaching for a tortilla and filling it with a mixture of melted cheese and chorizo. If it weren’t for the slight French inflection in his otherwise flawless Spanish and the Quebec licence plate on the suv he drives like a demon through the city’s crumbling streets, he could easily pass as Mexican.

Originally from the small Quebec town of Thetford Mines, Perron moved south more than a decade ago. He had just finished university and had a job offer from a large mutual fund company. But somehow, perhaps after watching his hometown, one of the world’s largest producers of asbestos, go from boom to bust, he figured he needed a competitive edge over the three thousand other students in his graduating class. The much-vaunted North American Free Trade Agreement, NAFTA, was just being signed. The twenty-something figured that if he learned Spanish and got a handle on the Mexican market, it would give him an advantage when he eventually moved back to Montreal.

“Looking ten years ahead, I thought Mexico was going to be important,” says Perron. “Unfortunately, it is not as important as I thought it would be.”

Far from it. More than a decade after NAFTA was signed, the road paved into the dense, jumbled market is largely deserted. While Americans, Europeans and Asians have piled in to sell product to Mexico’s young and underserved population or outsourced manufacturing to take advantage of lower labour costs, Canadians have eschewed Mexico’s arid northern industrial parks and rutted city streets for the silky-white sand beaches of Cancún.

Canadian business, either baffled by Mexico’s seemingly inscrutable business culture, leery of corruption or dismissive of its still developing market, has largely opted out. While bilateral trade has tripled since 1994, Canada sells a scant 0.7 per cent of its merchandise goods to Mexico. As of 2005, Canada had invested a measly $3.1 billion, equivalent to less than 1 per cent of its worldwide assets⁷ and a drop in the bucket compared with the more than $130 billion in foreign investment that has poured into Mexico since 1994.

It is not as if the Mexicans didn’t want Canadian investment. In fact, as they launched the largest sell-off of state-owned assets in Mexican history in the late 1980s and 1990s, they actively courted Canadians. Modest, manageable and politically neutral, the Canadians offered a middle road between powerful American interests still tainted by a history of war, annexation and economic imperialism and the powerful clutch of Mexican families whose sprawling, interwoven conglomerates dominate the economy. But there were few bites.

One Canadian banker recalls how he was approached by a Mexican cabinet minister looking to unload a vast copper mine in northern Mexico. The government was anxious to keep the mine out of the hands of Jorge Larrea, a hard-nosed tycoon who already controlled a number of privatized mines and railroads. Canada seemed like an obvious candidate. “The minister told me price was no object,” said the banker, who set up meetings with Canadian mining companies Noranda and Falconbridge. “The Canadians didn’t even want to look at it,” he said. In 1991 Larrea acquired the mine — Cananea — turning it into a springboard for his company, Grupo México, which went on to buy mines in the United States and Peru and is now the world’s fifth-largest copper producer. As for Noranda and Falconbridge, they no longer exist, having been acquired in a $20 billion hostile takeover by Xstrata and subsumed into its sprawling empire.

In 2001, President Vicente Fox took the unusual step of inviting twenty Canadian energy companies to his private ranch in a bid to coax them into investing in the creaking Mexican energy sector. His country was ramping up its industrial production and was in dire need of new energy capacity. The Canadians, mid-sized and without the political baggage of the Americans, seemed like the perfect fit. “There were twenty guys at the ranch— and only three went in,” said Michael Stewart, former president of B.C.-based Westcoast Energy International and one of the guests.

Of the three, including Westcoast, only the Alberta energy utility TransAlta is left. “People view Mexico as a wild, unsophisticated country, but parts of it are much more sophisticated than Canada, and some parts are much better to do business in than some parts of Canada,” said Stewart from his Calgary office. “You would think people in this town should look there. You can fly to Mexico City in the same time it would take you to get to Halifax — and the food’s better. But it’s tough to get people interested— they’re put off by the bureaucracy, the language and the built-in biases of what they think they can and cannot do.”

It’s the same story in banking. Canada’s Scotiabank and Bank of Montreal (BMO) were among the first foreigners to make careful inroads into Mexico’s tumultuous financial sector. Mexico’s banks had been nationalized in the 1980s and then reprivatized in the early 1990s before a currency crisis in 1994 prompted the collapse of the entire financial sector. In a cautiously astute manoeuvre, BMO swapped Mexican sovereign debt in 1996 for a minority equity stake in Bancomer, the country’s number two bank. The move was expected to position BMO, which already owned Harris Bank in Chicago, as the pre-eminent NAFTA bank. Instead, at the height of a foreign feeding frenzy in the sector, including the massive us$12.5 billion purchase by Citigroup of Mexico’s largest bank in 2001, BMO pulled out of Mexico.

David Winfield, Canada’s former ambassador to Mexico, was on the board of Bancomer at the time. He tried to persuade BMO to buy the bank. “They could have done so much better, and so much better throughout the Americas. BMO was well positioned with Harris Bank in the United States, and Bancomer was exceptionally well positioned to do Hispanic banking.”

