Tomorrow’s Gateways 1
Value Capture Strategies in
Key Sectors and Potential for Foreign Direct Investment
in Western Canada
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Canada’s four western provinces, together, make up the 18th-largest economy in the world.
Over the past decade, real economic growth in
Alberta, British Columbia, Manitoba and
Saskatchewan has outpaced growth in most U.S. states and jurisdictions in other G7 countries.
Across Western Canada, clusters of economic activity are emerging in a wide range of value- added sectors that make western Canadian centres some of the leading competitors in the
global economy. 2
From aerospace to new media and from
industrial chemicals to electronics, Canadian and foreign companies are increasingly choosing
Western Canada as their preferred investment destination.
Western Canada’s location at the confluence of
Asia and North America, together with current investments in gateway infrastructure, provides real opportunities to transform the region into the value-chain hub of choice for Asian and
North American investors. 3
Table of Contents
Research Objectives and Scope ...... 5 Methodology ...... 6
Executive Summary ...... 9
1. The Value Capture Imperative: From Hewers of Wood to Purveyors of Technology ...... 15
2. Selecting High-Value-Added Sectors: Methodology and Sector Profiles...... 23
Aerospace ...... 33 Wireless Communications, Gaming and Software Services ...... 39 Value-added Electronics ...... 50 Grain and Food Processing ...... 62 Industrial Chemicals ...... 68 Transportation and Logistics ...... 81 Trade-related Financial and Business Services ...... 88
3. International Best Practices: Picking Winners or Shifting Competitive Advantage? ...... 95
Case Study #1: New Mexico’s Investment Attraction Initiatives in Aerospace ...... 102 Case Study #2: Savannah’s Move into the Distribution Centre Business ...... 105 Case Study #3: Collaborative R&D Targeting SMEs through the Technology Innovation Program (TIP) in the United States ...... 108 Case Study #4: The European Union’s Competitive Marco Polo Program, Directed at Intermodal Transportation ...... 110 Case Study #5: Moving Corporate headquarters into Kansas ...... 112
Conclusions ...... 114
List of abbreviations ...... 118
Disclaimers and disclosures ...... 120
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Research Objectives and Scope
As the federal regional economic department for Western Canada, Western Economic Diversification Canada (WD) has a mandate to promote the development and diversification of the economies of Canada’s western provinces – Manitoba, Saskatchewan, Alberta and British Columbia – and to advance the interests of Western Canada in national economic policy, program and project development and implementation.
For this project, WD’s objective was to:
. Understand which sectors in Western Canada have or could attain a global competitive advantage and the factors that do or could contribute to this success; . Enhance value-added activity/opportunities arising from the Asia-Pacific Gateway and Corridors Initiative (APGCI) within these identified sectors; and . Develop new and innovative responses to make Western Canada more globally competitive with regard to its geographic location as a gateway to the Asia-Pacific region, with corridors to the United States and across Canada.
To achieve the above objectives, the following scope was identified for the project team:
. Identify between four and eight industry sectors (one per WD region and up to four pan-west or multi-region) that have either a recognized global competitive advantage or prospects of such an advantage. . Articulate the business case advantages (including, but not limited to, location, transportation, infrastructure, availability of labour, cost of doing business and level of engagement in global supply chains) currently enjoyed by each of the identified sectors. . Provide intelligence on tools, strategies and policies that would stimulate value-added activities, foreign direct investment (FDI) and small- and medium-enterprise (SME) involvement in these sectors. . Provide information on best practice examples from five regions or countries that show how the government and private sector work together through economic programs, regulations and/or policies that improve the competitiveness, attractiveness to foreign direct investment and opportunity for economic growth through value- added activity that could apply to the western Canadian context.
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Methodology
The selection of sectors included in this report took place after extensive consultation between IE Market Research Corporation (IEMR) and Western Economic Diversification Canada. A number of methodologies were considered, including conducting surveys among business executives to gauge their perceptions of how various value, cost, supply-chain and policy drivers impact on their companies’ competitiveness in the global marketplace.
Other methodologies considered included established research used by the site selection community, including sector competitiveness research already undertaken by other organizations, such as KPMG’s Competitive Alternatives and IBM’s Plant Location International.
In the end, we selected IBM’s Plant Location International because it provides the most comprehensive business-case- based and qualitative analysis of the global competitiveness of key western Canadian clusters. Plant Location International assesses the competitiveness of various western Canadian clusters, based on an investor’s perspective. It does so by taking prototype investment projects and running net present value calculations on the return on an investment, after taking into account location-sensitive investment, operating cost and revenue assumptions for each representative project.
To assess the quality of a location, Plant Location International data are collected from a wide range of sources and locations are benchmarked on various qualitative factors. Typical factors considered include: the general business environment, local potential for recruiting skilled staff, the presence of an industry cluster near a particular location, flexibility of labour and regulations, communications and infrastructure quality, availability and cost of real estate, and a location’s living environment.
Based on these quantitative and qualitative criteria, Plant Location International allows us to choose globally competitive clusters across Western Canada.
As further criteria, we chose those sectors that already contribute significantly to the Gross Domestic Product (GDP) of western Canadian provinces and are likely to benefit, either directly or indirectly, from the development of various Asia- Pacific Gateway infrastructure initiatives. Here, the key question we tried to answer was: “Does the globally competitive sector contribute significantly to output and does it become even more competitive as a result of Gateway initiatives?”
Based on these criteria, we selected the following seven sectors for this report: . Aerospace . Grain/Food processing . Industrial chemicals . Trade-related financial and business services . Value-added electronics . Value-added information and communications technologies (including gaming, software services and wireless communications) . Value-added logistics & transport services
The reader should keep in mind that this listing of sectors is neither comprehensive nor indicative of any future government policy or programming action. The sectors have been selected to initiate discussions on the global competitiveness of these value-added western Canadian sectors, and to identify international policy and programming best practices to support value-creating economic activity in Western Canada.
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Latin: valēre, to be worth. Relative worth, merit or the trade; the worth of something in terms of the amount of some medium of exchange; equivalent worth or return in denomination, as of a monetary issue or a postage stamp; symbol, or the like; import or meaning, force, significance; desirable as a means or as an end in itself; marketable
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importance; monetary or material worth, as in commerce or other things for which it can be exchanged or in terms of money, material, services, etc.; estimated or assigned worth; magnitude, quantity, number represented by a figure, liking or affection; favourable regard; any object or quality; portions of an orebody; assess; appraise; respect
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Executive Summary
Western Canada’s global comparative advantage rests on the wealth of its natural resources. The economic performance of the four western provinces – British Columbia (B.C.), Alberta, Saskatchewan and Manitoba – is dependent on commodities derived from mining, forestry, agriculture and oil and gas activity. Western Canada's economic output from these four resource-based activities accounted for about 15% of the region’s Gross Domestic Product (GDP), compared to only 3% for the rest of Canada. The term "hewers of wood and drawers of water", therefore, may more aptly refer to the western Canadian economy than to the Canadian economy in general.
Why should Western Canada’s resource-based economy be of concern to policymakers? Why should they focus their attention on what are called “value-added” sectors? What sectors are these? Is Western Canada globally competitive in these value-added sectors? What are the strategies needed to ensure that value-added sectors and the clusters that anchor them continue to grow in Western Canada? This report aims to answer these key questions.
The Dynamic Competitiveness of Western Canadian Sectors
The debate surrounding value-added activities in Western Canada usually tends to discount both the scale and the depth of value addition already occurring here. Our analysis of existing research through both IBM’s Plant Location International (PLI) and KPMG’s Competitive Alternatives studies consistently shows that Western Canada is globally competitive across a wide range of sectors. That is why hundreds of foreign investors have set up operations in Western Canada.
Aerospace Our analysis of Western Canada’s global competitiveness in the Aerospace sector reveals three important issues facing the long-term growth prospects of this sector. First, western Canadian centres rank significantly below other Canadian centres, particularly Montreal (ranked 3rd) and Toronto (ranked 4th). Second, western Canadian centres rank just as highly (from a quality perspective) as do other Tier 2 U.S. aerospace clusters, like Albuquerque, Wichita, Austin, Tulsa, Denver and Huntsville. These U.S. clusters have been receiving major investments from U.S.-based aerospace companies in the past decade, particularly post-9/11. Third, IBM-PLI’s Profitability Index shows that western Canadian centres do not have a major profitability advantage over other Canadian Tier 1 or even Tier 1 U.S. centres (such as Belleville/Seattle).
Put in this global context, it is clear that the competitive advantages that have resulted in the growth of the Aerospace sector in Western Canada are changing rapidly. Boeing, Airbus, Bombardier, Embraer, Raytheon and many Tier 0 aircraft manufacturers have already taken steps to ensure that they are no longer directly involved in parts manufacturing. Separating parts manufacturing from final assembly and certification
9 allows these Tier 0 players to focus on the highest level of value-added work, and also allows them to purchase parts and sub-assemblies from Tier 1, 2, 3 and 4 vendors throughout the world.
While this change in business models was a positive for Western Canada’s aerospace industry, it also means greater competition with other Tier 2 locations. One of the main competitive advantages in Winnipeg and Vancouver that is highlighted to foreign investors is the overall lower cost of operations compared to other Tier 2 locations. However, as we see from the IBM-PLI data – both from a quality and cost perspective – western Canadian centres may no longer show any such advantages over other Tier 2 U.S. or global centres.
Policy Implications: . From a growth perspective, it will be crucial for policymakers to attract major operations of Tier 0 aerospace companies into Western Canada. Incentives play an important role in this regard, and we provide a case study of how New Mexico has gone about attracting aerospace investment, making it the fastest-growing aerospace cluster in North America. New Mexico’s example provides a good starting point to think about the type of competition being faced by Western Canada’s aerospace industry, from other Tier 2 centres.
Value-added Information and Communications Technologies (including Gaming, Software Services and Wireless Communications) Our analysis of Western Canada’s ICT sector shows that this sector is robust, with deep clusters across the region. Foreign investors have recognized this and invested heavily in the region.
However, there are some gaps in capabilities in Western Canada. In the Wireless Communications sector, only a handful of firms are developing carrier-class solutions, device design, and manufacturing in the region. Developing carrier-class products and solutions is important, since carriers are at the top of the telecom value chain. The missing link in Western Canada is that the carrier industry was protected by foreign investment regulations that prevent global carriers from entering the Canadian marketplace. While this may change, given policy directions included in the 2010 Speech from the Throne, the entry of global carriers into Canada may not lead to the development of clusters of telecom technology suppliers in Western Canada, without the presence of the carriers' headquarters in the region.
Being directly involved in the components and devices ecosystem is also crucial since, just like carriers, Original Equipment Manufacturers (OEMs) are at the top of the devices value chain. This is why San Diego, Waterloo, Chicago, Stockholm, Helsinki, and Seoul have such vibrant technology clusters. They are anchored by global handset and infrastructure vendors, such as Apple, RIM, Motorola, LM Ericsson, Nokia and Nokia Siemens Network, Samsung, and LG.
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Policy Implications: . In terms of strategies for foreign direct investment attraction, the greatest thrust needs to be in the attraction of OEMs, global carriers and venture capital funds in the Wireless Communications sector. Indeed, the greatest growth in both the software and gaming markets will come from the way in which applications are moved into the mobile space with carriers and OEMs being right at the centre of the action. . Another area of policy attention is the permanent presence of global wireless carriers in Western Canada. Having a global carrier establish its Canadian headquarters in Western Canada would give a real boost to the wireless and software ecosystem in the region. . Existing interactions between western Canadian firms and global players need to be institutionalized, with funding for a permanent global telecommunications and gaming trade show taking place in Western Canada annually. Another option could be providing specific incentives to global carriers and/or OEMs, to establish marketing offices in Western Canada that act as links between western Canadian software and application development firms and their global-carrier and OEM customers.
Value-added Electronics Our analysis of IBM-PLI data on the electronics sector shows that Vancouver and Edmonton are ranked 9th and 13th, respectively, out of 20 global centres ranked in their study. On their Profitability Index, Vancouver and Edmonton are ranked 7th and 4th, respectively.
Two competitiveness issues need to be highlighted here. First, what is significant about the above ranking is that western Canadian centres rank significantly below other North American centres, particularly Toronto (ranked 2nd) and San Jose (ranked 4th), in quality rankings, and at par with Tier 2 Canadian and U.S. centres such as Ottawa, Waterloo and Raleigh-Durham. Second, on IBM-PLI’s Profitability Index, Edmonton does rank 4th, but Vancouver’s 7th-place ranking is not competitive with other comparable Tier 2 centres, in either the U.S. or Canada.
A study by Gartner Research shows that over the past three years (2006-2009), out of 191 companies that Gartner identified as private semiconductor companies, only 19 (or 10%) were established after 2006. This points to the fact that the competitive dynamics of the industry have resulted in fewer global players at the top of the electronics value chain. It is these large players that have a great deal of power over smaller technology companies, including in Western Canada, and will have a key role to play in the funding and technology direction of electronics start-ups in Western Canada.
Policy Implications: . Western Canada’s value-added electronics industry needs the presence of a large global Integrated Device Manufacturer (IDM) or a Semiconductor Assembly and Test Services (SATS) company to anchor the sector. However, current cost structures in Western Canada and the absence of major electronics OEMs in any of the electronics sub-segments tells us that this is not likely to happen anytime soon.
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Grain and Food Processing Western Canada is a global leader in value-added grain and food processing. Analysis by IBM-PLI shows that centres such as Brandon (Manitoba), Medicine Hat (Alberta), Red Deer (Alberta) and Regina (Saskatchewan) have a 10-15% cost advantage over U.S. competitors.
The key-value proposition for the establishment of grain- and food-processing facilities in Western Canada includes: access to low cost and reliable raw materials, low transportation and cold-chain costs, access to research and development facilities, and food and safety standards that conform to international norms. We think that the presence of gateway infrastructure is likely to have a positive impact on the development of this sector across Western Canada.
Foreign investors face a number of constraints that are unique to agriculture, when seeking a location for higher-value-added investments. Key factors include investment cycles (which tend to be lumpy), technology and regulatory cycles (which tend to have a deep impact on where and how food gets processed), and product cycles (which result in supply chains in existence today).
Policy Implications: . Because of the constraints and resistance to foreign investment in traditional Grain and Food processing sectors, one policy option is to encourage FDI by niche food processors that focus on the production of end-consumer products. Producers of functional foods, nutraceuticals and natural health products are particularly relevant here, because the value chain for functional foods and nutraceuticals differs from the standard food model. With functional foods and nutraceuticals, research and technology development is often the driving force behind product development. Western Canada has some great R&D facilities in the area of functional foods development, and these need to be given further support, as they do act as attractants for collaborations with foreign functional food companies.
Trade-related Financial and Business Services Supporting the growing Value-added Logistics and Transport Services sector is a growing trade-related Financial and Business Services sector. These are the firms that handle everything from banking and insurance to asset management and international legal services.
While British Columbia and, to a certain extent, other western Canadian centres (particularly Calgary and Winnipeg) have distinct cost advantages (anywhere from 11% to 17%), cost is not the only driver in creating a global competitive advantage in this sector. A key factor that will move western Canadian centres into the big leagues is the presence of headquarters of these financial and business services institutions in Western Canada.
Policy Implications: . We think that there is a real opportunity to attract foreign banks to undertake niche trade-related financial and business services activities in Western Canada. Vancouver provides the natural location for the processing of international financial instruments, primarily because Vancouver has a large Asian population that will
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increasingly be needed to process transactions with counterparts in the Asia- Pacific region. In areas such as legal services, accounting services, patent activity as well as commercial banking, Vancouver provides a strong niche-value proposition, primarily because of its large Asian population. Promoting this advantage to top-tier international banks and business service organizations, to establish their international trade processing units in Western Canada, will likely yield good results over the long term.
International Best Practices: Picking Winners or Shifting Competitive Advantage?
A perennial question facing policymakers in all jurisdictions is what set of tools, strategies and policies need to be in place in order to encourage the growth and development of high-value-added economic activity in their jurisdictions. One of the objectives of this project was to identify best practices in international jurisdictions that show how government and private sectors work together through economic programs, regulations and/or policies to attract FDI and to see which of these strategies could be applied within the western Canadian context.
