COVER

THE CANADIANS LOOK SOUTH

A RACE TO INVEST IN AMERICA

D’ARCY JENISH September 19 1988
COVER

THE CANADIANS LOOK SOUTH

A RACE TO INVEST IN AMERICA

D’ARCY JENISH September 19 1988

THE CANADIANS LOOK SOUTH

A RACE TO INVEST IN AMERICA

COVER

Vintner Allan Schmidt (above); Widdrington (right): bullish entrepreneurs on the move

From breakfast until bedtime, millions of New Yorkers are buying Canadian every day. Almost one-third of their milk products are produced in Canadian-owned dairies, and their most distinguished newspaper, The New York Times, is printed almost entirely on Canadian paper. They commute to work on Canadianmade subway cars and thousands of New Yorkers spend their days in office buildings owned by Canadians. Every time a cash register rings at Bloomingdale’s, another Canadian company has made a sale. And at the end of the day, droves of New Yorkers watch Hollywood’s latest offerings in Canadianowned theatres. Said Meyer Frucher, chief executive officer of New York’s Battery Park City Authority, which is supervising the vast

Battery Park City real estate development: “There’s no question that Canadians have been very vital to this city’s economy.” But the invasion of New York is merely the tip of a tidal wave of Canadian investment in the United States.

Over the past 10 years, Canadian investment has grown by an average of 20 per cent annually and now exceeds $45 billion. Canada is the fourth-largest foreign investor in the United States, behind Britain, the Netherlands and Japan. More than 525,000 Americans now work for Canadian employers, who own a vast array of American assets ranging from gold mines to professional football teams to California wineries. Said David Sacks, president of the Montreal-based Seagram Company Ltd., which is one of the larg-

est Canadian investors in the United States: “Canadian entrepreneurs have looked toward the border and moved across it in recent years in a way they had not done before.”

Although multinational corporations have traditionally dominated Canada-U.S. trade, smallto medium-sized companies now account for 30 per cent of that commerce. Besides exporting into the United States, hundreds of small Canadian firms have set up branch plants, warehouses and sales offices in American border communities.

Although they are less visible than the Japanese, with their high-profile consumer products, three of Canada’s most influential businessmen, Toronto’s billionaire Reichmann brothers—Paul, Albert and Ralph—are also Manhattan’s largest landlords. Their New York real estate holdings are conservatively estimated at $8 billion. Canadian business has even penetrated to the heart of American government. Mississauga, Ont.-based Northern Telecom Ltd., one of Canada’s oldest and most successful multinationals, produced the digital telephone switching system installed in the Senate buildings in Washington.

And new Canadian investment has transformed many border communities. At the eastern end of Lake Ontario, 96 companies, primarily from Montreal and Ottawa, have established operations in six New York state counties and have, in effect, created regional

economies that span the border. Said Francis Lapham, a municipal development officer based in Plattsburg, N.Y., 34 km from the Canadian border: “We’re more closely

aligned to Montreal than New York City.” At the other end of the lake, near Buffalo, N.Y., about 400 smallto medium-sized Canadian companies own branch plants, warehouses or marketing operations employing

5.000 people.

Canadian companies are

expanding into the United States and other countries for a variety of reasons. Peter Widdrington, chairman of London, Ont.-based John Labatt Ltd., said that four years ago company executives decided that a CanadaU.S. free trade agreement, or some other fundamental change in trading relations between the two countries, was inevitable. And with a leading 41 per cent of the domestic beer market, the opportunities for expansion in Canada were limited. As a result, Labatt embarked on a U.S. acquisition program in 1985, eventually bought 16 companies, and now derives 40 per cent of its revenues from U.S. sales. The increased Canadian activity in the United States partly reflects the changing attitude of small business. John Bulloch, president of the 80,000-member Canadian Federation of Independent Business, said that a survey conducted 10 years ago showed that just over half of the federation's members opposed free trade. But a similar survey this year, which drew

17.000 responses, showed that only seven per cent are opposed, while 65 per cent either support the free trade agreement or believe that it will not affect their companies. And Allan Schmidt, vice-president of a tiny Niagara Peninsula winery, said he believes that even the price-sensitive Canadian wine industry can carve out a market in the United States.

The most common explanation for southward expansion centres on the lack of growth opportunities in Canada. Raymond Pinard, chief operating officer of Montreal-based Domtar Inc., a manufacturer of packaging and construction materials, said that most large Canadian companies are forced to look abroad if they capture

one-third of their domestic market. He added that Domtar has been growing aggressively in the United States and it now derives almost one-third of its revenue from American operations.

The increased American activity requires a great deal of mobility among Canadian entrepreneurs. Businessman Victor Podd lives in Montreal, but he drives 45 minutes to work each day in Rouses Point, N.Y., where he owns a company called Powertex Inc., which manufactures disposable plastic liners for bulk shipping by boat and truck. Phütek Electronics Inc., a manufacturer of backup power systems for computers and telephone networks, has been operating in Richmond, B.C., since 1976. Philtek also manufactures in Bellingham, Wash., which benefits Asian customers, who want to buy Americanmade products in order to lower their trade surpluses with the United States. Said Earl Hutchins, manager of Philtek’s U.S. subsidiary: “The border is essentially an inconvenience.”

