THERE ARE SOME ORIENTAL GENTLEMEN HERE TO SEE US
They wish to make a small barter: their money for our resources
The women in identical blue skirts and jackets sit at computer control panels in the Osaka headquarters of C. Itoh, a colossal Japanese trading company, running reams of statistics through the pale yellow computers. Their task is to determine which country has the world’s best investment climate and the answer, currently, is Canada.
For C. Itoh and other Japanese multinational giants that means we have the resources they need, an easily accessible market and comparatively placid politics (no Watergates, no military coups — just Dave Barrett).
Last spring, after the world energy crisis flared and frightened the vulnerable Japanese, C. Itoh hurriedly launched a Canada Project Task Force, a coordinating group of 25 full-time specialists and 15 consultants who analyze investment possibilities in this country. They’ve quickly identified the choice potential projects; the Alberta tar sands development (in which the company hopes to invest with Sun Oil) and Quebec’s gargantuan James Bay hydro scheme (where they’re one of four Japanese trading companies expecting to extract their share of the mineral and forest bonanza that will follow the power development). C. Itoh is now the major shareholder in two British Columbia sawmills and a minority partner in three Quebec companies: a steel mill, a textile-dyeing plant and Rubin Brothers Clothiers, a menswear manufacturer.
What’s particularly interesting about all this is that C. Itoh is only the fourth largest Japanese trader — and its three senior competitors (Mitsubishi, Mitsui and Marubeni) are just as deeply immersed in marrying their money to Canada’s resources. They, and at least half a dozen other Japanese traders with offices in major Canadian cities, represent an important new foreign-investment force — a force that could eventually assume the nature of American capital in Canada.
For the moment, the Japanese offer us a beguiling alternative. They, unlike the Americans, bring us their money but not their lifestyle; even if the Japanese get involved in Alberta oil with a vengeance, it’s hard to imagine they’d try to turn Calgary into a Tokyo West.
Yet other fears remain. In British Columbia, which so far is the beachhead of the Japanese financial invasion, politicians are understandably nervous. The NDP’s Dave Barrett once said Japan’s policy is “to do economically what it couldn’t do during the war . . . and that is to control the resources of the world to meet Japanese needs.” He was opposition leader then; now, as BC’s premier, he has blocked one Japanese company, Mitsubishi, from buying Kootenay Forest Products, a timber company.
Estimates of the total Japanese investment in Canada run from $340 million to more than $500 million. Admittedly, half a billion dollars sounds small, like a grain of rice in a wheatfield, compared with other non-American investment (one West German firm alone owns $340 million worth of Canadian property). But Japanese money has been here for less than 20 years (the first sizable resource investment was in Bethlehem Copper in 1961). Since 1969 the flow has tripled and it shows little sign of diminishing.
Nor is Japan the only source of Asian investment: of $142 million in foreign funds fed into Vancouver real estate last year, nearly 70% came from Southeast Asia (Singapore, Taiwan, the Philippines), most of it funneled through the murky financial labyrinth of Hong Kong — which means that the true origin of the cash is as hard to come by as Howard Hughes’ telephone number. This influx is beginning to be felt outside BC: Gerald Knowlton, a Calgary realtor with a Far Eastern clientele, figures that Toronto (where he has an office) already gets 15% of the Asian action in Canadian real estate, which totals at least $100 million a year.
Most of the strictly Japanese capital is tied up in our natural resources but some of it also finances a surprising variety of businesses. Among them are a synthetic yarn maker, Cirtex Knitting Inc., in Caraquet, New Brunswick; a zipper manufacturer, YKK Zipper Co. (Canada) Ltd., in Montreal; the new $20-million Prince Hotel in Toronto; a prefab house builder, Misawa Homes Co. Ltd., in Gimli, Manitoba; a pump assembly factory, Ebadisco Manufacturing Canada Ltd., in Regina; an edible oil and rapeseed oil-cake plant. United Oilseeds Products Ltd., in Lloydminster, Alta.; and a fishing and sports equipment dealer, Daiwa (Canada) Ltd., in Vancouver.
The Japanese also have equity in five Canadian venture-capital firms, and three Japanese banks — Fuji, Mitsui and the Bank of Tokyo — have liaison offices here which act as economic eyes and ears for their countrymen (Fuji invested in Brinco Ltd. in 1973).