Given that the real policy issues in terms of attracting FDI arise from undertaking high- risk policies and programs that treat individual investors differently, we felt that it is important to highlight best practice funding programs and policy measures adopted by international jurisdictions in these sectors. The common elements across these policies and programs include:
. Co-ordinate tax incentive schemes across Canadian provinces: Our sampling of tax incentive structures in New Mexico (aerospace), Georgia (distribution centres) and Kansas (corporate headquarters) shows that sector-specific or activity-specific tax incentives are quite common among various jurisdictions. From a western Canadian perspective, we would note two points. First, western Canadian clusters exist in a world where their competitor jurisdictions highlight their incentive packages very prominently. These incentives and bonusing schemes are an important consideration for the site selection community. Second, any incentive program has the effect of creating a “beggar thy neighbour” or “investment poaching” scenario between jurisdictions. We think that FDI incentive schemes need to be coordinated as much as possible between provinces or at the federal level, to avoid any sub-optimal policies of this nature.
. More targeted marketing: Most national tax incentive schemes in OECD countries do not explicitly target specific sectors, but are aimed at R&D activities that may be more important to value-added sectors such as aerospace, wireless and electronics. For example, South Korea’s tax code allows mid-size to large enterprises to benefit from a 40% tax credit granted toward excess R&D and personnel training costs. Ireland’s tax code allows for a 25% tax credit in addition to a 12.5% tax deduction for eligible R&D expenses. While these tax incentives are applied across all sectors, they are marketed to foreign investors in targeted sectors, e.g., semiconductors and aerospace in South Korea, and ICT in Ireland. In contrast, our analysis of how western Canadian provinces go about marketing their specific clusters shows that beyond general value propositions or general tax incentives, there is very little targeting of specific sectors.
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. Limit HQ location incentives to operating and R&D units: While many local jurisdictions attempt to attract national and international headquarters using incentives, there is strong evidence to suggest that incentives such as property tax abatements do not work to attract stand-alone global or national headquarters. National or international HQ locations’ effectiveness usually depends on a network of face-to-face contacts that is not easily uprooted. Research in the United States suggests that about 25% of national headquarters in the U.S. are located in a cluster of headquarters belonging to the same industry. Most of the rest are located in large metropolitan areas in the U.S. What this means for mid-tier western Canadian centres is that the chances of attracting the international headquarters of global investors are limited to M&A situations. Therefore, any program targeting HQ location in Western Canada needs to focus on operating or R&D units of international investors, or on incentivizing western Canadian firms to keep their operating or R&D headquarters in Western Canada.
. R&D funding programs should be collaborative: Some of the best R&D funding programs are collaborative in nature, involving “rich teaming” of public and private sectors. A good example of this is the United States’ Technology Innovation Program (TIP), which was set up to fund R&D in a wide range of sectors, including civil infrastructure, materials manufacturing, personalized medicine research and green chemistry. This unique government-industry partnership program helps companies accelerate the development of emerging or enabling technologies that lead to new products and industrial processes and services. Over the past decade, the TIP and its predecessor program have funded over $5 billion in R&D activities across the United States and figure among the leading R&D funding programs in the world. The unique feature of this program is the attention paid to “high-risk, high-reward” technologies, and the “rich teaming” involving individuals, firms, joint ventures between firms, research institutions and not-for-profit research organizations and foreign firms.
. Let investors compete for funding: Some of the best-performing programs have a competitive application process through which stakeholders present their funding requests and are judged by an evaluation committee of subject-matter experts. For example, the Marco Polo program is the European Union's intermodal transportation funding program for projects that shift freight transport from the road to sea, rail and inland waterways. Each year, the EU announces a call for proposals meeting its specific policy objectives. These proposals are then evaluated on the basis of specific criteria, namely sustainability, innovativeness and volume of freight moved away from road to other transportation modes.
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The Value Capture
Imperative: From Hewers of Wood to Purveyors of Technology
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1.1. Western Canada has some of the highest rates of economic growth in the G7 Canada’s four western provinces together make up the 18th-largest economy in the world1. The traditional view of Western Canada’s economy is that it is substantially resource-based. Over the past ten years, for example, about 15% of the region’s GDP is accounted for by four commodity-based sectors: mining, forestry, agriculture and oil and gas2. This can be compared to only 3% of GDP that is resource-based for the rest of Canada. The term “hewers of wood and drawers of water”, therefore, may more aptly refer to Western Canada’s economy than to the rest of Canada.
At the same time, however, the western Canadian economy has changed substantially in terms of its structure and the quality of its growth experience over the past decade. Not only are western Canadians “hewers of wood and drawers of water”, they are also “purveyors of technology” with a global presence. Come to any major western Canadian city and you will see vibrant clusters of economic activity – ranging from high- tech to green tech and from petrochemicals to advanced materials manufacturing – that did not exist ten years ago.
Foreign direct investment has had an important role to play in this transformation. Major multinational corporations have invested heavily in Western Canada and form anchors that have resulted in the development of vibrant clusters across the West. ExxonMobil, Dow Chemical, Shell Chemicals, Cargill, Tyson, HSBC, Nokia, Electronic Arts, Boeing, Oracle, Microsoft, Intel, Honeywell and countless others have invested in western Canadian provinces, employing hundreds of thousands of western Canadians.
The extent of this transformation is clear from Western Canada’s growth statistics. Over the 1999-2008 period, Alberta, British Columbia, Manitoba and Saskatchewan ranked 11th, 21st, 42nd and 57th respectively in terms of their average annual GDP growth rates, compared with 173 sub-national jurisdictions across Canada, the United States, Germany, France and Italy (see Figure 2 below). On a weighted-average basis, the western Canadian economy grew at a real annual average growth rate of 3% and ranked 17th among G7 sub-national jurisdictions3.
1 Gibbons, R. and Roach, R. Playing for Keeps: Boosting Western Canada’s Economic Competitiveness in the Post-Recession World. pp. 4. Canada West Foundation. 2 Western Economic Diversification Canada.
Figure 2: Comparison of Average Annual GDP Growth in Western Canadian Provinces with Fastest-growing Sub-national Jurisdiction in Germany, France, Italy and the U.S., 1999-2008
Saskatchewan (57th) 2.0 Kansas (48th) 2.34 Bayern (GERMANY, 47th) 2.34 Manitoba (42nd) 2.38 Bretagne (FRANCE, 23rd) 2.87 British Columbia (21st) 2.91 Ontario (20th) 2.92 Western Canada Weighted Average (17th) 3.04 Alberta (11th) 3.48 Utah (9th) 3.52 Texas (8th) 3.61 Colorado (7th) 3.61 California (6th) 3.67 South Dakota (5th) 3.82 Oregon (4th) 4.03 Idaho (3rd) 4.31 Nevada (2nd) 4.41 Arizona (1st) 4.7
0.0 1.0 2.0 3.0 4.0 5.0 Average Annual Real Growth in GDP, %
Source: Calculations by IE Market Research Corporation, based on: Statistics Canada. National Economic Accounts. CANSIM Table 379-0025 U.S. Bureau of Economic Analysis. Gross Domestic Product by State.
1.2. Commodities account for a large part of the growth experience in Alberta and Saskatchewan, while British Columbia’s and Manitoba’s growth experiences are more diversified Part of this growth story is indeed the resource and commodities boom of the last decade. A closer look at GDP growth numbers at the provincial and industry levels tells a more nuanced story, however. As we see in Table 1 below, only the mining and oil and gas industry achieved double-digit growth rates in all four provinces over the past ten years. Despite the commodities boom, the GDP growth numbers confirm the widely held view that both the Agriculture and Forestry sectors have undergone a long restructuring in the recent ten-year period.
Furthermore, in terms of contribution to GDP growth, the numbers provide an even more telling picture of Western Canada’s economy (see Table 2). On average over the last ten years, Mining and Oil and Gas extraction accounted for the lion’s share of GDP growth only in Alberta (55% contribution to growth) and Saskatchewan (59% contribution to growth). The economic growth experience in British Columbia and Manitoba has been more diversified with resource-based sectors accounting for less than 15% of GDP growth in British Columbia and Manitoba.
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It is therefore important to emphasize that while resource-based industries will continue to contribute to economic growth in Western Canada, that contribution has been limited to the Mining and Oil and Gas extraction industries, and only in Alberta and, more recently, Saskatchewan. Forestry and Agriculture have experienced long-term restructuring across the West over the past ten years.
Table 1: Nominal GDP Growth in various sectors in Western Canadian Provinces, CAGR 1999/2008 (%)
Alberta British Columbia Manitoba Saskatchewan All industries 8.5% 4.8% 4.3% 6.1% Resource-based industries Agriculture, forestry, fishing and hunting (11) 0.4% -0.9% 1.3% -3.0% Mining and oil and gas extraction (21) 13.2% 15.1% 12.4% 12.6% Utilities (22) 5.5% 1.2% 3.8% 2.4% Construction (23) 11.3% 6.6% 4.4% 7.1% Manufacturing (31 – 33) 4.4% 3.2% 3.8% 4.4% Wholesale trade (41) 7.5% 4.5% 4.6% 6.5% Retail trade (44 – 45) 8.2% 5.5% 6.1% 7.3% Transportation and warehousing 48-49) 6.9% 4.7% 3.4% 5.9% Finance, insurance and real estate services (24) 6.2% 4.3% 3.2% 4.2% Information and cultural industries (51) 7.4% 5.4% 5.2% 3.8% Professional, scientific and technical services (54) 9.4% 6.8% 6.0% 4.7% Administrative and support services (56) 9.7% 6.6% 8.3% 6.7% Educational services (61) 6.4% 4.2% 4.1% 4.9% Health care and social assistance (62) 7.3% 4.3% 5.2% 6.6% Arts, entertainment and recreation (71) 6.1% 6.0% 4.8% 8.6% Accommodation and food services (72) 5.3% 3.1% 2.9% 2.5% Other services (81) 8.3% 5.8% 4.2% 5.1% Public administration (91) 5.2% 3.8% 3.5% 5.0% Source: Calculations by IE Market Research Corporation from Statistics Canada. CANSIM Table 379-0025 – Gross domestic product (GDP) at basic prices, by North American Industry Classification System (NAICS) and province.
Table 2: Contribution to Nominal GDP Growth by Various Sectors in Western Canadian Provinces, Average Contribution for 1999-2008 (%)
Alberta British Columbia Manitoba Saskatchewan All industries 100% 100% 100% 100% Resource-based industries Agriculture, forestry, fishing and hunting (11) 2% -2% 1% 0% Mining and oil and gas extraction (21) 55% 14% 7% 59% Utilities (22) 8% -6% 1% 6% Construction (23) 6% 8% 4% 7% Manufacturing (31 – 33) 4% 0% 10% 2% Wholesale trade (41) 3% 5% 6% 4% Retail trade (44 – 45) 1% 7% 10% 3% Transportation and warehousing (48-49) 3% 7% 5% 0% Finance, insurance and real estate services (24) 6% 23% 16% 6% Information and cultural industries (51) 1% 5% 4% 1% Professional, scientific and technical services (54) 3% 5% 4% 1% Administrative and support services (56) 1% 3% 3% 1% Educational services (61) 1% 5% 6% 2% Health care and social assistance (62) 2% 8% 12% 2% Arts, entertainment and recreation (71) 0% 2% 1% 1% Accommodation and food services (72) 0% 2% 1% 1% Other services (81) 1% 5% 3% 1% Public administration (91) 0% 5% 6% 4% Source: Calculations by IE Market Research Corporation from Statistics Canada. CANSIM Table 379-0025 – Gross domestic product (GDP) at basic prices, by North American Industry Classification System (NAICS) and province.
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The Value Capture Imperative
1.3. Capturing value to increase wealth By definition, any activity that is accounted for in GDP calculations either contributes to or takes away from value addition. According to some critics, value addition in the sense of “turning a tree into lumber, bitumen into synthetic crude, or wheat into pasta”4 does not contribute much toward economic growth. Most critics of this type of value addition discount the economic potential of these types of basic activities, since they involve the processing of resources and most of the value is left off the table for other players in the value chain.
Take bitumen processing as an example. In May 2009, Imperial Oil Ltd. announced that it would initiate a bitumen extraction project in Kearl Lake, Alberta. As we show in Table 3, Imperial’s Phase One strip mining facilities would cost $8 billion and would produce 100,000 barrels of bitumen per day, beginning in late 2012, at an operating cost of $4.50 per barrel. Two additional phases would raise bitumen production to 345,000 barrels per day. Add in the capital costs, and the total cost of bitumen extraction rises to $18-$20 per barrel.
What is significant about Kearl Lake is that Imperial Oil does not plan to build a bitumen upgrading facility in Canada. Assuming that the final cost of a barrel of crude oil after converting bitumen into synthetic crude is $36-$40, the absence of an upgrade facility means that theoretically, each year $2.27 billion to $2.52 billion of economic value- added is not undertaken in Canada5. According to Imperial Oil, Kearl's total recoverable bitumen is estimated to be 4.5 billion barrels. This means that simply not processing bitumen into synthetic crude for this one project over the project’s lifespan means a theoretical loss in economic value-added of $10.2 billion to $-11.3 billion, or 3.5-3.9% of Alberta’s current Gross Domestic Product (GDP).
4 Gibbons, R. and Roach, R. Playing for Keeps: Boosting Western Canada’s Economic Competitiveness in the Post-Recession World. pp. 26. Canada West Foundation. 5 We are assuming bitumen production of 345,000 barrels per day, bitumen extraction costs of $18-20 per barrel and final synthetic crude production costs of $36-40 per barrel. 19
Table 3: The Value of Turning Bitumen into Crude at Kearl Lake and the Value Lost by not Refining Crude in Alberta
Cost of not Undertaking Synthetic Crude Production at Kearl Lake Cost of bitumen extraction (including capital costs) from an open pit mine: $18-$20/barrela
Final cost of production of synthetic crude: $36-$40/barrelb
Kearl Lake: Production capacity at maturity: 345,000 bpdc
Value addition not occurring in Alberta as a result of no bitumen upgrade facility, assuming an $18-$20/barrel cost of bitumen extraction @ $18/barrel @ $20/barrel Annual value addition not occurring in Alberta as a result of no bitumen $2.27 billion $2.52 billion upgrade facility (billions of dollars per year) Estimated recoverable bitumen at Kearl Lake (barrels, billions)c 4.5 4.5 Total value addition not occurring in Alberta as a result of no bitumen $10.2 billion $11.3 billion upgrade facility (billions of dollars) Current price of gasoline ($/gallon)d $2.64 $2.64
Number of gallons in a barrel 42 42
Retail value of a barrel of crude $110.75 $110.75 Total annual value addition not occurring in Alberta as a result of no refining $11.68 billion $11.43 billion of Kearl’s crude output into gasoline (billions of dollars per year) Total value addition not occurring in Alberta as a result of no refining of $52.56 billion $51.43 billion Kearl’s crude output into gasoline (billions of dollars) Alberta's current GDP (billions of dollars) $291.26 billion $291.26 billion Static opportunity cost of not undertaking crude production in Alberta (% of 3.50% 3.89% Alberta’s annual GDP) a, b Assumptions based on NEB (June 2006) (PDF). Canada's Oil Sands Opportunities and Challenges to 2015: An Update. National Energy Board of Canada. http://www.neb-one.gc.ca/clf- nsi/rnrgynfmtn/nrgyrprt/lsnd/pprtntsndchllngs20152006/pprtntsndchllngs20152006-eng.pdf. Downloaded December 4, 2009. c
Source: Calculations by IE Market Research Corporation.
Another way to look at this issue is the notion of moving “up the value chain”. For our bitumen example, this usually means not just extracting the bitumen and turning it into synthetic crude, but also refining the crude, transporting it to markets and selling it to end customers. To use our Kearl Lake example, our calculations show that, by not refining the synthetic crude to gasoline nor transporting it to markets nor marketing and selling it to end consumers, the theoretical loss in economic value-added increases to about $51 billion at current retail gasoline prices in the United States6.