Instead, Tony Comper, BMO’s president and chief executive, “was persuaded it was too big a risk and too expensive,” says Winfield. “I think it was the wrong decision. But it required a visionary to see there was a business opportunity there.” Comper, who was tapped for the “Don Knotts Award for Meekest Ambition” by National Post Business magazine, sold out to the Spanish, who along with the Americans and the HSBC Group dominate the amazingly profitable sector, which boasts returns of over 20 per cent.

It is not as if there are no Canadian companies in Mexico. Scotiabank survived the currency crisis to see its wildly profitable Inverlat subsidiary, which represents just 6 per cent of the Mexican market, contribute 11 per cent to the bank’s bottom line. A number of Quebec companies, like Bombardier, Quebecor and Transcontinental, have also made the trek. In many cases, however, companies such as auto parts maker Magna “were dragged down” by their clients. Others tried, but were unable to penetrate the market. “When I compare the number of Canadian companies going through my office and the rate of success, it was very, very low,” says longtime Mexico hand and former Scotiabank executive Pierre Alarie. “We missed the boat everywhere.”

Troy Wright, former president of the Canadian Chamber of Commerce in Mexico and the managing director of Inverlat’s capital markets division, admits Canada’s track record has been patchy. “The Europeans— Spain, France, Italy — have been aggressive. It’s an attitude you don’t see in Canada. The U.S., when they see an opportunity, they attack,” says Wright. “Canadian companies take the cautious route or no route at all.”

To be sure, there are plenty of risks in doing business in Mexico, and Canadian companies are justified in being cautious. Although conditions have improved significantly, Mexico remains rife with corruption and its democratic institutions are still a work in progress. Yet, it is not the tenuous rule of law or language barriers that seem to most flummox Canadians. As Ambassador Winfield recalls a businessman telling him: “Why should I go to Mexico if I can’t even drink the water?” One Canadian government bureaucrat explained the dilemma this way: “How do we get Canadian companies more engaged in Mexico and not get diarrhea?”

ARMCHAIR TR AVELLERS

At first blush, the delicate constitution of Canadian companies seems incongruous with the country’s claim to be one of the world’s great trading nations. Despite representing 2.5 per cent of the world’s economy and just 0.5 per cent of its population, Canada is the world’s eighth-largest trader, a feat that has secured its place in the elite group of eight most-industrialized countries, the G8. Over the past two decades Canadian trade has expanded exponentially, from 44 per cent of gdp to 72 per cent, making it the most trade-reliant country of the G8.

But while some $1 million in merchandise trade criss-crosses the Canada–U.S. border every minute, cementing the world’s largest single trading relationship,* Canadian “trade” rarely ventures beyond the cozy confines of the northern United States. When it comes to the rest of the world, Canadians are armchair travellers, rarely roused from the familiar contours of the “intramestic” American market to seek their fortune in foreign lands.

Canadians may be trading with, and investing in, the rest of the world more than ever before, but the record to date reveals, if anything, that they are the antithesis of true traders. In every major market from Brazil to China, Canada is facing ever-widening trade deficits as its market share continues to erode under the strain of increased global competition. In 2005, Canada racked up a record $44 billion trade deficit with the rest of the world, and with the odd exception of countries like Lebanon and Sri Lanka, its only trade surplus was generated from just a single country: the United States. As Pierre Alarie, a Canadian veteran of international markets, observed: “If Canada were beside Bosnia instead of the United States, we’d all be bankrupt.”

When it comes to foreign direct investment (FDI), Canada musters the lowest level of outward-bound fdi in the G8 and remains largely absent from the current global push into developing markets. While it’s true that Canada is now a net exporter of fdi for the first time in its history, it’s also true that the third-largest recipient of Canadian foreign investment is Barbados, an offshore tax haven and post office box for dozens of Canadian banks and insurance companies.* According to Statistics Canada, an estimated $88 billion, close to a quarter of Canada’s overseas investment, is parked in similar tax havens in Ireland, Bahrain and the Caribbean.⁸

“Canada’s trade and investment market share has been falling, falling, falling, year after year, with few exceptions, since the end of the 1970s,” says Glen Hodgson, chief economist at the Conference Board of Canada. The dismal showing comes as little surprise to the rest of the world, which by now has become resigned to Canada’s cursory attempts at international business and seeming unwillingness to wade in and take the time and energy to actually cultivate trade. “You are nice people,” says Boris Rousseff, a European businessman who has worked closely with Canadian companies, “but you are not a trading nation.”

A quick tour of world markets reveals Canada’s declining and increasingly peripheral position. In Europe, long considered a second home for Canadian goods and investment, “Canada’s turn seems to have passed,” says one European diplomat who has worked to enhance two-way trade. Canada’s share of European Union (EU) imports declined by a third between 1990 and 2002. While Europe has been a beachhead for some of corporate Canada’s most aggressive international forays, including Alcan’s $4 billion acquisition of French aluminum giant Pechiney in 2003, Canadians on the whole have taken a laissez-faire attitude to Europe. As the Americans and Japanese scramble for position and the eu becomes increasingly preoccupied with its growing membership and the rise of China, Canadian companies have hung back like awkward teenagers waiting to be asked to the prom. Europeans, as a result, are often left scratching their heads, wondering why the Canadians bother showing up at all.