But the majority of the Japanese corporations involved in Canada are subsidiaries of the trading companies, sogoshosha, which have no convenient equivalent in North America. If anything, they’re a cross between importexport houses and multinational conglomerates. (They are distinct from the better-known mavericks, household names such as Sony and Honda, both independent companies which are not at all representative of the Japanese business style.) The trading companies act as middlemen, representing Japanese industrial companies in foreign markets.
Jim Wilfley is president of Lakeside Farm Industries, Canada’s largest cattle feedlot, and Lakeside Packers, which is 20% owned by the largest of the Japanese traders, Mitsubishi. Wilfley told me that through Mitsubishi he can get daily cattle market reports from around the world — information that allows him to make more realistic business deals.
Wilfley went in with the Japanese because he considered their country one of the few untapped markets for beef export. They were not interested in a majority position, he said. “They’re very conscious of politics. And aware that in
Paul Grescoe is a Vancouver writer and a contributing editor of Maclean’s.
It’s a popular myth that the Japanese don’t seek control of the Canadian companies in which they invest
Canada we’re very patriotic right now.”
Particularly because of the Foreign Investment Review Act, the traders have begun making noises about concentrating on more equable joint ventures with Canadian companies.
This certainly hasn’t been the case up till now. An inclusive report published in 1973 in Japan listed 88 separate Japanese companies operating in Canada. In well over half of them, the Japanese had controlling interest. In more than a third, they were outright owners. The figures clearly belie the common belief that the Japanese insist on coming into Canada as very junior partners in joint ventures.
I found those figures important to remember when listening to defenders of Japanese investment. Keith Hay is an economics professor at Carleton University and a consultant to the CanadaJapan Trade Council, an Ottawa-based lobby of businessmen dedicated to encouraging commerce between the two countries. Hay, a transplanted Englishman who studied here and in the U.S., assured me: “I’m more nationalistic than some of my friends.” He suggested that by dealing with the Japanese we lessen our dependence on the U.S.
We lessen our dependence on the U.S., but what about Japan? At present there’s no way the Japanese government can exert control over Canada. But this could change if we let the Japanese continue their pattern of controlling the companies they help finance in Canada. Happily, there are encouraging gestures that both sides are realizing that while we’re important to one another (after the U.S., Japan is our dominant trading partner) Canada has been dealt the stronger hand. So far, though, she has played it like a fumbling amateur.
Right now, less than 3% of our exports to Japan are manufactured products; in other words, turning the raw material into finished goods means jobs for them, not us. Last spring, while discussing the possibility of joint ventures with the Japanese, Ontario’s Industry Minister Claude Bennett said: “Our real concern is that more and more raw material be brought to a semi-finished state before being exported.” And recently the provincially operated BC Petroleum Corporation informed the Japanese that it was not interested in their investment in the petrochemical industry unless the processing was done in the province.
In 1973, the BC government protested to Ottawa after another trading company, Marubeni, bought a 49% interest in Cassiar Packing, a fish-processing company in the province. Cassiar also owned 100 fishing boat licenses —and fisheries officials don’t want foreigners taking over our commercial fishing fleets by buying the companies that hold the boat licenses. Jack Davis, when he was environment minister, said he would propose that boat licenses be withheld from fish companies with more than 25% foreign equity. But the Fisheries Act was never amended.
All the Japanese businessmen I’ve met have expressed their willingness to follow any reasonable foreign-investment guidelines Canada demands. So there will probably never be a better time to rewrite the ground rules for Japanese participation in our economy. As Carleton’s Professor Hay wrote last June in a study for the Canada-Japan Trade Council: “Economic realities are such that Japan is now more dependent than ever on assured supplies of commodities. Under these conditions, Canada can use the opportunity to bargain reasonably for higher levels of pre-export processing, more market access and increased participation in joint ventures.
In late 1973, the Japanese government forbade its moneymen from getting into Canadian real estate — because such investment returns few direct benefits to Japan. But the restriction hasn’t stopped Canadian realtors from courting Japanese investors in the hope that the law will someday be lifted.