We introduced the above example to bring out two related issues that are important in Western Canada. First, the value addition achieved from simply “turning a tree into lumber, bitumen into synthetic crude, or wheat into pasta” is significant and cannot be discounted. For Western Canada, particularly for Alberta and British Columbia, this is true in the Oil and Gas Extraction and Mining sectors, and has been largely driven by increases in oil and metals prices. Second, moving “up the value chain” means that western Canadian resource-based sectors have the potential to keep more of the economic wealth of any given resource opportunity. This is certainly true for mining and oil and gas extraction, as we make clear in the above example. It is even more so the case in industries such as agriculture and forestry, where declines in commodity prices
6 We are making some brave assumptions about value capture here, particularly that all logistics and transportation value-added of transporting refined oil to markets is captured in Canada. 20
have resulted in the squeezing of the amount of value that can be captured from basic resource processing activities such as turning a tree into lumber or crops into grain.
1.4. Capturing value to increase employment At the heart of the value capture imperative is also the fact that resource-based sectors can only achieve a certain level of labour productivity and employment growth, beyond which capital investments become a more important determinant of per-capita income growth.
In Figures 3a to 3d below, we highlight research on labour productivity conducted by the Centre for the Study of Living Standards (CSLS) from unpublished Statistics Canada data. The solid circles in Figures 3a to 3d show that during the 1997-2007 decade, the actual labour portion of labour productivity growth for the agriculture, forestry, fishing, and hunting industries was a paltry 4.4% for Manitoba, 0.0% for Saskatchewan, 6.0% for Alberta and -18.2% for British Columbia. In the Mining and Oil and Gas Extraction sector, the labour component of labour productivity ranged between -22.0% in British Columbia and only 0.5% in Manitoba (see solid triangles). By contrast, the capital component of labour productivity growth in the Agriculture, Forestry, Fishing and Hunting sectors ranged from 9.1% in British Columbia to 48.6% in Saskatchewan.
Why does this matter? The lack of labour input into labour productivity growth is important because labour productivity growth has, historically, accounted for more than half of per-capita income growth in Canada over the last 25 years7. The lagging contribution of labour input into labour productivity growth in resource-based industries, compared to other industries in Western Canada, directly translates to fewer hours worked over time and lower wage rates in these industries, relative to other industries.
Moving up the value chain is therefore not just a matter of capturing more economic wealth from resource-intensive sectors, but also an important imperative that will drive the long-term standard of living of western Canadians.
7 Boothe, P. and Roy, R. “Business Sector Productivity in Canada: What Do We Know?” Industry Canada. International Productivity Monitor. See: Table 1. pp. 4. 21
Figure 3: Output Growth and Contribution of Labour Input to Labour Productivity Growth of Various Sectors in Western Canadian Provinces, 1997-2007
22
Source: Centre for the Study of Living Standards.
Selecting High-Value- Added Sectors: Methodology and Sector
Profiles
23
2.1. Benchmarking FDI criteria Most discussions of what it takes to attract foreign investment focus on the impacts of globalization on business processes of foreign investors. Advances in information and communications technologies, the lowering of transportation costs, more open economic policies in low-cost jurisdictions, and trade and investment liberalization have resulted in production processes that are indeed global. What this means from a value- chain point of view is that, for the foreign investor, the value added by different processes or activities at every stage of production is completely global.
As we show in Figure 4, it makes sense for foreign investors to unpack Michael Porter’s famous Value Chain Model and shift specific functions to lower-cost or higher- productivity destinations. Whereas, in the past, most of a firm’s primary and support activities – from strategic planning to infrastructure – may have taken place within one geographic jurisdiction, globalization and the resulting vertical integration of firms has meant that neither their primary nor their support activities may be concentrated in one central jurisdiction. Even functions such as strategic planning or human resource management of global companies now take place at a regional level, primarily driven by a shifting of these activities to where it makes the most sense from an efficiency or productivity point of view. Gaining access to new markets or making strategic acquisitions that enhance the overall value-added of their offering is another reason why foreign investors choose to invest overseas.
Put in this context, how does one select high-value-added sectors that can attract greenfield FDI into Western Canada? Fundamentally, these sectors in Western Canada must offer some compelling competitive advantage over other international destinations that guide the selection criteria used by foreign investors. These selection criteria include:
. General Business Environment: Factors such as economic and financial stability, political stability, support from government, business establishment procedures, financial supports and subsidies, and a strong legal and intellectual property framework are typically important selection criteria used by foreign investors and site selectors to weed out lower-quality investment destinations. . Infrastructure: Depending on their sector, foreign investors want to invest in destinations with easy access to air, road, rail and/or marine transportation alternatives. They also typically look at factors such as the quality and reliability of communications networks, including the availability of secure network backbones and backhaul capability, the reliability of power supplies, availability of public transportation, etc. For high-value-added sectors such as aerospace or wireless communications, the presence of niche educational institutions that offer R&D infrastructure is also considered an important factor. . Talent: In most value-added sectors, the availability of a suitable talent pool is an essential decision-making criterion for foreign investors. The presence of experienced industry employees, including management and technology workers, and the availability of a pool of workers who can be trained are important factors considered by foreign investors.
24
. Cluster: For many high-value-added sectors, the presence of a substantial industry cluster in a given location is important. The presence of other firms not only offers the investor a market signal that others have invested in a particular location, but also offers them a network of suppliers and customers that can be leveraged to make a particular operation more cost-efficient or profitable. . Regulations: Typically, firms in high-value-added sectors are sensitive to regulatory issues surrounding their specific sector. These include restrictions on foreign ownership or the movement of capital, permit requirements, labour regulations such as hiring and firing flexibility, laws governing unions, etc. . Real Estate: In some sectors, the availability and price of real estate can quickly ratchet up the capital costs of investments, thereby reducing the investors’ profitability. . Living Environment: For firms in the High-technology sector, the ability to attract and retain talent to work in any given destination is directly related to living environment issues such as the cost of living, the attractiveness of the destination for new recruits and expatriate employees, etc.8.
Typically, foreign investors will also look at their current operations and develop an assessment of how a given investment destination fits their existing operations strategically. Foreign investors may also choose to invest in a destination by making a strategic acquisition based on technologies or supply chain advantages conferred on it by acquiring a target firm. In these cases, strategic issues tend to dominate over the typical greenfield investment issues highlighted above.
IBM’s Plant Location International benchmarking data provide the most comprehensive business-case-based and qualitative analysis of the global competitiveness of key western Canadian clusters. Plant Location International assesses the competitiveness of various western Canadian clusters based on an investor’s perspective, by taking prototype investment projects and running net-present-value calculations on the return on an investment after taking into account location-sensitive investment, operating-cost and revenue assumptions for each representative project. To assess the quality of a location, Plant Location International data are collected from a wide range of sources and locations are benchmarked on qualitative factors, most of which are described above.
We take these qualitative and quantitative criteria and benchmark clusters across Western Canada. We do so by first establishing the profitability of setting up a typical greenfield operation in Western Canada in that sector and comparing western Canadian profitability to other international investment locations. We divide up the sample into high/medium/low profitability locations, by determining the standard deviation of profitability of the overall sample and dividing the sample into relatively high (Average + 1.5 St. Dev.) and low (Average – 1.5 St. Dev.) profitability locations.
8 These criteria are more or less applied by site selectors and global benchmarking consultancies such as IBM’s Plant Location International and KPMG’s Competitive Alternatives. The list selected here comes from IBM’s Plant Location International. 25
Figure 4: Transformation of Global Value Chains
USA China
India
Firm Infrastructure Primary Act ivities Telecom Infra Transport Infra Technological Strategic Planning Development M arketing & Sales Research & Operations & Finance De velop me nt Customer Service Lo gistics Human Resource Management Primary Activit ies
Human Resource Management Procurement Source: IE Market Research Corporation. 26
We then map this profitability on a quality score (rated 1-10) of the investment destination, as defined by the above factors. Using the standard deviation analysis described above, we divide the sample among high/medium/low-quality destinations. This profitability-quality mapping results in a Competitive Matrix for western Canadian clusters and comparisons between these clusters and others across the world. Out of the 28 sub-sectors available to IEMR, we pick the top 7, where western Canadian clusters achieved at least a “Medium-Medium” Profitability-Quality ranking. Figure 5 shows an example of this methodology for the Industrial Chemicals sector, and Figure 6 shows the competitiveness of Western Canada in each of the seven clusters.
As further due-diligence criteria, we confirmed that these sectors already contribute significantly to the western Canadian provinces' GDP and are likely to benefit, either directly or indirectly, from the development of various Asia-Pacific Gateway infrastructure initiatives. Here, the key question we tried to answer was: “Does the globally competitive sector contribute significantly to output and does it become even more competitive as a result of Gateway initiatives?”
Based on these criteria, we selected the following seven sectors for this report: . Aerospace . Grain/Food processing . Industrial chemicals . Trade-related financial and business services . Value-added electronics . Value-added information and communications technologies (including gaming, software services and wireless communications) . Value-added logistics and transport services
The reader should keep in mind that this listing of sectors is neither comprehensive nor indicative of any future government policy or programming action. The sectors have been selected to initiate discussions on their global competitiveness and to identify international policy best practices to support value-creating economic activity within them in Western Canada.
2.2. Constraints to using benchmarking metrics There are a number of weaknesses to this methodology. First, benchmarking studies typically benchmark costs of “representative operations”. Our experience is that these cost structures can vary considerably, depending on a variety of factors that cannot possibly be considered in location benchmarking studies. For example, cost structures in gaming are different for a firm establishing a full-fledged gaming studio, compared to a game development centre requiring primarily software and programming work. While the output of these two activities is the same (i.e., a video game), the relative cost structure between them is different in any given location.
27
Cost structures of foreign investors are also dynamic in nature, while location benchmarking is an inherently static exercise. For example, investors will typically look at financial incentives and explicitly take this into account in their calculations. This radically changes the profitability of a location that might offer such incentives. Another example of the dynamic nature of cost structures is that existing facilities near a particular location might drastically change the profitability picture of that location, since costs for items such as infrastructure, real estate and staffing can be leveraged between the old and new locations. The IBM-PLI data (and other benchmarking data) only provide benchmarks of greenfield investments, without taking into account these and other dynamic factors impacting on multinational corporations’ decisions to invest.
28
Figure 5: Sector Selection Methodology for Industrial Chemicals
Step 1: Adjusted Profitability Index Step 2: Quality Score Calculated for
Calculated for Leading international Leading International Locations Locations
Adjusted Profitability Index Quality Index Industrial Chemicals Average 151.13 Industrial Chemicals Average 6.48 Mumbai, IND 163.93 Mumbai, IND 5.6 Shanghai, PRC 160.55 Shanghai, PRC 7.0 Kuala Lumpur, MAL 160.55 Kuala Lumpur, MAL 7.0 Yanbu, Madjnah, SAU 160.55 Yanbu, Madjnah, SAU 6.5 Monterrey, MEX 157.17 Monterrey, MEX 5.7 Singapore, SN 153.79 Singapore, SN 7.2 Newcastle, AUL 152.1 Newcastle, AUL 6.1 Houston, TX 150.41 Houston, TX 7.0 São Paulo, BRA 150.41 São Paulo, BRA 6.4 New Orleans, LA 150.41 New Orleans, LA 5.9 Madison, WI 150.41 Madison, WI 5.9 Halifax, NS 150.41 Halifax, NS 5.8 Toronto, ON 148.72 Toronto, ON 7.6 Montreal, QC 148.72 Montreal, QC 7.3 Sarnia, ON 148.72 Sarnia, ON 5.7 St. John, NB 148.72 St. John, NB 5.8 Newark, NJ 147.03 Newark, NJ 7.7 Edmonton, AB 147.03 Edmonton, AB 6.2 Rotterdam, NET 143.65 Rotterdam, NET 7.1 Leipzig, GER 141.96 Leipzig, GER 6.1 Antwerp, BEL 138.58 Antwerp, BEL 6.5
Industrial Chemic als
8
Ne wa rk
HighHigh Toronto
7. 5
Mont real
Singapore Rotterdam Shanghai 7 Ho usto n Ku ala L u mpu r
ee
6. 5 Antwerp Yanbu-Madinah Sao Paulo MediumMedium
Scor Scor Quality Quality Ed monton Leipzig New Cast le 6 Ne w Orlea ns Madison
SarniaHa lifa x Saint-John Mont errey
Mumbai 5. 5
LowLow
Low Medium High 5
135 140 145 150 155 160 165 170
Profitability Ind ex
Source: Calculations by IE Market Research Corporation, from IBM-PLI data.
29
Figure 6: Selected Sectors’ Competitive Matrices
In d us t rial Ch emic als
8
Ne wa rk HighHigh Toronto 7. 5
Mont real Singapore Rotterdam Shanghai 7 Ho usto n Ku ala L u mpu r
ee
6. 5 Antwerp Yanbu-Madinah Sao Paulo Medium Medium
QualityQuality Sco Sco r r Ed mon ton Leipzig New Cast le 6 Ne w Orlea ns Madison SarniaHa lifa x Saint-John Mont errey Mumbai 5. 5
LowLow Low Medium High 5 135 140 145 150 155 160 165 170
Profitability Ind ex
30
Figure 6: Selected Sectors’ Competitive Matrices (continued)
31
Figure 6: Selected Sectors’ Competitive Matrices (continued)
32
Innovation-driven Competitive Sectors
Aerospace
33
Global Competitiveness Snapshot: Aerospace
IBM-PLI Quality Score Ranking IBM-PLI Profitability Index Ranking
Western Canadian Capabilities in Aerospace: Strong Tier 2 Capabilities Western Canada’s aerospace industry employs approximately 17,000 people in Alberta, British Columbia, Manitoba and Saskatchewan. With $3 billion9 in annual revenues, companies located in Western Canada are involved in a wide range of value- added activities in this sector. These include: . Advanced materials R&D; . Aircraft and component manufacturing; . Manufacture and repair of composite materials; . Satellite manufacture and ground tracking; . Space systems development and remote sensing; . Testing and certification services; and . Unmanned vehicle systems development.
In terms of job count and number of companies, Winnipeg is the largest aerospace cluster in Western Canada, employing about 5,300 people10. Winnipeg is a major centre in North America for the manufacture of composite aircraft components and aircraft maintenance, repair and overhaul (MRO) services. Vancouver is the next- largest aerospace cluster in Western Canada, with strengths in composite aerostructures, MRO, design and manufacture of small satellites, and information support systems. Saskatoon and Calgary also have small aerospace clusters, with Calgary firms focused in areas such as unmanned vehicle systems and defence electronics, while Saskatoon firms are engaged in satellite-based communications systems, products and services. Western Canada also has some important national aerospace research and training institutions that anchor the long-term competitiveness of this sector. These include the University of Manitoba’s Faculty of Engineering (home to a Tier I Canadian Research
9 Western Economic Diversification Canada.
Chair [CRC] in Aerospace Materials), which offers degree programs with specializations in aerospace engineering; the Composites Innovation Centre (CIC) in Winnipeg; the British Columbia Institute of Technology (BCIT); and the Stevenson Aviation and Aerospace Training Centre at Red River College (which offers a wide range of technical certificate and degree programs in Aircraft Maintenance Engineering, Aircraft Gas Turbine and Airport Operations).
Business Case Analysis: Western Canada’s Aerospace Sector Ranks below Other North American Destinations Our analysis of the IBM-PLI data gives an interesting snapshot of the global competitiveness of this sector in Western Canada. On IBM-PLI’s Quality Score, western Canadian centres are ranked as follows out of 32 global centres: Vancouver – 13th, Winnipeg – 17th, Calgary – 17th and Saskatoon – 21st. On their Profitability Index, western Canadian centres are ranked as follows: Winnipeg – 6th, Calgary – 6th, Vancouver – 7th and Saskatoon – 7th, bearing in mind that profitability metrics were similar across many jurisdictions, according to IBM-PLI data.
In terms of the different qualitative factors influencing this ranking, western Canadian centres rank competitively in areas such as their general business environment, infrastructure and living environments. However, they ranked relatively poorly in areas such as flexibility of labour and regulations, the presence of an industry cluster, and local potential to recruit skilled staff.
