No more in the big leagues
Regional innovators create prosperity while larger traditional champions flop or sell out. from Alberta Report
Sept. 13, 1999
By Mike ByField

     Neither a century of tariff protection nor free continental trade have enabled Canada to build up a stable flock of world-scale multinationals.  Of the world’s top 100 companies, as listed by Forbes magazine in July, not one hails from the land of the Maple Leaf.  The national scarcity of heavy-weight contenders became blatant this summer, with American competitors passing and crushing proud icons of corporate Canada like pingpong balls.  Among the more humbling cases:

  • On Jue 21, Weyerhaeuser Limited announced its proposed purchase of MacMillan Bloedel Limited for $3.6 billion.  Traditionally, MacBlo has been the foremost champion of B.C.’s forest industry but its American acquisitor is five times larger.
  • T. Eaton Co. Ltd., perhaps the most famous Canadian brand of all time, went into voluntary liquidation August 23 and laid off 13,000 employees.  The death rattle of this country’s pioneering department store took the form of vulgar ads – “the sale you’ve waited 150 years for.”  And shoppers, far from voicing memories of treasured catalogues lovingly read on isolated farmsteads, whined that the fallen giants closeout prices were not low enough.
  • Willson Stationers, a 99-year-old company, went belly up last week, filing for protection under the Companies’ Creditors Arrangement Act. Willson, once a national player, had already been reduced to 17 stores in western Canada, and its demise means all major stationery retailers in this country are foreign-owned.
  • Air Canada, the nation’s flagship airline, found itself caught in an exceedingly unwelcome takeover bid financed primarily by American Airlines.  Canadian Airlines, once owned and nurtured by the Alberta government, will disappear along with its entire Calgary headquarters if the proposed merger between it and Air Canada goes through. Ottawa must now face an awkward fact: Canada apparently is not large enough to support more than one major domestic airline, yet a semi-monopoly air carrier is unlikely to provide competitive prices to consumers.
  • Nortel Networks, a telecommunications manufacturer, is one of four Canadian firms ranked between 101 and 200 in the Forbes list of largest multinationals.  (The others include two banks and the Bell Canada telephone utility.) But Nortel complains bitterly about heavy Canadian taxes, with thinly-veiled hints about leaving if necessary (its head office is already split between Toronto and Richardson, Texas).  Nortel’s current worldwide restructuring program will eliminate about 1,000 jobs, mainly in B.C. and Ontario.
  • The industrial showpiece of choice for Alberta’s Lougheed-Getry governments was Nova.  An Alberta Corporation, which received ample largesse.  Gratitude, however can be fleeting.  Last week, Nova Chemicals Corp.  announced that its president Jeffrey Lipton and all senior vice-presidents would be relocated to Pittsburgh within a year.  In all, 65 decision-makers will head for Pennsylvania, purportedly to be nearer their petrochemical customers.  But the fact that U.S. taxation on high-income individuals is much lower than Canada’s may have influenced the decision as well.
  • Poco Petroleums , along with Renaissance Energy, pioneered the corporate model that shaped the modern Alberta oilpatch, implementing new management techniques which permitted large-scale growth where traditional multinationals could not turn a profit.  But independence has proven elusive.  Poco was acquired in mid-August by Houston-based Burlington Resources Inc., forming North America’s largest independent natural gas producer.  Burlington, exerting typical American financial strength, did not put up a penny in cash, opting instead for a share exchange.  So the Houston –based aggresor’s capacity to make more acquisitions in Canada remains undiminished.

     Few analysts expect the industrial reshuffling to end any time soon.  For instance, financial markets were recently swept with a report that Enron, a U.S. pipeline and energy services bohemoth, was preparing to acquire Calgary-headquartered TransCanada PipeLines Limited.  Both companies have convincingly denied the rumoured merger, which would have been Canada’s larget acquisition ever.  But no one doubts that Enron could quite easily swallow TransCanada if it saw enough upside in the target’s future.