For a growing number of Canadian firms, a U.S. address, phone number and personnel

are essential for successful sales to Americans. Allan Ghetler, secretary treasurer of Montreal-based Northwear Fashions Inc., an outdoor-apparel manufacturer, said that his company sells 75 per cent of its output through a showroom in Manhattan and a warehouse in Rouses Point. Said Ghetler: “Americans won’t give you a large percentage of their money if you’re situated in Canada.” Or, they may do so only while protesting vigorously. Regina-based Management Systems Ltd., a computer software firm, has faced political opposition in Wyoming after receiving contracts from workers’ compensation boards in that state. But Management Systems president Grant Gayton, whose company also operates in North Dakota, Nevada and Colorado, said that future growth depends on expansion into the United States.

Executives at an increasing number of companies across Canada say that their fortunes are now tied to markets in the United States. Roger Stirling, president of the Seafood Producers Association of Nova Scotia, said that the East Coast fishing industry cannot thrive on the small domestic Canadian market. And Leslie Hulicsko, president of Regina-based Sweeprite Mfg. Inc., a company that designs and produces street sweepers, has built his growth strategy on exports to the U.S. market. Sweeprite has sold 65 machines to American cities, including Los Angeles, Detroit and Chicago.

For some of the largest Canadian companies, successful entry into the American market has led to worldwide expansion. Seagram, the distilling and wine-making giant, has operated in the United States since 1933, but is now expanding most rapidly in Europe because the company faces a mature distilled-spirits market in North America. And Gordon Cummings, president of Halifax-based National Sea Products Ltd., said that his company has owned fish-processing plants in the United States for two decades. But during the past four years, National Sea has purchased distribution plants in Portugal, Japan, Hong Kong and France. Cummings predicts that, under free trade, it will become commonplace for Canadian companies to expand beyond the United States, which will eventually reduce Canada’s dependence on that country.

As Canadian companies have become more active internationally, domestic banks and other financial in-

BORDER JUMPERS ARE CREATING OPPORTUNITIES AND NEW WEALTH

stitutions have moved rapidly to provide expanded services. For years, most of the major chartered banks have relied on their own subsidiary companies to handle commercial lending abroad. In late 1984, the Bank of Montreal broke with its counterparts and purchased Chicago-based Harris Bankcorp, Inc., the 45th-largest U.S. bank, for almost $720 million. Said bank spokesman Brian Smith: “We had to have a significant position in the United States to serve Canadian customers.”

A similar need to serve Canadian businessmen abroad and foreign entrepreneurs looking for investments in Canada launched Toronto-based Royal Trustco Ltd. on a significant expansion of its foreign assets in June, 1986. The company paid $239 million for London-based Dow Financial Services, a private and merchant-banking firm with offices in Switzerland,

cer, said that the company has already spent $160 million acquiring interests in several American financial institutions. Said Henstock: “Our goal is to get 50 per cent of our income from outside Canada because the

Hong Kong and Singapore. Barry Henstock, Royal

Trust’s chief financial offi-

world is becoming one marketplace.”

But for some Canadian companies, expanding to the United States has been a painful experience. Ian Smyth, president of the Calgary-based Canadian Petroleum Association,

said that shortly after the introduction of the National Energy Program in late 1980, dozens of Canadian petroleum companies invested in the United States. Smyth said that many of them paid too much for exploration rights,

entered joint ventures under unfavorable terms or simply acquired poor properties. Some of the companies were later forced to write down the value of their investments, which resulted in huge losses. Smyth added that Canadian oil companies have been much more successful outside the United States. They have made major discoveries in Australia, Malaysia, New Zealand, the Mediterranean Sea and the North Sea.

One of the few senior Canadian executives who say that they remain firmly opposed to the trade deal is Frank Stronach, chairman of Markham, Ont.-based Magna International Inc., the country’s largest auto-parts manufacturer. Magna operates 120 manufacturing and product-development facilities in North America and last year had total revenues of $1.15 billion. But Stronach, who has been nominated as the federal Liberal candidate for the riding of York-Simcoe in the next federal election, says that although free trade will be good for Magna, it will be bad for the country. He contends that Canada will increase its exports of natural resources to the United States, but that the country will lose high-skill, well-paid manufacturing jobs.

Even if the free trade agreement fails to become law, commercial links between the countries seem destined to strengthen in the future. Seagram’s Sacks, for one, said that his company already moves goods and people to and from the United States with such ease that the border barely exists. Battery Park’s Frucher predicts that Canadian businessmen will continue to find growth opportunities south of the border. And he adds that a common language and similar entrepreneurial attitudes will lead to closer commercial links. As a result, even without a formal free trade agreement, the emergence of one huge continental economy appears to be inevitable.

D’ARCY JENISH