Taking a step back from the actual scores, three points are important to observe from the benchmarking data. First, what is significant about this ranking is that western Canadian centres rank significantly below other Canadian centres, particularly Montreal (ranked 3rd) and Toronto (ranked 4th). Second, western Canadian centres rank just as highly (from a quality perspective) as do other Tier 2 U.S. aerospace clusters like Albuquerque, Wichita, Austin, Tulsa, Denver and Huntsville. These U.S. clusters have been receiving major investments from U.S.-based aerospace companies in the past decade, particularly post-9/11. Third, IBM-PLI’s Profitability Index shows that western Canadian centres do not have a major profitability advantage over other Canadian Tier 1 or even Tier 1 U.S. centres (such as Belleville/Seattle). All three points on quality and profitability are important when thinking about the types of policies and programs that need to be put in place to encourage further aerospace investments in Western Canada.
Industry Structure and Competitive Dynamics: Domestic Rather than Foreign Backbone While we think that the plant operations of foreign investors (such as Boeing) provide important anchors for the development of this sector in Western Canada, other factors related to the global aviation and aerospace industry have also been important elements that have led to the type of growth and structure of the aerospace industry in this region. These factors include: investments by Canadian firms and the growth of home-grown western Canadian firms, Canadian and foreign government aerospace contracts, the historical interaction between Canadian firms and their foreign customers, and the strong presence of the aerospace industry in Quebec and Ontario.
35
It is important to keep these points in mind when thinking about the types of policies and programs that need to be put in place to encourage further aerospace growth in Western Canada.
In our view, the most important foreign investor in Western Canada’s aerospace industry is Boeing Canada Operations Ltd. Established in 1971 with 50 employees, Boeing’s Winnipeg facility employs 87% of its Canadian workforce (Boeing employs 1,300 people in Winnipeg) and accounts for 7.6% of employees in Western Canada’s aerospace industry11. Winnipeg is home to one of Boeing’s ten major global sites for commercial aircraft – only one of three such sites outside the United States – and the Winnipeg facility is the largest composite manufacturing facility in North America. Supplying its worldwide commercial airplane production, Boeing Canada Technology's Winnipeg division manufactures more than 1,000 parts and assemblies in Winnipeg for the company’s 737, 747, 757, 767, 777 and 787 aircraft.
Aside from Boeing, however, it is interesting to note that most major aerospace manufacturing employers in Western Canada have historically been homegrown western Canadian firms or divisions of Tiers 1 and 2 Canadian aerospace and aviation companies.
To illustrate this point, take Aveos (700 employees in Winnipeg12), Magellan Aerospace (650 Winnipeg employees12), StandardAero (1,200 Winnipeg employees12), Cascades Aerospace (600 employees in Abbotsford13) and Avcorp (480 employees in Delta14). Together with Boeing’s 1,300 employees in Winnipeg, these six firms form the backbone of Western Canada’s aerospace industry, employing about 73% and 29% of Manitoba’s and Western Canada’s aerospace workforce, respectively.
Aveos was formerly Air Canada Technical Services, which changed its name to Aveos Fleet Performance Inc. to reflect Air Canada’s new ownership structure back in September 200815. Its largest customer is still Air Canada. Mississauga-based Magellan Aerospace Corporation acquired Winnipeg-based Bristol Aerospace Ltd. in 1997. What is interesting is that Bristol Aerospace was established by Jim and Grant MacDonald in Winnipeg, as the MacDonald Brothers Aircraft Company, in 1930. StandardAero (acquired from The Carlyle Group by Dubai Aerospace Enterprises in 2007) is one of the world's largest independent gas turbine engine and accessory repair and overhaul companies. StandardAero was founded in Winnipeg in 1911.
11 Boeing Canada.
Avcorp, a world leader in the design and manufacture of airframe structures, is headquartered in Delta, B.C. Cascades Aerospace, one of North America’s Top 10 MRO companies, is based in Abbotsford, B.C.
Put together, it is fair to say that the western Canadian aerospace industry is home to a strategic mix of Tier 1, 2, 3 and 4 aerospace manufacturers and service companies that form an important part of the North American aerospace value chain.
However, in putting the sector’s overall size in perspective, it is interesting to note the relative size of aerospace clusters in competitor Tier 2 global and North American locations. Scotland (population: 5.1 million) had 16,000 employees in its aerospace industry in 200816. New Mexico (population: 1.9 million) had 8,000 employees in its aerospace industry in the same year17. Colorado (population: 5.0 million) had 24,700 employees in its aerospace industry that year18.
What is significant is that these new Tier 2 centres, such as Albuquerque, Belfast, Glasgow and Queretaro have Tier 1 aerospace companies with plants operating there. Bombardier’s Learjet wings have been made in Belfast since 1990; the Glasgow- Prestwick corridor has MRO and manufacturing facilities for British Airways, Rolls- Royce, General Electric and Goodrich Corporation; and Queretaro has wiring harness manufacturing facilities for Raytheon, Bombardier and Cessna.
Put in this global context, it is clear that the competitive advantages that have resulted in the growth of the aerospace sector in Western Canada are changing rapidly. Some of the trends will continue to be net-positive for Western Canada. While commercial air travel continues to grow worldwide, there are now only four manufacturers of commercial airliners: Boeing, Airbus, Bombardier and Embraer. Long-range forecasts predict continued growth in worldwide passenger airline travel of about 5% on average over the next 20 years, with comparable growth in demand for their aircraft. This growth in demand for commercial aircraft should translate to steady growth in Western Canada’s aerospace industry (MRO, parts, composites, etc.).
However, the aerospace industry’s business models have changed. The era of huge aircraft factories is gone. Boeing, Airbus, Bombardier, Embraer, Raytheon and many Tier 1 aircraft manufacturers have already taken steps to ensure that they are no longer directly involved in parts manufacturing. Separating parts manufacturing from final assembly and certification allows these Tier 1 players to focus on the highest level of value-added work, and also allows them to purchase parts and sub-assemblies from Tier 2, 3 and 4 vendors throughout the world, usually at far lower costs.
While this change in business models can be positive for Western Canada’s aerospace industry, it also means greater competition with other Tier 2 locations. One of Winnipeg’s and Vancouver’s main competitive advantages, which is highlighted to foreign investors, is the overall lower cost of operations compared to other Tier 2
16 Scottish Development International. MRO in Scotland. pp. 6. March 2009. 17 New Mexico Business Weekly. State’s aerospace industry upward bound despite reaction.
Foreign Direct Investment Implications: Targeting Tier 0 Investments Our analysis, above, of the western Canadian aerospace industry shows that the number of foreign investors locating in western Canadian centres is relatively limited. The largest cluster, Winnipeg, has one major foreign investor: Boeing. The other anchor companies in Winnipeg (and Vancouver) are all home-grown western Canadian outfits.
From a growth perspective, it will be crucial for policymakers to attract major operations of Tier 0 U.S. and Canadian aerospace companies to Western Canada. The presence of a wider industry cluster is absolutely crucial to the growth of this industry.
In the policy section below, we provide, as a case study, New Mexico, which has the fastest-growing aerospace cluster in North America. New Mexico took a “blue skies” approach to the development of its aerospace cluster four years ago and introduced a combination of tax and facilities development incentives. Tax incentives ranged from a job training incentive program, a high-wage job tax credit, an aircraft maintenance or remodeling tax deduction, an aerospace R&D tax deduction, an aircraft manufacturing tax deduction and four tax deductions related to the establishment of operations in its new Spaceport America facility. The state also funded the development of its Spaceport America facility, to the tune of $200 million. New Mexico was also aggressive and targeted in its marketing efforts to ensure that the benefits of establishing plants and operations within its boundaries were clearly understood by Tier 0 companies.
The result of these policies is clear. For a sector that had only 1,100 employees in 2005, New Mexico now has over 8,000 employees and companies such as Boeing SVS, Northrop Grumman, Lockheed Martin, Honeywell Defense Avionics, Raytheon, Goodrich and Virgin Galactic are establishing operations in New Mexico.
§§
38
Innovation-driven Competitive Sectors
Wireless Communications, Gaming and Software Services
39
Global Competitiveness Snapshot: Wireless Communications
IBM-PLI Quality Score Ranking IBM-PLI Profitability Index Ranking
Global Competitiveness Snapshot: Gaming
IBM-PLI Quality Score Ranking IBM-PLI Profitability Index Ranking
40
Global Competitiveness Snapshot: Software Services
IBM-PLI Quality Score Ranking IBM-PLI Profitability Index Ranking
Western Canadian Capabilities in Wireless Communications, Gaming and Software Services: World-class Capability with Investments by Leading Global ICT Companies
Western Canada’s ICT sector is the second-largest ICT cluster in Canada (after Ontario), with considerable breadth and energy. Strong research infrastructure has attracted and retained world-class specialists in many areas such as wireless communications, gaming and software services, and, as a result, an increasing number of foreign investors have already established their R&D centres in Western Canada.
“ICT” is a broad term that covers all technical means of producing, communicating and organizing information. According to Statistics Canada, it includes older technologies such as radio, copper line and television broadcasting, and newer technologies such as Web development and mobile devices19. Therefore, data on Western Canada’s ICT sector may vary across different sources, depending on the definition of the ICT sector used. However, we think that the most significant growth segments in the ICT sector clearly are software development, wireless communications and digital media. In this report, “ICT” refers to these three sectors.
19 Statistics Canada.
Employment Levels, Contribution to GDP, Key Foreign Investors British Columbia’s ICT sector has more than 6,000 companies, and generated approximately $9 billion in revenues in 200820. BC Stats reports that employment in key job categories in British Columbia’s ICT sector in 2008 was as follows: 32,400 in computer system design services; 24,100 in broadcasting and telecommunications; and 7,300 in Information Services and Data Processing Services21. We expect that these numbers will be growing rapidly over the next decade, as more students graduate from the province’s educational institutions and more highly-skilled immigrants come into the province from around the world. British Columbia’s Digital Media and Gaming sector is also large, with leading companies such as Electronic Arts and Radical Entertainment expanding their operations. Within this province, the sector had annual revenues of $2 billion in 200822.
Employment in British Columbia’s ICT sector is concentrated in Greater Vancouver, where global firms such as Microsoft Corporation, Intel, IBM, Broadcom, 3M, Eastman Kodak Company, Harmon International Industries, Sophos, Oracle, Business Objects, Nokia, Honeywell, Raytheon, Electronic Arts and Seiko Epson have their operations23. In addition, local firms such as TELUS, ACL Services Ltd., D-Wave Systems Inc., MPR Teltech, MDA, Sierra Systems, PMC-Sierra and Sierra Wireless are also growing rapidly in British Columbia. The Information and Communications Technology Council (ICTC) estimates that, in 2006, internationally educated ICT professionals represented 18.7% of total ICT workers in British Columbia, compared to the national average of 10.3%24. Immigrants and international researchers therefore play an important role in B.C.’s ICT sector.
In Alberta’s ICT sector, there are nearly 4,300 firms that, taken together, employ about 54,500 people and generate over $10.2 billion in annual revenues25. Among the 54,500 employees, it is estimated that about 16,600 people work in the software industry, and 16,000 in the Wireless sector26. Leading ICT firms include Shaw Communications Inc., GE Power Systems Canada Inc., Hemisphere GPS, Nexen Inc., Allstream, Flextronics, Colt Engineering Corp., IBM and Schlumberger Canada27. There are also a number of leading wireless firms, such as Meta4hand, Blackline GPS,
20 Government of British Columbia.
Novatel, Wedge Networks, Hemisphere GPS, Redwood Technologies and Baseband Technologies28.
In Manitoba, 15,000 workers are employed at ICT firms. There are about 2,500 computer programmers and 1,500 computer and network operators, and web technicians in the province29. Fifteen hundred leading ICT firms in the province include EDS, IBM Canada, IDERS, ImagiNET Resources Corp., Momentum Healthware, Online Business Systems, Protegra Technology Group and Emerging Information Systems Inc. ICT firms in Manitoba are concentrated in Winnipeg.
In Saskatchewan, there are about 300 information technology firms in the province, and its ICT industry had revenues of $1 billion in 200830. Saskatchewan’s software industry employs approximately 14,000 workers31. IT firms in Saskatchewan are concentrated in Saskatoon and Regina32. Growing ICT firms in Saskatchewan include Cronus Technologies Inc., Itracks, MarkeTel Multi-Line Dialing Systems Ltd. and Technology Management Corporation33.
Research and Development Facilities R&D, combined with commercialization, is key to the growth of the ICT sector. Some of the world’s best ICT research facilities are located in Western Canada. These include:
TRLabs, a Calgary-based R&D consortium focusing on ICT and the largest consortium of its kind in Canada. TRLabs functions as an R&D vehicle by connecting industry partners with researchers, university professors and students, and helping them create innovative technologies. It has five labs (Calgary, Edmonton, Regina, Saskatoon and Winnipeg), and has created 369 commercialized technologies and 83 active patents34. The Network for Emerging Wireless Technologies (NEWT) is a division of TRLabs. NEWT is a wireless testing and development centre that provides hardware and software design, implementation and test support to developers of wireless products and services.
WestGrid (Western Canada Research Grid) is a consortium of western Canadian universities that provides high-performance computing (HPC) resources for Canadian research projects. These include systems and applications programs, data storage, networks and programming35.
28 Invest in Canada Bureau.
MiNa, the Microsystems and Nanotechnology Research Group at the University of British Columbia, is also contributing significantly to advancing ICT in Western Canada. Areas of research covered by the Group include nanodevices and computing.
The National Institute for Nanotechnology (NINT), Canada's flagship nanotechnology institute, was established in 2001 and is operated as a partnership between the National Research Council and the University of Alberta. NINT aims to establish Alberta as a leading centre of innovation in nanotechnology, and is funded by the Government of Canada, the Government of Alberta and the University of Alberta36. The facility houses more than $40 million of the latest generation of scientific equipment, including electron and scanning probe microscopes, and chemical and material analysis instruments37.
In Saskatchewan, the Saskatchewan Research Council operates a 3D Virtual Reality CentreTM. This centre employs the latest-generation high-resolution stereo projection equipment, which can project computer-generated active stereoscopic 3D images on three screen modules of 8 feet by 10 feet. The technology allows the user to navigate in all directions and choose various camera positions, including viewpoints not available in real environments.
Manitoba also has leading-edge research facilities in ICT – most notably, the Engineering and Information Technology Complex at the University of Manitoba. This facility has advanced computer-based product development tools, including a 40-seat computer laboratory as well as a mini-simulated manufacturing laboratory with a rapid prototyping machine, mini-numerical controlled machine tools and a virtual reality system.
In British Columbia, the University of British Columbia (UBC) has the Advanced Materials and Processing Engineering Laboratory, where scientists and engineers specializing in various fields, including electrical and computer engineering, gather to invent innovative technologies. Also, the Institute for Computing, Information and Cognitive Systems at UBC, and the Centre of Scientific Computing at Simon Fraser University provide a visible focus for computational research on the campus and in the wider Pacific Rim research community. Other programs offered in British Columbia include a unique Masters of Digital Media Program offered jointly by the University of British Columbia, Simon Fraser University, Emily Carr University and BCIT.
Existing Government Programs Both the federal government and provincial governments offer many types of supports for the ICT industry in Western Canada, and we think that this will continue to be a significant factor in global companies’ decisions to invest in the region.
36 University of Alberta.
The Government of Canada has the Scientific Research and Experimental Development (SR&ED) program that encourages businesses, including small and start- up companies, to develop R&D-based new products or processes. SR&ED provides companies with either refundable or non-refundable tax credits for eligible expenditures incurred in Canada for R&D activities38, and is considered one of the most generous R&D tax incentive programs in the developed world.
At the provincial level, British Columbia has some of the lowest tax rates in North America and also provides various tax credits and incentives for R&D work. British Columbia’s R&D Tax Credits provide qualified R&D firms with a 10% tax credit against provincial income tax, in addition to receiving the federal SR&ED tax credits39. The B.C. government also has programs to attract investors, such as the International Financial Activity Act (IFAA) and the Small Business Venture Capital Act (SBVCA). These programs help start-up ICT companies in the province commercialize their ideas.