Calgary realtor Gerald Knowlton brought 28 Japanese real estate developers to his city during Stampede Week last summer and swamped them with western hospitality. Roast beef barbecues, rodeos, cowboy music and marching bands — the whole shebang. He had them sit still one morning for a commercial from Michael Webb, a Calgary lawyer who also happens to be the national vice-president of the Liberal Party. Webb told them his government’s Foreign Investment Review Agency would not likely screen any real estate transactions valued at less than $10 million. “Land generally is not such a sensitive commodity,” he told them, “and I think that the climate for foreign investment in land in Canada will continue to be favorable for a long time.”
If the Japanese have very little yen for our real estate, other Southeast Asians do. Their money comes through Hong Kong, which as the Switzerland of Asia is the closemouthed banker for cash
Vancouver mayor Art Phillips wants the government to reduce the inflow of Asian money to take the pressure off land prices
smuggled out of such countries as Thailand and the Philippines, countries with weak currencies and strong currency-exchange regulations. The money started gushing into Canada after three weeks of Communist riots shook Hong Kong in 1967; nervous Asian investors decided to shift some of their capital to our calmer political climate; a few even emigrated here.
Vancouver is the target of this Asian real estate offensive: of all such foreign investment in the city in 1973, only 3% originated in the U.S., 13% in the United Kingdom and 16% in Germany. Sixtyeight percent arrived from Hong Kong.
What’s worrisome about this investment is not its origin but the additional competition it imposes on Canadians. With more buyers bidding against one another in the real estate market, prices naturally rise. A management consultants’ report for the Greater Vancouver Real Estate Board last year defended foreign investors, but was forced to admit that their competition, coupled with their willingness to accept a lower return on their investment, has actually helped to bump up the prices of the city’s office and apartment buildings. When the
prices soar, so do the rents — and the study said there was evidence that some foreign investors have raised rents after buying property.
The management consultants confessed too that “to the extent that foreign investors buy developable land or redevelopable property and then hold it instead of building, they may create a scarcity of sites for development.” They acknowledged this might be indeed happening in Vancouver.
City alderman Jack Volrich says most Hong Kong money in Vancouver is simply speculating. Certainly one recent real estate transaction confirms this view: Ark Developments, a company owned by Hong Kong financiers, began buying four parcels of strategic downtown land in 1967; then, last year, doubled its money by selling them as a nine-million-dollar package.
Last June, at the National Housing Conference in Toronto, Vancouver Mayor Art Phillips summed up the city’s case against the uncontrolled foreign capital: “In Vancouver, we are receiving a tremendous amount of money from places like Hong Kong. This money is going into land and is willing to accept a
very low current return. The influx of money from other parts of the world is adding tremendously to the upward trend in land prices in our area. The time has come for governments to take steps to reduce this inflow of foreign capital into land to take some pressure off land prices.”
In fact, the federal government has a tool to regulate foreign capital in both our real estate and our natural resources: the Foreign Investment Review Act. The trouble with the act is that it’s so fuzzily worded it’s really no deterrent to anyone buying Canadian real estate.
It was only after the act was passed that the government published guidelines about what real estate falls within its frame of reference; though they aren’t legally binding, the guidelines reflect the government’s thinking, which is that the act should apply only to a real estate purchase exceeding $10 million. Even in an inflated economy, $10 million buys a big building or a great deal of land.
The act’s regulations on foreign takeovers of Canadian companies are also disturbingly vague, stressing only that the proposed investment should be of “significant benefit to Canada” and will be judged “in terms of its overall compatibility with federal and provincial economic policy objectives.” The judge is the Foreign Investment Review Agency which last May, with its first decision, established a puzzling precedent for what constitutes a take-over of significant benefit to Canada: when one American grain company wanted to sell nine of its Canadian subsidiaries to another American company, the agency approved the $28-million deal with no official explanation.
It will be interesting to see if the act is amended to accommodate Prime Minister Trudeau’s election promise to demand Canadian ownership of at least 50%, preferably 60%, of major new resource projects.
A gutsier and more precisely worded act would clarify our stand for Asian investors (along with the Americans and Europeans and even confused Canadian businessmen) and allow us to welcome unreservedly the right kind of Asian capital — capital that’s willing to let us be at least equal partners in business ventures in our own country.
Japan, I’m sure, would understand why we’re doing it. After all, her government has a tough foreign investment policy that rigidly limits the amount of outside equity in the Japanese economy
— especially in resource companies.lt;£?