     The wealth-generating strength of multinationals is enormous, comments Sarah Anderson, an analyst with the left-leaning Institute for Policy Studies in Washington.  “As of 1995, the top 200 corporations accounted for much more than 25% of the world’s economic activitiy.”  Ms. Anderson says. “Of the top 100 economies in the world, 51 are individual companies, only 49 are nations.” WalMart, the number 12 corporation, is more economically powerful than 161 of the world’s 191 countries.  If you subtract the nine largest national economies (U.S., Japan, Germany, France, Italy, Britain, Brazil, Canada and China), the top 200 corporations have more econiomic clout than the rest combined.  One-third of world trade is simply international transactions within the same company.”

     Why do world-scale transnational firms flourish more commony in nations smaller in both population and landmass than Canada, such as Switzerland, Holland, and Sweden? Roger Gibbins, president of the Canada West Foundation, points to the National Policy introduced by prime minister John A. Macdonald in the 1870s.  His government provided the young nation’s “infant” manufacturers with tariff protection against imported goods.  Theoretically, companies would eventually grow strong enough to export into world markets. Theoretically, companies would eventually grow strong enough to export into world markets.  In practice, however this scheme almost always failed.  Instead, central Canadian manufacturers exploited all Canadian consumers with higher-than-world prices.  Adding insult to injury, those protected companies were often not Canadian but subsidiaries of American firms.  The federal tariff strategy endured until the Canada-U.S Free Trade Agreement was signed in 1989.

     Corporate relics of that era – Eaton’s and Willson Stationers, for instance – lack the sheer size to fend off their competitors, and often the skill as well.  “The retail sector is in the midst of profound changes and Canadian companies are having trouble adapting.” Says Doug Fosbrooke, a banking consultant in Calgary.  “The typical mall outlet is paying $25 to $40 per square foot in rent, while big box stores like Home Depot and Staples pay $5 to $10.  The bigger stores have typically three times the sales volume per retail clerk as well.”

     Architecturally, the big boxes are simple structures compared to a classic department store; second floors, basements or costly lacades are rare.  The new chains continue to grow quickly.  Winners, a U.S.-owned operator of discount clothing stores, recently opened it’s seventh store in Calgary. And big box dominance is so great that the nearest serious competition to a chapters book store of Staples office supplies outlet may be another branch of the same chain.

     That said, however, the National Policy did nothing to protect the resource industries, yet they too are proving very vulnerable to takeover.  Petroleum producers and service companies, much like MacMillan Bloedel, get picked off at will.  Charles Widman, a Vancouver consultant, blames the low dollar and high taxes.  An economist by training, he has analyzed the West Coast forest industry for 50 years.  “The U.S. economy is much larger than ours, of course, so the long-term trend has always been for them to acquire more in B.C. than we do in their country.  But the low dollar has greatly intensified the trend.  We look like a bargain.”

     B.C. forestry also suffers from a cost structure – burdened with hefty provincial stumpage rates, corporate and machinery taxes, and so on – that is high even by Canadian standards.  “That’s why eastern Canadian companies as well as Americans have recently been purchasing assets here.”  Mr. Widman explains.  “They’re also gambling that the New Democrats will lose the next election and be out of power by 2001.”

     Government involvement helps explain why no agricultural/commercial giants have emerged on the Canadian prairies despite their being a world-scale breadbasket.  “At one time, the Winnipeg Grain Exchange rivaled Chicago in terms of volume.” remarks Ralph Hedlin, a calgary resource economist and political analyst.  “The Canadian Wheat Board was created to keep grain prices low during the Second World War, and that killed entrepreneurial activity on a world scale in Winnipeg, the country’s grain center.  The city never recovered its momentum. If you add the forced transfer of aerospace activity from Manitoba to Montreal, you can see that federal policy has damaged Winnipeg more than any other city in Canada.”

     The wheat board, a $6 billion a year operation, continues to dominate the commercial lives of 110,000 producers.  Federal rail transportation subsidies, although withdrawn during the 1990’s, ensured that most food processing was from the prairies as well.  Although a growth spurt is now proceeding in that sector, competitors face globe-girdling U.S. rivals in the form of Cargill, Archer Daniels Midland, and IBP Inc.  Western beef packing, for instance; it has been taken over by American interest in recent years and boosted to world scale.