The other three provinces have tax credits to encourage R&D as well. Alberta’s Scientific Research and Experimental Development Tax Credit is worth 10% of eligible expenses40. The Government of Saskatchewan also has the Saskatchewan Research and Development Tax Credit of 15% of qualifying R&D expenditures41, and the Government of Manitoba’s Manitoba Research and Development Tax Credit provides a 20% non-refundable tax credit applied against Manitoba corporate income taxes payable42.
Both federal and provincial governments also offer support for promoting western Canadian technology to the rest of the world. The Government of British Columbia sponsors exhibition space for Canada Pavilions at various trade shows such as CommunicAsia, the largest Information and Communications Technology trade show in the Asia-Pacific region. It also had an active Olympics pavilion campaign and stepped up marketing efforts for B.C.-based companies in both the 2008 Beijing Olympics and the 2010 Winter Olympics in Vancouver/Whistler. We think that it is extremely important for Western Canada’s ICT companies to connect with firms and organizations in the Asia-Pacific region, considering Western Canada’s potential to grow as a North American gateway to the Asia-Pacific market.
We also see some innovative incentives for R&D provided by the Government of Alberta. The Alberta Innovation Voucher Pilot Program, launched in November 2008, provides small technology-driven businesses with Innovation Vouchers that can be used as payment for services offered by approved service providers. Preference is given to businesses in emerging growth sectors, including ICT, and the list of approved service providers includes NINT, TRLabs, NanoFab at the University of Alberta, the
38 Government of British Columbia.
Alberta Centre for Advanced Microsystems and Nanotechnology Products and the Alberta Research Council.
The Government of Alberta also supports various groups that help energize the ICT industry. For example, it supports Alberta Deal Generator (ADG), which facilitates investment in high-growth Alberta technology companies by connecting companies with its large network of accredited investors. The Government of Alberta also has various endowment funds, such as Access to the Future Fund, a $3-billion endowment that supports innovative post-secondary initiatives, and the Alberta Ingenuity Fund, a $1- billion science and technology endowment fund that encourages innovation. In addition, the Government of Alberta has established a Research and Development Associates Program that gives ICT companies two years of support for recent Master’s and doctoral graduates hired to conduct research within the company (a $55,000 annual stipend and a research allowance of up to $7,000).
Business Case Analysis: World-class Capability Our analysis of IBM-PLI data shows that Western Canada’s ICT sector is globally competitive across the three sub-sectors considered in this report. In the Wireless Communications sector, Vancouver and Calgary ranked 18th and 20th respectively, in terms of their quality scores. This was likely driven by the fact that the Wireless Communications sector in both cities has a niche focus on applications, Global Positioning System (GPS) and Location Based Services (LBS) development, and some focus on carrier-class network development products. Moreover, from a profitability perspective, both western Canadian cities ranked 3rd and have comparable cost structures to those of centres such as Toronto, Montreal, and Waterloo, and better cost structures than those of other U.S. and international wireless communications clusters.
In gaming and software services, IBM-PLI data show that western Canadian cities have a superior quality-profitability advantage. In the Gaming sector, Winnipeg’s cost structures help to rank it 3rd in the world, in the same league as Seoul (which has a tremendous gaming industry), while Victoria (4th) and Edmonton (4th) are not far behind. Vancouver, of course, has a large gaming industry anchored by Electronic Arts and others, and from a cost perspective is still an attractive location compared to similar global centres such as San Diego, Toronto or Tokyo.
IBM-PLI’s indicators show that labour costs are lower in Western Canada than in comparable cities in the U.S. For example, estimated annual labour costs for a large- scale enterprise software design centre would be $9.4 million in Winnipeg, $9.5 million in Saskatoon and $9.7 million in Edmonton, compared to $13.1 million in San Francisco. Also, when we calculated labour costs of a typical video game company, we found that it would cost C$2.5 million in San Diego, but $2.2 million in Vancouver, $2.1 million in Victoria, $2.0 million in Edmonton and $2.0 million in Winnipeg. In our view, lower labour costs in Canadian cities partly reflect the lower costs of providing employee benefits such as health insurance in Canada. Keep in mind, however, that these costs are only wage costs and do not take into account job and training tax credits offered in most U.S. states.
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Professionals in the Gaming sector who possess skills in software as well as in digital media production are difficult to find. Therefore, digital media and gaming companies locate in places where such skilled workers are available. Vancouver is one of the leading centres in the world when it comes to the availability of such talent, and in IBM- PLI’s index of presence of experienced games-related employees, Vancouver received the fourth-highest score among all of the cities covered in the study, next only to Montreal, Toronto and Los Angeles. In addition to experienced workers, Vancouver also has a large student population and a large pool of people employed in the film industry. This nexus of digital and traditional media production is increasingly gaining in importance, as the line between digital and traditional media is becoming increasingly blurred.
In other areas such as infrastructure, business taxes, general business environment and quality of life (all of which are key decision criteria for foreign investors), western Canadian centres come out strongly.
Industry Structure and Competitive Dynamics: Strong Presence in Application and Software Development; Lacking in Carrier-class Solutions, Components and Devices Expertise It is clear from the above analysis that Western Canada’s ICT industry is robust, with deep clusters across the region. Foreign investors have recognized this western Canadian advantage and have invested heavily in the region. As a result, Western Canada has some strong capabilities in engineering services, infrastructure services and enabling software and services, along with strong expertise in the development of enterprise-class and consumer-class solutions, and of course in digital content development.
At the same time, a look at the leading ICT companies in Western Canada suggests that there are only a handful of firms undertaking carrier-class solutions and component and device design and manufacturing in Western Canada. This is in part the result of history, but it is an important factor that needs to be kept in mind when thinking about attracting FDI in this sector in Western Canada.
In the wireless space, developing (and selling) carrier-class products and services is absolutely crucial since carriers are at the top of the telecom value chain. The missing link in Western Canada (and indeed in Canada, more generally) is that the wireless carrier industry is protected by foreign investment regulations that essentially prevent global carriers from entering the Canadian market. The entry of a global carrier (of the stature of Vodafone, Orange, T-Mobile, China Mobile, etc.) leads to the development of clusters of technology suppliers around it, as well as to a stronger network of connections between the carrier’s headquarters and technology vendors that seek to develop and sell their solutions globally. Barring this, Canadian technology vendors use trade shows and private visits with global carriers to pitch their products and services. In other words, the likelihood of a carrier buying a product or service for its global operations increases if its suppliers are in the same city, rather than halfway across the world.
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Across the wireless, gaming and software industries in Western Canada, we can think of only a handful of firms that are directly engaged in the design and manufacture of devices or components that go into telecom or gaming infrastructure and devices. Being directly involved in the components and devices ecosystem is also crucial since, just like carriers, OEMs are at the top of the devices value chain and their presence results in strong positive network externalities. This is why San Diego, Waterloo, Chicago, Stockholm, Helsinki and Seoul have such vibrant technology clusters. They are anchored by global devices and infrastructure vendors such as Apple, RIM, Motorola, LM Ericsson, Nokia and Nokia Siemens Network, Samsung, and LG Electronics.
Our sense of the ICT industry in Western Canada is that there is more than enough room for it to grow in the short-to-medium term. According to Gartner, the fastest- growing segments within the software application development market during the next five years will be security testing, distributed testing and Microsoft.NET platform application development tools43. Within this application development market, which is an important market for western Canadian software services firms, the key factor facing application development vendors will be their inability to deliver, in a timely fashion, product quality, effective marketing and well-trained distribution channels43. All of these, together with continued economic uncertainty and skills shortages in U.S. centres, will result in a greater emphasis among software vendors on consolidating closer to home, with western Canadian suppliers benefiting from these trends.
In the Wireless Communications sector, the applications market has exploded in the past two years with the introduction of the iPhone. Western Canadian companies, which focus on wireless application development, have benefited from this applications boom and will continue to grow their solutions across various platforms, as we think that there is great depth and scope of platform expertise in Western Canada.
In the Gaming sector, western Canadian expertise is fairly well-established and with some of the leading global companies already operating out of Western Canada, we do not see any short- to medium-term threats to this industry in Western Canada.
Foreign Direct Investment Implications: Tier 1 Players, Global Carriers and Venture Capital Needed in Wireless Communications Sector In terms of strategies for foreign direct investment attraction, we feel that the greatest thrust needs to be in the attraction of Tier 1 players, global carriers and venture capital funds in the Wireless Communications sector. Indeed, the greatest growth in both the software and gaming markets will come from the way in which applications are moved into the mobile space, for example in areas such as enterprise mobility and mobile gaming. A scan of capabilities in Western Canada shows that in the wireless space, outside of a limited number of Tier 1 foreign investors such as Nokia (and, to a certain extent, Microsoft’s recent investment in B.C.), there are a limited number of global handset vendors or wireless telecom infrastructure vendors with significant ongoing operations in Western Canada. As in the Aerospace sector, the presence of these firms
43 Gartner Research Inc. “Market Trends: Application Development Slow but Steady, Worldwide, 2009-2013”. 48
acts as a magnet that attracts their suppliers and customers to also establish operations in Western Canada and helps in the development of clusters that centre on these firms.
Another area of attention is the permanent presence of global wireless carriers in Western Canada. To a certain extent, Canadian foreign investment laws limit the extent to which global carriers can invest in network operations in Canada directly (witness the recent controversy over investments by Orascom Telecom in Globalive). This definitely has an impact on the strength of the relationship between Canadian suppliers and their global-carrier customers. At the same time, global carriers are not just looking to establish operations in a particular country or region: They are also looking for the best technologies and applications available to them and have active venture funds to invest in these technologies and applications. In our view, most interactions between potential western Canadian suppliers and their global carriers is intermittent, with trade shows, industry associations and one-off private meetings that result from these interactions acting as important conduits for investments by these global carriers in technologies developed by western Canadian firms. These interactions need to be institutionalized, with options such as the establishment of a permanent global telecommunications trade show in Western Canada or incentives to global carriers to establish a marketing office in Western Canada that acts as a permanent link between western Canadian software and application development firms and their global-carrier customers.
An example of this interaction is the Service Provider Investment Forum (SPIF), organized annually by Wireless Innovation British Columbia (WINBC) together with the Telecom Council, at the margins of its annual Pacific Northwest Wireless Summit held in Vancouver. SPIF, a monthly meeting of representatives from both wireless and wireline carriers, venture capital and R&D divisions of service firms from around the world, is held monthly in San Francisco. SPIF investors are focused on strategic investment and partnerships in areas such as components, devices and enabling technologies for enterprise solutions and content44. Since 2006, SPIF has attracted the venture capital arms of France Telecom, NTT DoCoMo, British Telecom and Nokia, among other global carriers and infrastructure vendors. Institutionalizing focused events such as these or inviting the business development offices of these global venture capital funds into Western Canada would be an effective mechanism to help increase investments by these global players in the region.
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44 See
Innovation-driven Competitive Sectors
Value-added Electronics
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Global Competitiveness Snapshot: Electronics
IBM-PLI Quality Score Ranking IBM-PLI Profitability Index Ranking
Western Canada’s Capabilities in the Value-added Electronics Sector Western Canada’s Value-added Electronics sector is very diverse and comprises many facets of hardware-oriented technologies. Key areas of strength include: . Photonics; . Power Smart technologies; . Computer hardware (including haptics, robotics, nanotechnology, quantum computing, semiconductor design, sensors and System-on-a-Chip [SoC]); and . End of Life electronics processing.
It is important to note that the western Canadian Value-added Electronics sector is largely focused on design and integration, and does not have significant manufacturing capacity. While low-volume, high-margin components are often manufactured in Western Canada, most firms elect to outsource higher-volume, lower-margin manufacturing, mostly to Asia.
Many value-added electronics sub-sectors got their start serving Western Canada’s natural resources industries, such as forestry and mining, as well as the transportation, automotive, agriculture and tourism industries. As these industries have become increasingly mechanized, western Canadian technology innovators have risen to the challenge, developing rugged, cost-effective, environmentally-friendly solutions to complex technical problems. As such, the western Canadian technology community excels at designing integrated self-contained systems that are sufficiently resilient to withstand extremes often found in Western Canada, including temperature, salt water, humidity and extreme vibration.
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Coincidentally, due to Western Canada’s historical reliance on natural resources, an important advantage for western Canadian manufacturers is cradle-to-grave lifecycle value. Most notably, mining giant Teck provides many of the precious metals used in electronics manufacturing and similarly provides end-of-life recycling for electronics to recover those same metals.
Employment Levels, Contribution to GDP and Key Foreign Investors Overall, the high-tech industry contributes about 5% to Canada’s GDP45, and the Value-added Electronics sector generates a significant portion of this. In Western Canada, there are a total of 848 establishments focused on computer and electronic product manufacturing, and 423 specializing in electrical equipment, appliance and component manufacturing. British Columbia leads western Canadian provinces, with 660 establishments in these sub-sectors, although Alberta is also home to a significant number of value-added electronics companies46.
Photonics Western Canada’s photonics industry generated C$760 million in revenue in 2007. This sub-sector encompasses a number of technologies, including biophotonics, display technologies, imaging technologies, LED technologies, manufacturing, optical computing and memories, sensors and solar energy.
British Columbia is home to approximately 50 photonics companies that are particularly active in the areas of signage, lighting and alternative energies, and has generated a number of innovative spin-off companies. B.C.’s photonics companies employ 2,010 people, whereas Alberta, Saskatchewan and Manitoba have approximately 95 photonics companies, which employ about 2,990 people47.
Many of Alberta’s photonics companies focus on developing solutions for the Oil and Gas sector, and its photonics industry is supported by NINT, the Alberta Centre for Advanced Microsystems and Nanotechnology Products (ACAMP), the Alberta Centre for Advanced Microsystems and the provincial government’s Nano-Alberta team.
Some noteworthy western Canadian companies operating in the photonics space include: Carmanah Technologies (Victoria-based), GBL LED Lighting (Vancouver- based), Photon Control Inc. (Vancouver-based), Illumivision Inc. (Edmonton), Imaging Systems Group Inc. (Calgary), Immersive Media Corp. (Calgary) and Channel Systems Inc. (Pinawa, Manitoba).
45 Canadian Manufacturers and Exporters. < http://cme-mec.ca/pdf/Outlook2020.pdf>. Downloaded December 12, 2009. 46 Industry Canada.
Powersmart Technologies Due to its strengths in environmental technologies, there has been a rapid increase in the number of companies in Western Canada specializing in the manufacture of equipment that generates and distributes electrical power, as well as storage and transmission devices, accessories, and electronics for carrying electricity. The majority of clean technology companies in Western Canada are focused on energy generation and energy efficiency, with 89% of products and services having moved beyond the research stage to testing and refinement, or revenue generation48.
British Columbia has 50 establishments specializing in the manufacture of equipment that generates and distributes electrical power, which represents 8.4% of the Canadian total. Of these, 36 have employees, but the majority are relatively small, with 15 falling into the “micro” category (1-4 employees), 19 small (5-99), 2 medium (100-499) and no large players. Alberta leads B.C. with 59 companies (41 employers) but, as in B.C., the majority of companies are relatively small. Manitoba and Saskatchewan have very few companies, but Manitoba does have one significant establishment with more than 500 employees, compared to just 2 large players in all of Ontario49.
As for companies primarily engaged in manufacturing electrical power storage and transmission devices, as well as accessories for carrying current, B.C. leads Western Canada with 114 establishments (71 employers), or 17.8% of the Canadian total. Alberta has 57 in total (35 employers), Saskatchewan 8 (5 employers), and Manitoba 16 (9 employers). Most of these companies are small. B.C. has just 5 medium-sized companies and Saskatchewan and Manitoba have one each. There are no companies with 100 or more employees50 in Alberta.
In B.C., there are also 39 establishments involved in the manufacture of electric lighting equipment (22 employers), compared to 16 (11 employers) in Alberta, 3 (1 employer) in Manitoba, and none in Saskatchewan. There are no large companies (500+ employees) focused on this sub-category in Western Canada, and only one medium- sized establishment (100-499 employees) in B.C. All other companies operating in this space have fewer than 100 employees51.
Despite their small size, many western Canadian energy companies are known for innovative design and development of solutions that integrate electronics to make power more cost-effective and environmentally-friendly. Some noteworthy Power Smart technology companies in Western Canada are Delta-Q Technologies Corp., Energy Aware Technology Inc., Powertech Labs (a subsidiary of BC Hydro) and Manitoba Hydro.