“Canadians are perceived as very friendly, but we don’t know what they are up to. What are they here for? What do they want to achieve? They don’t make any effort. They wait, like in the old days when women expected to be approached by men,” said one European businessman. “Things have changed. Even women don’t go for that anymore.” Apparently, neither do the Europeans. “We can tolerate that attitude from the U.S., but not from an average-sized country like Canada. You are bound to lose.”

Nowhere is Canada’s losing record more evident than in Latin America. In a rare burst of foresight, the Canadian government led a series of Team Canada trade missions to the up-and-coming region in the early 1990s in a bid to pre-empt American hegemony by parlaying Canadian goodwill into a first-mover advantage. As a result, Canada signed a free-trade agreement with Chile in 1996, six years before the United States did. Nevertheless, Canadian exports to Chile have stagnated to 1994 levels, as they have in almost every country in the region.

At the same time, Canada’s trade deficit has grown. All told, it exports less than 1 per cent of its merchandise trade to South America and the Caribbean. The lacklustre trade has been mirrored by a mass exodus of some of Canada’s biggest companies, including Bell Canada’s (now defunct) international wing, bci; Quebec cellular group Telesystem International Wireless; Alberta pipeline companies Nova Gas and TransCanada PipeLines; and even Scotiabank in Argentina. Many left the region with their tail between their legs.

Canada’s biggest retreat has been in Brazil. Exports to the sprawling country have been declining since 1997 as a $300 million trade surplus was converted into a $2 billion deficit in 2005. Sales to the world’s fifth-most-populous country represent just a quarter of 1 per cent of Canadian exports.

James Mohr-Bell, executive director of the Brazil–Canada Chamber of Commerce, says two-way trade, while edging up in favour of Brazil, remains “ridiculously low.” The Brazilian businessman has watched in frustration as Canadian companies remain “on the sidelines” while other foreigners, shrugging off currency devaluations and political volatility, have snapped up privatized state assets and invested in infrastructure projects. Although Canadian direct investment has cautiously expanded from $6.7 billion in 2000 to $8 billion five years later, overall foreign direct investment in Brazil has ballooned from us$40 billion in 1992 to over us$236 billion⁹ a decade later. “Canada has lost a lot of position. It used to be the sixth- or seventh-largest investor in Brazil, now it’s twelfth or fifteenth,” says Mohr-Bell. “As far as Canada is concerned, Brazil has just been forgotten, left aside. It was never exploited by Canadians to its potential.”

But perhaps the most worrying omission in the Canadian trade calculation is Asia. By mid-century, the region is expected to be home to three of the world’s six largest economies, yet Canada is barely a footnote in what is being touted as a historic changing of the economic guard. Canada’s share of Asian imports has almost slipped off the charts, from 2.88 per cent in 1988 to 1.06 per cent in 2004 in the wake of near-negligible exports and ballooning trade deficits. In 2004, Canada trailed Chile as the eighteenth-largest foreign investor in Southeast Asia.

While shrinking exports to Japan, a long-time trading partner, and Korea are cause for worry, it’s the seeming indifference to China that’s most alarming. As the world scrambles to feed China’s ravenous economic appetite, Canada directs less than 2 per cent of its exports to what has been the globe’s fastest-growing economy for the past decade. Not surprisingly, Canada lags behind every other major country in export growth to China.¹⁰ In fact, in the first half of 2006, exports actually contracted by 8 per cent compared with the same period in 2005.

Canada’s meagre and diminishing share of Chinese imports is matched by minuscule direct investment. By 2005, Canadian investment in the world’s most populous country barely topped $1 billion, representing 0.2 per cent of all Canadian investment abroad and nowhere near the $11 billion of Canadian money socked away in the Cayman Islands. At the same time, foreign investment in the Middle Kingdom has shot up by a phenomenal us$356 billion¹¹ between 2001 and 2006.

The anemic performance even caught the attention of James Wolfensohn, the former president of the World Bank. During a speech at the Montreal Board of Trade Conference in 2004, he carefully admonished the country for not taking “as significant advantage of that extraordinary market as you might.” Howard Balloch, Canada’s former ambassador to China, is decidedly less diplomatic in his assessment of the country’s limp efforts. A trace of impatience ruffles his otherwise cool, bow-tied demeanour when asked why Canada still lingers at the water’s edge while the rest of the world takes the plunge.

“The Japanese recognize their presence in China is vital to their own economic existence. They are huge investors. The Germans are all over China. General Motors is investing billions. Where are the auto p...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• DEDICATION
• CONTENTS
• INTRODUCTION
• PART ONE: WHY WE CAN’ T COMPETE ABROAD, OR WHAT HAPPENED TO OUR COJONES ?
• PART TWO: WHY ALL IS NOT LOST: HOW TO GET FROM BUFFALO TO BEIJING
• SOURCES
• ACKNOWLEDGEMENTS