     Globally, the biggest corporate heavy-weights are beefing up to even larger size in many sectors, driven by competition between themselves.  British Petroleum feels constrained to merge with Amoco, Chrysler with Aimler-Benz.  Canada West’s gibbins points out that the West’s prairies and mountains – the most isolated region within North America’s empty quarter – will probably never be a natural home for head offices of this magnitude.  Like Nova Chemicals, head-quarters folk typically want to be nearer to major financial centers and mass markets.  “But just because we don’t get world-scale multinational headquarters doesn’t mean we can’t do well in manufacturing. “ Prof. Gibbins remarks.

     In fact, Alberta is enjoying a massive industrial surge.  And in a historic breakthrough, its progress is not based on a raw materials boom.  Instead, the new prosperity is broadly based across many sectors.  The expansion is driven by two phenomena:

  • With relatively low taxation plus a hard-working, well-educated population, the province is drawing multinational branch plants.  Nortel is a case in point.  This spring, it designated Calgary as one of its seven world-scale manufacturing locales; other sites are in Quebec, Ireland, the U.S. and France.  Notably absent is Ontario, the company’s home province.  “We definitely plan to continue being a big presence in Alberta.” Promises Nortel spokesman Lloyd Avram.  So do powerful players in wood, petrochemicals, meat, and other industries.
  • Even more promising for budding entrepreneurs and the West’s economic stability is the fact that small, high-tech manufacturing and processing firms can now target world markets.  Alberta Treasury Branches head Paul Haggis credits much of Alberta’s remarkably strong performance during recent round of low commodity prices to export-oriented juniors working in many industries.

     David Grant, an Alberta-bred engineer, explains how new technology can now work for the West.  He has just formed Multi-Tek Industries Inc., financed via the Alberta Stock Exchange, North America’s most efficient forum for publicly funding micro-companies.  “We are in the process of acquiring Tactx Controls, a private Firm in Victoria with six employees,” Mr Grant says.  Tactex has developed the world’s first commercial model of a “touch sensitive surface.”

     In essence, the company sandwiches a web of fiber-optic cables between two rubbery mats.  The device can sense how hard its surface is gripping an object at many points, performing much like a hand.  “Multi-point pressure sensitivity has never been achieved before.” The Multi-Tek founder says.  The device has a myriad potential applications, ranging from lifting large, delicate objects to more exciting electronic game pads and direct digital input to a musical keyboard (a global first). “We just shipped our first dozen units, a beta model.” Mr. Grant says.  “I can’t name most of our customers, but one went to the University of California at Berkley, which shows the league we’re playing in.”

     The entrepreneur is no novice to the high-tech game.  He has already created Omni-Lite Industries, whos 10 employees “cold-forge” specialized parts made from space-age composite materials for buyers like Chrysler, GM, the U.S. Army, and Nike.  “Unfortunately, we had to move Omni-Lite to the Los Angeles area because Calgary is too far from the highly specialized suppliers we depend on.”  Mr. Grant says.  “But Alberta can easily hang onto many small manufacturers.  The lifestyle there is better, I think – less crowding, less crime, better working hours.  Professional incomes may be higher in southern California, but so are the costs, and the pressure leaves most people with less time for their families.”

     Robert Mansell, an economist who studies regional development, says Alberta’s economic muscle is strengthening with impressive speed, notably in manufacturing.  “Look at the growth between 1987 and 1997 in almost every sector.” The University of Calgary professor suggests.  Annual manufactured exports from Alberta to the rest of Canada and the world rose from $7.3 billion to $12.8 billion (in constant 1992 dollars).  The range was broad: food products, up 62% ; furniture and fixtures, up 286%; electrical and electronic goods, up 469%; chemicals and chemical products, up 197%; fabricated metal, up 207%; and the tale is similar in a dozen other categores.

     The post-industrial horizon beckons the West, Prof. Mansell says, but federal policy remains a dangerous problem.  “Ottawa spent money like a drunken sailor between the 1970’s and the early ‘90s and now it must be repaid.  And their policies still make no economic sense.  We send two-thirds of our income taxes to the federal government but the richer provinces get very little value back.  Instead the money is transferred to poorer provinces, encouraging them to remain unproductive, and there is plenty of plain waste besides.  Until we get sensible government, people’s purchasing power will not recover.

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