48 See:
49 Industry Canada.
Computing Hardware Computing hardware comprises a number of sub-categories, including data storage, haptic interfaces, quantum computing, robotics, semiconductors (SoC) and sensors.
As with other high-technology clusters, the number of western Canadian companies specializing in computing hardware has increased dramatically over the past decade. The following table provides an overview of computing hardware establishments in selected provinces.
Table 4: Computing Hardware Establishments in Selected Provinces
Percent of Micro Small Medium (100- Large All Employers Canadian (1-4 Empl.) (5-99 Empl.) 499 Empl.) (500+ Empl.) Establishments Total British Columbia 243 94 134 13 2 428 13.2 Alberta 185 68 106 10 1 335 10.4 Saskatchewan 18 3 13 2 0 35 1.1 Manitoba 34 13 20 0 1 50 1.5 Ontario 953 310 548 79 16 1,574 48.7 Canadian Total 1,921 622 1,128 146 25 3,234 100
Source: Industry Canada. See: http://www.ic.gc.ca/cis-sic/cis-sic.nsf/IDE/cis-sic3351etbe.html.
Western Canada is home to a number of innovative computing hardware companies, including MacDonald, Dettwiler & Associates (MDA) (based in Richmond, B.C.); Spark Integration Technologies (Vancouver); Intelligent Robotics Corporation (IRC) (Vancouver, B.C.); D-Wave Systems (Burnaby, B.C.); Pacific Insight Electronics Corporation (Nelson, B.C.); Teradici Corporation (Burnaby, B.C.); Dynastream Innovations Inc. (Cochrane, Alberta); Control Innovations Inc. (Calgary, Alberta); Kayden Instruments (Calgary, Alberta); Scientific Instrumentation Ltd. (Saskatoon, Saskatchewan); International Road Dynamics (Saskatoon, Saskatchewan); SED Systems Ltd. (Saskatoon, Saskatchewan); Custom Circuits Ltd. (Regina, Saskatchewan); and SMT Research (Winnipeg, Manitoba).
End-of-life Electronic Equipment (E-waste) Processing Electronics contain a considerable amount of metals, including valuable precious metals like silver and gold and dangerous heavy metals like lead, cadmium and arsenic. Due to the accumulation of electronic waste (e-waste) in our technology- focused world, end-of-life management is increasingly part of the overall value chain for electronics.
Western Canada is a North American leader in e-waste recycling, primarily due to Teck Resources Ltd. and regional programs that are run as subsidiaries of Global Electric Electronic Processing (GEEP) Inc. in Alberta and Manitoba.
Research and Development Facilities: Our research shows that Western Canada is home to over 30 research facilities and groups that have generated numerous technological innovations and spin-off companies in the Value-added Electronics sector. Some key centres of research and innovation are as follows:
. Advanced Materials and Process Engineering Laboratory (AMPEL) – University of British Columbia: AMPEL is a multidisciplinary research centre designed to bring
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together top-level basic and applied research groups to work on leading-edge research of materials, devices and processing sciences. Key research areas include electro-optics, materials for sustainable energy, nanocomposites, nanomaterials, nanoscience and engineering, photonics and nanostructures, quantum coherence in nanostructures, and quantum materials. . 4D Labs – Simon Fraser University, British Columbia: 4D Labs is an applications- and science-driven research centre, providing multiple facilities with equipment for academic, industrial and government researchers. 4D Labs is focused on accelerating the design, development, demonstration and delivery of advanced materials and nanoscale devices, with the goal of making technologies faster, smaller and less expensive. Key research and development areas include biosystem and electronic integration, fuel cells, magnonics, molecular electronics, passive energy control systems, photonics and photovoltaics. . National Institute for Nanotechnology (NINT), Alberta: NINT is a multidisciplinary institution involving researchers in physics, chemistry, engineering, biology, informatics, pharmacy and medicine. Established in 2001 and operated as a partnership between the National Research Council and the University of Alberta, it is jointly funded by the Government of Canada, the Government of Alberta and the University of Alberta. Areas of research include devices and sensors, electron microscopy, engineered materials for energy, materials and interfacial chemistry, molecular scale devices, nano-life sciences, nanotechnology and supramolecular nanoscale assembly. . Quantum Computing Research Group – University of Calgary, Alberta: Quantum information has real potential for changing the way we process information. Quantum devices could, potentially, dramatically speed up data searches, easily solve computational problems that are hard to solve on existing devices such as supercomputers, generate true random numbers and unbreakable cryptographic keys (the latter for secure communication), increase communication capacity by dense packing of information, provide ultra-precise measurements, etc. In collaboration with other research groups and institutions, the Quantum Computing Research Group conducts research into computational aspects of quantum mechanical systems, including quantum algorithms, quantum complexity theory, quantum communication complexity, quantum information theory and quantum computer simulations of quantum mechanical systems. . Manitoba HVDC Research Centre Inc.: Located in Winnipeg, the Manitoba HVDC Research Centre was jointly established by Manitoba Hydro, Teshmont Consultants, Federal Pioneer and the University of Manitoba, in 1981, as a non- profit research company. The Research Centre has become a world leader in electric power system simulation, applied power systems analysis and related technologies.
HVDC develops and markets an array of products and services worldwide, including the renowned power system simulation software PSCAD® (PSCAD®/EMTDC®) and the real-time playback system RTPTM. The Centre employs 28 people full-time, the majority of whom are professional engineers and technology specialists.
Table 5: Key Electronics-related Research Facilities in Western Canada
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Key Value-added Electronics Research Facilities and Groups in Western Canada Province Group or Facility URL British Columbia Adaptive Optics Research Group – UVic http://www.engr.uvic.ca/~cbr/ Centre for Research in Electronic Materials (CREM) – SFU http://www.sfu.ca/chemistry/Research/materials/index.html Image Communication Lab – SFU http://www.ensc.sfu.ca/research/ Imager Laboratory for Graphics, Visualization and HCI – UBC http://www.cs.ubc.ca/labs/imager/ Integrated Systems Design Laboratory – UBC http://www.cs.ubc.ca/labs/isd Materials Science Group – SFU http://www.sfu.ca/chemistry/Research/materials/index.html Microsystems and Nanotechnology Research Group – UBC http://www.mina.ubc.ca/ Robotics and Control Laboratory – UBC http://rcl.ece.ubc.ca Robots and Mechanisms Laboratory – UVIC http://www.me.uvic.ca/~ram Signal, Image and Multimedia Processing Lab – UBC http://simpl.ece.ubc.ca/ System-on-a-Chip Research Group and Lab (SoC) – UBC http://soc.ece.ubc.ca TRI-University Meson Facility (TRIUMF) – Particle Accelerator www.triumf.ca/ Visualization and Human-Computer Interaction – UVIC N/A Alberta Calgary Centre for Innovative Technology http://www.ucalgary.ca/uofc/Others/ccit/ Calgary Energy Research Institute http://www.ceri.ca/ Cramb Group – University of Calgary N/A Electrical and Computing Engineering Research Facility (ECERF) – http://www.engineering.ualberta.ca/ece/ University of Alberta National Institute for Nanotechnology (NINT) – University of Alberta http://www.nint.ca/ Saskatchewan Canadian Light Source http://www.lightsource.ca High Performance Computing Centre – University of Saskatchewan http://hpc.usask.ca/
Centre for Studies in Energy & Environment – University of Regina http://csee.eenv.uregina.ca/ Institute for Computer and Information Technology – University of http://www.cs.usask.ca/icit/ Saskatchewan Saskatchewan Structural Sciences Centre http://www.usask.ca/sssc/ TR Labs http://www.trlabs.ca/ Manitoba Applied Electromagnetic Laboratory – University of Manitoba www.ece.umanitoba.ca/research/appliedem.html Atomic, Molecular and Optical Physics Program – University of http://www.physics.umanitoba.ca/research/programs/atomic.html Manitoba Industrial Technology Centre www.itc.mb.ca Institute of Industrial Mathematical Sciences – University of Manitoba http://www.iims.umanitoba.ca
Intelligent Sensing for Innovative Structures (ISIS) www.isiscanada.com Manitoba HVDC Research Centre http://www.hvdc.ca Scanning Probe Microscopy and Nanofabrication Laboratory – http://www.ece.umanitoba.ca/node/15 University of Manitoba TR Labs http://www.trlabs.ca/
Source: IE Market Research Corporation.
Leading Foreign Firms Invested in Western Canada: Western Canada has attracted some significant multinational companies in the Value- added Electronics sector, including Eastman Kodak, Dolby Laboratories, Schneider Electric and Seiko Epson. The majority of foreign firms are located in Greater Vancouver, and most created their presence through acquisitions of existing local companies.
3M: 3M Touch Systems is a diversified technology company producing solutions for a number of markets, including health care; display and graphics; and safety, security and protection services. 3M Touch Systems was formerly the B.C.-based Dynapro Technologies, which had 275 employees and was acquired by 3M’s Optical Systems division in 2000.
Bosch Group: The Bosch Group is a leading global supplier of technology and services in the areas of automotive and industrial technology, consumer goods and building technology. Bosch established a presence in Western Canada when it acquired Burnaby-based Extreme CCTV for C$93 million in 2007. Extreme CCTV specializes in the design, development and manufacture of advanced infrared illuminators and precision-engineered video surveillance products.
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Broadcom Corp.: Broadcom Corporation is a global leader in semiconductors for wired and wireless communications. Broadcom established itself in Western Canada by acquiring Vancouver-based HotHaus Technologies in 1999 for $280 million. HotHaus is a manufacturer of software for embedded digital signal processors that enables transmission of digital voice, fax and data packets over data networks, including the Internet.
Dolby Laboratories: In 2007, Dolby, a world leader in entertainment technologies, acquired BrightSide Technologies, a development-stage technology company focused on innovations in High Dynamic Range (HDR) image technology for the film, medical, geophysical and satellite imaging markets. Dolby Canada conducts imaging research and development in Vancouver.
Eastman Kodak Co.: Eastman Kodak is the world's foremost imaging innovator. Kodak Research Laboratories was established with its acquisition of Burnaby-based Creo Inc., which had a broad portfolio of digital graphics solutions.
Honeywell International Inc.: B.C.-based Honeywell Video Systems (formerly Silent Witness Enterprises), a division of Honeywell International, provides digital video and CCTV systems and components, including equipment for specialized applications and financial transaction verification systems.
Intel Corp.: Intel produces quad-core processors for desktop and mainstream servers for those in the healthcare industry. In 2003, Intel acquired West Bay Semiconductor, a Vancouver-based designer of high-speed and high-density networking chips that enable voice and data transport over synchronous optical networking/synchronous digital hierarchy-based optical networks.
Schneider Electric: Schneider Electric, a world leader in electrical distribution, industrial control and automation products, systems, services and supplies, established a significant presence in Western Canada with the acquisitions of Victoria-based Power Measurement, a designer and manufacturer of enterprise energy-intelligent systems, and Vancouver-based Xantrex Technology, a producer of advanced power electronic products and systems for the renewable and mobile power markets.
Seiko Epson Corporation: Seiko Epson specializes in digital image innovation devices. The company’s Vancouver Design Center is a global leader in the development of energy-saving LCD graphics controller chips for mobile communications and handheld computing devices.
Business Case Analysis: Niche Expertise in Specific Electronic Sub-segments Our analysis of the IBM-PLI data gives us a snapshot of the global competitiveness of the Electronics sector in Western Canada. On IBM-PLI’s Quality Score, Vancouver and Edmonton ranked 9th and 13th out of 20 global centres in the study. On the Profitability Index, Vancouver and Edmonton ranked 7th and 4th respectively.
As in the Aerospace sector, in terms of the different qualitative factors influencing this ranking, western Canadian centres show up competitively in areas such as their
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general business environment, infrastructure and living environments. However, they ranked relatively poorly in areas such as flexibility of labour and regulations, the presence of an industry cluster and local potential to recruit skilled staff.
We would like to make two points about the benchmarking data as they relate to Western Canada’s Value-added Electronics sector. First, what is significant about this ranking is that western Canadian centres rank significantly below other North American centres, particularly Toronto (ranked 2nd) and San Jose (ranked 4th) in quality rankings, and at par with Tier 2 Canadian and U.S. centres such as Ottawa, Waterloo and Raleigh-Durham. Second, on IBM-PLI’s Profitability Index, Edmonton does rank 4th, but Vancouver’s 7th-place ranking is not competitive with other comparable Tier 2 centres in either the U.S. or Canada. These Canadian and U.S. clusters have been receiving major investments from Canadian and international electronics companies.
Also, a look at the history of foreign investments in Western Canada’s Electronics sector shows that typically, most of the large investments have taken the shape of strategic acquisitions, by global players, of western Canadian companies with a specific product portfolio that adds value to the global portfolios of foreign companies. Most of the major investments described above have been strategic acquisitions, telling us that western Canadian capabilities are strong in niche electronics applications.
Industry Structure and Competitive Dynamics: Strong Enabling Technology Players in Western Canada, but Minimal Electronics Manufacturing Capability Our analysis of western Canadian capabilities in electronics shows that the industry has strong niche players that have historically developed enabling products and technologies used in various electronics industry segments worldwide. Companies such as MDA, Spark Integration Technologies, PMC-Sierra, D-Wave Systems, SED Systems and western Canadian divisions of 3M, Broadcom, Dolby and Eastman Kodak have developed a strong electronics product and services portfolio that is used worldwide by leading integrated device manufacturers (IDMs) and semiconductor assembly and test service (SATS) manufacturers. Newer western Canadian players in the photonics and Power Smart technology space are following the same route, developing niche enabling products that are used in their respective global value chains.
The two major global trends in electronics over the past decade have been: 1) The movement of back-end manufacturing capacity to the Asia-Pacific region and 2) Major cost reductions by IDMs and SATS worldwide. According to Gartner Research, during the past five years, electronics packaging, assembly and test capacity has increasingly shifted from IDMs (such as Intel, NEC Electronics, Toshiba, Resesas and Spanslon) to SATS (such as Powertech Technology Inc., Chipbond Technology, Amkor, Nakaya Microdevices, etc.)52. Gartner Research also reports that 15 of the 18 planned facilities that were scheduled to begin production between 2009 and 2010 are located in the Asia-Pacific region, including six in China53.
52 Gartner Research. Dataquest Insight. “Back-End Manufacturing Capacity Continues its Shift to Asia/Pacific”. September 29, 2009. Downloaded November 1, 2009. 53 ibid. 58
The movement of electronics production to the Asia-Pacific region is primarily driven by cost structures. Industry structure and global investments in electronics are largely driven by costs. Costs are going to be even more important in the short-to-medium term, given that the recent global recession has had a deeply negative impact on the electronics industry globally. According to Gartner Research, in 2008 and 2009, the semiconductor industry as a whole, including foundries and SATS companies, was expected to lose more than $22 billion54 (versus $10 billion lost in 2008). Manufacturing costs are the largest determinant of overall profitability in the Electronics sector, and can run as high as 80% of revenue in sub-sectors such as memory semiconductors, 50% in non-memory semiconductors and 70% in foundry and SATS operations55. Furthermore, within manufacturing costs, variable costs such as raw materials, chemicals and power are also moderately scalable, with economies-of-scale advantages accruing to facilities with high production and capacity utilization rates. The recent deep recession in the electronics industry has shown that companies are reluctant to cut labour costs in the short term, given that labour force investments represent considerable outlay for training and development. In contrast, electronics IDMs and SATS are more than happy to cut R&D spending during downturns, as a short-term cost-saving measure56.
All of these factors suggest to us that when it comes to core manufacturing capability, western Canadian centres such as Edmonton and Vancouver are competing directly with global centres such as Shanghai and Taipei. Without a major reduction in costs in Western Canada, we do not think that global IDMs or SATS would consider investing in western Canadian centres. Western Canadian centres also lack the deep cluster of suppliers necessary to attract semiconductor manufacturing capability.
Given the current negative impact of the global recession on the electronics industry, we think that past trends of cost reductions and strategic acquisitions of IP in this industry will continue to accelerate over the next two to five years. A study by Gartner Research showed that over the past three years (2006-2009), out of 191 companies that Gartner identified as private semiconductor companies, only 19 (or 10%) were established after 200657. While we think that this number is low on a global basis, it does point to the fact that the competitive dynamics of the industry have resulted in fewer global players at the top of the electronics value chain. It is these large players that have a great deal of power over smaller technology companies, including in Western Canada, and will have a key role to play in the funding and technology direction of electronics start-ups worldwide.
54 Gartner Research. Dataquest Insight. “Semiconductor Profitability Marred by Continuing Losses in Memory Sector” . July 21, 2009. Downloaded November 1, 2009. 55 ibid. 56 ibid. 57 Gartner Research. Dataquest Insight. “Private Semiconductor Company Directory, 2009”. November 27, 2009. Downloaded December 16, 2009.
59
Gartner’s study also found that approximately 25% of investment examples included funding from larger device and services vendors or OEMs. There are many examples of these types of investments in Western Canada, which we highlight above. Significantly, Gartner’s study found that for 2008 and 2009, the total disclosed amount invested in semiconductor companies was $756 million, with wired and wireless communication semiconductor companies, RFID, and power management companies attracting significant investments. Again, we think that this figure is low, but the trend of investments and strategic acquisitions in the communications sub-segment of the semiconductor industry portends well for foreign strategic acquisitions in Western Canada.
Photovoltaics: A Possible Game-changer for Western Canada In our view, the North American photovoltaics (PV) market is entering a growth phase, primarily driven by legislative changes in the United States. In 2009, the U.S. federal government passed the American Recovery and Reinvestment Act (2009), which provided important incentives for investments in many aspects of renewable energy generation. While the press in Canada was focused on the “Buy American” provisions affecting the construction and steel industry, the Act provided for a plethora of measures that have an impact on solar power, including renewable energy grants, manufacturing investment credits, loan guarantee programs, subsidized financing, renewable energy bonds and funding for smart grid technologies. In addition to this, in 2008, the U.S. Congress passed legislation to extend the 30% federal investment tax credit for solar installations to eight years and removed restrictions on utility projects and qualifying residential projects.
In addition to the above federal initiatives, there is a significant amount of state-level engagement in PV (particularly in California). The California Solar Initiative, the Multifamily Affordable Solar Housing (MASH) Program and the New Solar Homes Partnership now have combined multi-year multi-billion-dollar budgets.
The implications for Western Canadian firms of this new focus on PV in the U.S. could be significant. PV has a significantly different value chain structure, compared to the traditional semiconductor-focused electronics industry. Given that ingot/wafer production, cell production and module production, and systems integration have a wide variety of niche applications that do not require large capital investments in Fab plants, R&D spending, etc., we think that western Canadian firms in the PV industry are well-placed to take advantage of this recent shift in U.S. solar power policies.
Foreign Direct Investment Implications: Partnering with Downstream PV Customers Our analysis, above, of the western Canadian electronics industry shows that investments by foreign firms have been limited to strategic acquisitions of niche IP portfolios developed in Western Canada. We feel that this trend will continue into the future and any future investments by global players will be limited to strategic IP-related acquisitions or funding of IP development activity of start-ups by global players in areas such as nanotechnology.
As in the Aerospace sector, we feel that the western Canadian value-added electronics industry needs the presence of a large global IDM or a SATS company to anchor the
60 sector. However, current cost structures in Western Canada and the absence of major electronics OEMs in any of the electronics sub-segments (such as PCs, mobile devices, etc.) tell us that this is not likely to happen anytime soon.
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61
Resource-driven Competitive Sectors
Grain and Food Processing
62
Global Competitiveness Snapshot: Grain and Food Processing
IBM-PLI Quality Score Ranking IBM-PLI Profitability Index Ranking
Western Canadian Capabilities in Grain and Food Processing: Strong Grain, Beef and Biofuel Capabilities By any measure, Western Canada can be described as North America’s grain, beef and biofuel production centre. The total value of the Grain and Food Processing sectors (excluding crop production) in Alberta, Manitoba and Saskatchewan was over $16.6 billion in 200758, with Alberta accounting for $10.8 billion, Manitoba $3.6 billion and Saskatchewan $2.4 billion in sales in 2008 (no recent statistics were available for B.C.).
Alberta’s grain and food processing industry is dominated by meat products processing. In 2007, this sector accounted for $5.4 billion in sales (or about 33% of grain and food processing for the three western Canadian provinces). Other major sectors in Alberta were grain and oilseed milling ($1.1 billion in sales in 2007), and beverage manufacturing ($779.9 million in sales in 2007). The remaining $3.5 billion in sales consisted of animal food and feed, dairy products, bakery and tortilla products, snack foods, fruit and vegetable products, specialty foods, and other manufactured food products.
Manitoba’s $3.6-billion grain and food processing industry is dominated by significant operations in wheat, oat and feed milling, oilseed crushing, and flax milling operations. Manitoba is a leading global supplier of milled oats, and its grain and oilseed milling industry exported $642 million worth of milled products in 2008. Manitoba is home to a
58 Government of Alberta. Alberta Agriculture Statistics Yearbook 2007. Year in Review. < http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/All/sdd12270/$FILE/yearinreview.pdf>. p.1. Downloaded November 25, 2009. Government of Saskatchewan. Ministry of Agriculture. December 2008 Agricultural Statistics Fact Sheet.
63 number of leading global agri-food companies (many of them Canadian), including the Canadian Wheat Board, Cargill Limited, Intercontinental Exchange Inc., Bunge, Emerson Milling, Can-Oat Milling (a division of Viterra Inc.), Richardson International, Parrish and Heimbecker, Agricore United, and Keystone Grain.
Saskatchewan’s $2.3-billion grain and food processing industry includes more than 300 processors and over 6,100 employees, and is dominated by grain and oilseed milling, primarily for North American consumption. Saskatchewan also produces over $1 billion worth of beef annually, making it the second-largest producing province in Canada (after Alberta). In 2007, there were a total of 22,000 beef producers in the province, with a total of 1.5 million beef cows. There are ten provincially-inspected and seven federally-inspected beef processing plants in the province. The beef products from these facilities are sold in the retail, wholesale, hotel, restaurant and specialty markets.
A growing Grain and Food Processing sub-sector in Saskatchewan is biofuels. Saskatchewan is the largest source of agricultural biomass in Canada. Each year, on average, Saskatchewan's farmers produce 13 million tonnes of wheat, 4.6 million tonnes of canola and 5.3 million tonnes of barley. This makes Saskatchewan particularly well-suited for the production of biofuels, including ethanol, biodiesel and biogas. There are three ethanol plants currently operating in Saskatchewan. In total, these three plants produce 167 million litres of ethanol per year, with total capacity scheduled to increase to 1 billion litres of ethanol and 400 million litres of biodiesel by the end of 2010. A new market derived from the co-products of wheat-based ethanol production is emerging. Wheat Distillers' Dried Grains with Solubles (DDGS) is high in energy, protein and fibre. DDGS is suitable for consumption by various classes of livestock as both an energy and a protein supplement. Saskatchewan currently has 150,000 tonnes of wheat DDGS available for sale, with that number expected to climb to 300,000 tonnes with the opening of a new ethanol plant. The presence of Potash Corp. and Viterra Inc. (formerly Saskatchewan Wheat Pool) also provides Saskatchewan with a strong global presence in the grain and food processing industry.
Business Case Analysis: World-class Advantages Our analysis of IBM-PLI data shows that from both a profitability and quality point of view, Alberta, Manitoba and Saskatchewan offer superior advantages over competitor U.S. grain and food processing centres. Centres such as Brandon, Manitoba; Medicine Hat, Alberta; Red Deer, Alberta and Regina, Saskatchewan have a 10-15% cost advantage over important U.S. grain and food processing centres such as Wichita, Sioux Falls and Lubbock.
Key western Canadian advantages include ready access to raw materials (i.e., grains and livestock, etc.), low transportation and cold-chain costs, world class R&D facilities available in all three western Canadian provinces, and integration of the Agriculture sector into global value chains because of both the presence of large multinationals in Canada and the fact that Canadian firms such as the Canadian Wheat Board, Viterra Inc., Agricore United, etc. are themselves important global players in the grain and food processing industry.
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Industry Structure and Competitive Dynamics: Global Competitiveness vs. Local Competition It is interesting to note the structure of Canada’s food and grain processing industry, and the important role played by foreign investors in developing this sector in Canada.
In the Beef sector, for example, the processing of cattle in Western Canada has been dominated by two U.S. firms: Cargill Inc. and (until recently) Tyson Inc. Cargill Meat Solutions’ meat processing plant in High River, Alberta and XL Foods’ Lakeside plant in Brooks, Alberta (purchased in 2009 from IBP Tyson) together have a 95% market share of the Canadian finished cattle slaughter market. The majority of Canadian boxed beef is exported to the United States market, as a result of investments by both Cargill and Tyson.
In grain processing and handling as well, U.S.-based companies have had an important role to play in stimulating competitive developments in Canada and causing Canadian firms and co-operatives to compete globally. Faced with the high costs of refitting outdated mills in the United States, U.S. mills began purchasing Canadian mills to meet increasing demand for grain products in U.S. markets. Since 1990, milling companies based in the U.S. have invested substantially in the Canadian milling industry. In Saskatchewan, Grain Millers (Minnesota) acquired Popowich Milling in Yorkton in 2001, and in 2002, Michigan-based Dawn Food Products bought CPS Foods from the Wheat Pool, as well as Humboldt Flour Mills Ltd. In 2002, Agriculture and Agrifood Canada estimated that over 70% of Canada’s wheat milling capacity was controlled by U.S. interests59.
These developments and investments in production capacity by the likes of Cargill, Bunge, Archer Daniels Midland, Louis Dreyfus Mitsui Foods, etc. have prompted the restructuring of some important Canadian institutions, particularly the formation of Viterra from Agricore United and the Saskatchewan Wheat Pool.
A look at the history of FDI in Canada’s Agriculture sector shows that Canadian inward investment policies are fairly liberal, with important areas such as milling and food processing open to foreign interests. Furthermore, in areas such as seed and chemical distribution and genomics, Canadian investment policies have resulted in investments by players such as Monsanto, Bayer, Syngenta, CF Industries and Terra Industries, among many others. As pointed out above, the presence of these global players has prompted M&A activity among Canadian firms and resulted in the formation of homegrown western Canadian companies that are global agribusiness players. These include companies such as Potash Corp., Viterra Inc., the Canadian Wheat Board and XL Foods.
However, not everyone is supportive of these developments in Western Canada’s food and grain processing industries. There is a significant amount of trepidation among Canadian farmers and ranchers about the high level of concentration in these value-
59 Agriculture and Agri-food Canada. Bi-weekly Bulletin. July 19, 2002. Vol. 15. No.14. pp.2.
added sectors, which effectively reduces farm incomes60. There are also strong calls among primary producers for expansion of publicly-funded plant and animal breeding programs; the establishment of rights to save, reuse, exchange and sell seeds; changes in current variety registration and de-registration systems to stop the introduction of genetically modified seeds; and the establishment of clear competition rules preventing further consolidation in areas such as grain marketing and grain handling.
It is an increasingly tough challenge to balance the viability of agricultural sectors with the demands imposed by the global nature of agribusiness today, where scale is an important determinant of efficiency and global competitiveness. At one level, the responses have been uniquely Canadian: the formation of Viterra Inc. or the divestment of Potash Corp. has resulted in global operations that are substantially owned by Canadians. These and other western Canadian agribusiness companies compete effectively at the global level and source most of their inputs from Canadian sources. Nonetheless, it is tough to deny Western Canada’s farm crisis and the impact of forces of globalization on western Canadian farmers.
Foreign Direct Investment Implications: Targeting Smaller, but Higher-value-added Investments and International Markets Thus far, investments in Western Canada’s food and grain processing industry have been limited to large investments and M&As in primary processing areas such as grain milling, grain distribution or boxed beef production where operations in Western Canada are vertically integrated with, primarily, U.S. markets. It is clear that while opportunities for consolidation in grain milling, grain distribution, fertilizer production, etc. will always exist in the North American and global marketplace, real global growth opportunities are also available in areas such as functional foods, nutraceuticals, natural health products and biofuel production.
Foreign investors face a number of constraints that are unique to the Agriculture sector when seeking a location for higher-value-added investments. Key factors include:
1) Investment cycles: Given that agricultural production and distribution have a high fixed cost at all stages of the value chain, there is a strong incentive throughout the value chain to stabilize volumes processed, schedule flows, optimize capacity utilization and meet regulatory requirements. To do this, most processors and distributors have established facilities closer to consumers and will only look at investing in new plants and operations when past investments have come to the end of their life cycles. The new investments also mean not just a new plant, but a different supply chain where raw material and distribution to wholesalers/distributors/retailers must be as efficient as, or more efficient than, existing supply chains. 2) Technology and regulatory cycles: The vertical integration of Western Canada’s beef industry with that of the United States is an excellent example of how
60 See: National Farmers Union. “Canada’s Farm and Food Sectors, Competition and Competitiveness, and a Path Out of the Net Farm Income Swamp.” Report prepared by the National Farmers Union for the House of Commons Standing Committee on Agriculture. June 11, 2009. 66
technology and regulatory cycles can impact on foreign investment in an industry. In the 1990s, there were dramatic changes in traditional approaches to beef and pork production, with technology for disease control and regulatory changes mainly responsible for the vertical integration of all parts of the beef value chain, from cattle feed, cow-calf operations, stockers and backgrounding to finishing, packing and processing, etc. In other words, as technological and regulatory changes materialize (in areas such as packaged foods), foreign investors will seek locations that best meet their supply chain requirements. 3) Product cycles: A major constraint faced by foreign investors when seeking a location for higher-value-added investments in Western Canada (or any other location) is the perishability of many food products. This single fact has resulted in an entire supply chain and cold-chain industry that caters to the quick movement of agricultural raw material, from the farm, closer to the consumer’s plate, and limits the extent to which further processing can take place close to the farm. Therefore, it is not surprising, given Canada’s open investment climate, that most major investments in Western Canada have taken place in primary processing of agricultural commodities. Again, however, as product cycles are extended through the use of technology and regulations, secondary processing operations should materialize in Western Canada.
We therefore think that it will be important to encourage investments by niche food processors that focus on the production of end-consumer products and encourage these firms to establish plants and operations in Western Canada. Producers of functional foods, nutraceuticals and natural health products are particularly relevant here, because the value chain for functional foods and nutraceuticals differs from that of the standard food model. Three components are added to the value chain: research, technology development and product commercialization61. While these three components are also present in the value chain for conventional foods, they are generally considered insignificant. With functional foods and nutraceuticals, scientific research and technology development are often the driving force behind product development, and product commercialization takes on added significance.
Importantly, Western Canada has some great R&D facilities in the area of functional foods development. The Richardson Centre for Functional Foods and Nutraceuticals, which is part of the University of Manitoba, is the only centre of its kind dedicated to R&D of functional foods and nutraceuticals. Our research suggests that while other centres exist elsewhere, the Richardson Centre is the only one exclusively dedicated to the development of a market for this type of food category.
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61 Agriculture and Agri-Food Canada. “Potential Benefits of Functional Foods and Nutraceuticals to the Agri-Food Industry in Canada”.
Resource-driven Competitive Sectors
Industrial Chemicals
68
Global Competitiveness Snapshot: Industrial Chemicals
IBM-PLI Quality Score Ranking IBM-PLI Profitability Index Ranking
Western Canadian Capabilities in Industrial Chemicals: Strong Global Competitiveness Canada’s Industrial Chemicals sector is among the country’s largest in manufacturing, and is the country’s third-largest manufacturing exporter. Nationwide, the industry has 3,000 firms and employs approximately 78,000 people62. Nine of the Top 10 global industrial chemical companies have established production facilities in Canada63.
Industrial chemicals comprise a technology-driven industry employing an enormous number of highly-skilled knowledge workers who have expertise in a wide range of disciplines, including chemistry, computer science and mechanical and chemical engineering. Alberta is the largest petrochemical manufacturing region in the country, benefiting from abundant natural resources that support the manufacture of both petrochemicals and organic chemicals64.
Western Canada’s chemical industry encompasses the following sectors.
Petrochemicals Western Canada’s Petrochemicals sector is focused principally on ethylene production. Major foreign petrochemicals firms, such as Dow Chemical and NOVA, have a significant presence in Western Canada, and Alberta has four major ethylene plants, two of which are among the largest in the world65.
62 Invest in Canada Bureau.
Plastics This high-growth industry produces plastic products, as well as machinery and moulds. In Western Canada, plastics production is concentrated in B.C. and Alberta. This sector is closely integrated with other advanced manufacturing sectors, including aerospace, automotive, medical devices and telecommunications.
Two key western Canadian cities for plastics manufacturing are Edmonton and Vancouver. Edmonton and surrounding areas have seen a significant increase in economic growth as a result of investments in Alberta’s oil sands, which have benefited the local plastics industry. Vancouver, as Canada’s gateway to the Pacific, also hosts a strong industry cluster of plastic products firms, serving both local markets and fast-growing markets in the western U.S. and Asia.66
Other chemical products produced in Western Canada include pesticides and fertilizers, specialty and fine chemicals (dyes, lubricants, etc.), synthetic resins, soap and other cleaning compounds and toilet preparations, and paints and coatings for the architectural and industrial markets.
Employment Levels, Contribution to GDP and Key Foreign Investors Although there are numerous industrial chemicals establishments in Western Canada, they tend to be relatively small, with the majority employing fewer than 100 people. B.C. has only four medium-sized players (100-499 employees) and no large establishments with more than 500 employees67.
Alberta has an enormous number of industrial chemicals establishments. The province is home to 27 medium-sized enterprises and one large player in the basic chemicals space (Dow Chemicals, which employs about 630 people). As with B.C., the majority of medium- sized establishments are in the plastic and rubber industry, though there are also seven medium-sized enterprises in petrochemicals and four in pesticides and fertilizers 68.
Saskatchewan is home to fewer major establishments, although it does have one large company with more than 500 employees in the Petrochemicals sector. Manitoba also has fewer establishments overall, but has one large player in the Rubber and Plastics sector69.
Alberta Overall, Western Canada has the largest petrochemical manufacturing industry in Canada, with Edmonton supporting an integrated upgrading, refining and petrochemical complex and the country’s largest Petrochemical Manufacturing sector. Edmonton is home to two of the world’s largest petrochemical plants, as well as to smaller establishments employing more than 7,700 people that generated exports of $6.2 billion in 2007. With access to abundant natural gas stores and the potential to access even more supplies with the
66 ibid. p.1 67 Industry Canada.
refinement into petroleum of oil sands reserves, Edmonton is poised to become one of the world’s largest and most competitive chemical producing regions70.
Alberta is home to a world-class cluster of approximately 36 major chemical and petrochemical manufacturers, representing more than 50% of Canada’s petrochemical capacity. Nearly 35% of all Canadian basic chemicals and resins are produced in Alberta. The province’s industrial chemicals industry benefits from low-cost ethane and natural gas feedstocks, as well as the Alberta oil sands, which are the world’s second-largest known oil source71.
As the province’s largest manufacturing sector in terms of exports and revenues, Alberta’s chemical and petrochemical industries produce more than $9.5 billion worth of products each year, the majority of which are destined for the U.S., Asia and Mexico. Overall, chemical and petrochemical shipments comprised 44% of the province’s 2006 manufacturing shipments72. Some of Alberta’s more significant industrial chemicals companies are: . NOVA Chemicals: Headquartered in Calgary, NOVA specializes in ethylene, polyethylene and performance styrenic polymers, and has a joint venture with BP’s olefins and derivatives business (Innovene), a leading European marketer of styrenic polymers. NOVA employs 4,200 people and has manufacturing sites in various North and South American locations73, including the world’s largest ethylene production facility in Alberta74. . Agrium Inc.: With 9,000 employees, Calgary-based Agrium is a leading global wholesale producer and marketer of specialty fertilizers, with more than 500 retail farm centres. Agrium’s Advanced Technologies Division also develops materials for mining explosives, household products, pulp and paper, fibreboard, aluminum and other goods75. . Suncor Energy Inc.: Headquartered in Calgary and employing 5,600 people, Suncor pioneered the commercial development of Canada’s Athabasca oil sands. The company has established oil refineries across Canada and in Commerce City, Colorado, and is Canada’s largest producer of quality lubricant base stocks. Suncor also has four wind power farms and an ethanol facility. In 2009, Suncor merged with Petro-Canada76. . Syncrude Canada: Based in Fort McMurray, Syncrude is among the largest producers of crude oil from Canada’s oil sands, with the capacity to supply 15% of the nation’s petroleum requirements. The company provides 14,000 jobs directly and indirectly across Canada, and operates one of Western Canada’s largest private-sector R&D programs77.
70 Invest in Canada Bureau.
. Husky Energy: Headquartered in Calgary, Husky is one of Canada’s largest energy companies, with $28 billion in assets and more than 4,000 employees. Key activities include oil and natural gas exploration and production, and products include gasoline, aviation fuel, diesel, asphalt, ethanol and related goods and services78. . Nexen Chemicals: Employing 4,000 people worldwide, Calgary-based Nexen is a global energy leader, selling proprietary and third-party natural gas, crude oil, natural gas liquids, ethanol, and power, and offering customized electricity and natural gas solutions. Nexen also has an industrial chemicals business (the Canexus Income Fund), and plants in Brandon, Nanaimo and Vancouver79. . CWD Windows and Doors: Calgary-based CWD manufactures high-quality PVC, wood and aluminum-clad windows and door systems in its 300,000-square-foot manufacturing facility. CWD serves a global market and has distribution centres throughout Western Canada, employing 550 people. CWD offers green solutions such as lead-free PVC vinyl products, and CWD products are often incorporated within LEED®-certified buildings80. . Gienow Windows and Doors: Calgary-based Gienow supplies vinyl, wood and metal doors and windows to a global market. Employing more than 800 people, Gienow received both the Energy Star Manufacturer of the Year Award from Natural Resources Canada and the Power Smart Manufacturer of the Year Award from BC Hydro in 200781.
British Columbia Vancouver’s thriving chemical industry is supported by strong infrastructure, such as Port Metro Vancouver, which is a key conduit in connecting Vancouver to offshore chemical markets. The local industry, which supplies adhesives; antifreeze; clean-burning gasoline additives; formaldehyde; hard and soft plastics; paints; processing aids and agents; pulp, paper and water treatment agents; and minerals and vitamins for animal feed, generates more than $1 billion in annual shipments through Port Metro Vancouver82.
Major chemical companies in Greater Vancouver and other locations in B.C. include the following:
. METHANEX Corporation: Based in Vancouver and employing 792 people, METHANEX is the world’s largest supplier of methanol, an important ingredient in many industrial and consumer products, including windshield washer fluid, recyclable plastic bottles, plywood floors, paint, silicone sealants and synthetic fibres, as well as energy applications such as dimethyl ether, direct gasoline blending and biodiesel83.
78 See:
81 See:
. Jim Pattison Group: Headquartered in Vancouver, the Jim Pattison Group is a conglomeration of companies that provide a range of products and services. Its Packaging Group consists of Genpak, the premier independent supplier of disposable foodservice packaging in North America; Coroplast, the continent’s leading manufacturer of corrugated plastic sheet; and Montebello Packaging, a world-calibre manufacturer of collapsible aluminum and laminate tubes and ink markers84. . Teck Resources Ltd.: Teck is Canada’s largest diversified mining, mineral processing and metallurgical company. Headquartered in Vancouver with research centres in Trail, B.C., and Mississauga, Ontario, the company also has interests in several oil sands development assets. Teck produces a range of chemicals, recovered from the company’s core zinc and lead smelting operations85. . Cloverdale Paint: Headquartered in Surrey with industrial manufacturing operations in Winnipeg and a specialized industrial coatings factory in Edmonton, Cloverdale Paint has developed one of the industry’s largest selections of water-based and low-VOC (volatile organic compound) paints and coatings86. . InterWrap: Headquartered in Mission, InterWrap is a multinational industry leader in the field of coated woven products. InterWrap serves a wide variety of markets, such as wood packaging/lumber wrap, industrial packaging, large-format outdoor digital print media, converted fabrics and agricultural and construction products87.
Saskatchewan Saskatchewan is home to some major chemicals and fertilizer companies, and its plastics industry is well-established and has high growth potential. Small plastics clusters have arisen in Saskatoon and Regina/Moose Jaw, and the industry receives support from the Saskatchewan Research Council88. The most notable industrial chemical company is the Consumer’s Co-operative Refineries Limited (CCRL). Located in Regina, CCRL is the world’s first co-operatively owned refinery, supplying local co-operative associations with quality petroleum products. Since its inception, CCRL has experienced immense growth and now employs 640 full-time staff and an additional 1,000 employees and contractors during peak times89.
Manitoba Manitoba does not have as many larger players as do the other western provinces, but it is home to Winpak Ltd., a major manufacturer of high-quality packaging materials and innovative packaging machines that operates nine production facilities in Canada and the U.S., employs 300 people and serves a global customer base. The Winnipeg-based company’s products are used primarily for the protection of perishable foods and beverages, and in healthcare applications90.
84 See:
Leading Foreign Firms Invested in Western Canada Western Canada has attracted a large number of leading multinational industrial chemical firms, many of which have established a significant presence in more than one western province.
. BASF: Headquartered in Ludwigshafen, Germany, BASF is the world’s leading chemical company, with approximately 97,000 employees and a global customer and partner base that spans nearly all countries of the world. BASF Canada operates two plants in Alberta, at Blackie and Nisku91. . Royal Dutch Shell: Headquartered in The Hague, Netherlands, and London, U.K., Shell comprises a global group of energy and petrochemical companies with approximately 102,000 employees in more than 100 countries and territories. Calgary-based Shell Global Solutions, employing more than 5,000 people, licenses cutting-edge technologies and provides business and operational consulting services. Shell Canada Ltd. is also headquartered in Calgary92. . Dow Chemical Company: Headquartered in Midland, Michigan, Dow is a diversified chemical company serving a global customer base and employing 46,000 people worldwide, with 150 manufacturing sites in 35 countries, a portfolio of 3,300 products and annual sales of $57.4 billion in 2008. Dow’s western Canadian operations are headquartered in Fort Saskatchewan, and the company also has an establishment in Calgary93. . DuPont: Headquartered in Wilmington, Delaware, and operating in more than 70 countries, DuPont opened a market development and business office in Calgary in 2006, and acquired Vancouver-based Brookdale International Systems, a safety products company, in 200094. . ExxonMobil: Headquartered in Irving, Texas, ExxonMobile is the world’s largest publicly-traded oil and gas company, operating facilities and marketing products in most of the world’s countries, and exploring for oil and natural gas on six continents. ExxonMobil’s Imperial Oil is one of Canada’s largest corporations and has been a leading member of Canada’s petroleum industry for more than a century. Imperial Oil has numerous key production and development areas in Western Canada, and its Strathcona Refinery in northern Alberta, which has a daily rated capacity of 187,000 barrels of crude oil, employs about 430 people and 250 contractors. In addition to gasoline, diesel and aviation fuels, the refinery also produces propane, butane, lubricating oils, waxes, asphalts and heavy fuel oils95.
91 See:
Research and Development Facilities and Programs: Western Canada is home to a number of state-of-the-art research facilities and groups focused on industrial chemicals. Some key centres of research and innovation are as follows:
University of Alberta Lipid Utilization Research Program: Through the University of Alberta’s Lipid Utilization Research Program, the world’s largest team of lipid utilization scientists is engaged in breakthrough research into the use of oilseed crops and animal fats for bioplastics and specialty chemicals96.
Alberta Energy Research Institute (AERI): AERI promotes energy research, technology evaluation and technology transfer in areas including oil and gas, heavy oil and oil sands, coal, electricity, and renewable and alternative energy. AERI promotes consortia and builds networks by integrating the knowledge, skills and investment potential of industry players, federal and provincial governments, research providers, and universities97.
Alberta Ingenuity Centre for In Situ Energy (AICISE): AICISE brings together scientists, industry and other partners to develop more efficient, cost-effective and environmentally sustainable processes and practices for in situ recovery and upgrading of Alberta’s oil sands. The Centre was established in 2004. Shell International E&P/Shell Canada is the Centre’s founding industry partner, and ConocoPhillips, Nexen Inc., Repsol YPF and Total E&P Canada have become industry partners in AICISE. The Centre is housed in the Calgary Centre for Innovative Technology98.
University of Calgary Institute for Sustainable Energy, Environment and Economy (ISEEE): ISEEE was established in 2003, to provide leadership and coordination for developing and implementing energy- and environment-related initiatives at the university. ISEEE provides leadership for engaging world-class, interdisciplinary and mission-based research and education, with the goals of advancing sustainable energy, protecting the environment and the enhancing the economy99.
University of Calgary Consortium for Heavy Oil Research by University Scientists (CHORUS): The purpose of CHORUS is to develop and evaluate seismic methods for monitoring heavy oil recovery processes. This involves the processing of time-lapse seismic data and interpretation of the results. Benefits include real field data problem- solving for specific real reservoir data issues in heavy oil production. CHORUS sponsors include ConocoPhillips, Nexen Energy, Shell Canada and other major energy companies100.
96 See:
Alberta Research Council: The Alberta Research Council (ARC) is a not-for-profit applied research and development corporation that specializes in developing and commercializing technology, and converting early-stage ideas into marketable technology-focused products and services. ARC employs more than 600 engineers, scientists and other professional staff, and operates five facilities throughout the province, working in collaboration with the Government of Alberta to help fulfill Alberta’s innovation agenda, including in the Industrial Chemicals sector101.
University of Regina Petroleum Technology Research Centre (PTRC): PTRC, located in Regina’s Research Park, adjacent to the University of Regina campus, is a not-for-profit research and development organization that was founded in 1998 by Natural Resources Canada, Saskatchewan Industry and Resources, the Saskatchewan Research Council and the University of Regina, with support from the western Canadian oil and gas industry. PTRC’s activities include managing the world’s largest CO2 Storage Project (the Weyburn- Midale CO2 Project), managing potentially the world’s largest avoided CO2 emissions project (the JIVE Project), collaborating with SaskPower on the world’s first zero-emissions coal-fired power plant and advancing enhanced oil recovery technologies (EOR Research Program)102.
Saskatchewan Research Council (SRC): SRC is Saskatchewan’s leading provider of applied R&D and technology commercialization, including in the Industrial Chemicals sector. SRC has more than 350 staff and annual revenues of $41 million. SRC has five business divisions: Agriculture, Biotechnology and Food; Alternative Energy and Manufacturing; Energy; Environment and Forestry; and Mining and Minerals. The Council operates more than 110,000 square feet of bench-scale laboratories and pilot-scale facilities, and its 350 employees serve more than 1,900 clients and partners.
Business Case Analysis: Strong Value Propositions that will Benefit from Gateways Our analysis of IBM-PLI data shows that Edmonton is the only western Canadian location that appears on their Top-20 list of global industrial chemicals centres. Based on IBM-PLI’s quality and profitability scores, Edmonton is ranked 9th and 8th respectively. In terms of quality, it is significant to note that Edmonton is ranked broadly in the same category as some leading industrial chemicals centres, such as Yanbu-Madinah, São Paulo, Leipzig, etc., and above North American centres such as Sarnia and New Orleans. In terms of profitability scores, Edmonton’s ranking generally compares well to those of other Canadian centres and of leading U.S. industrial chemicals clusters such as Houston and New Orleans.
101 See:
Competitive advantages for Western Canada’s chemicals industry include a highly skilled workforce, relatively low tax rates, modern ethylene crackers, large and efficient extracting plants, some of the world’s largest derivative plants and a ready supply of competitively priced feedstock103. In addition, the development of offshore resources and northern natural gas pipelines in the near future is anticipated to further increase the profitability of the sector104.
Given that the value chains in the Industrial Chemicals sector run north-south, we undertook a further analysis of cost structures of western Canadian cities compared to other U.S. and Canadian industrial chemicals clusters based on KPMG’s Competitive Alternatives study. This analysis gives us a more detailed comparison of cost structures in Western Canada. We find that with the exception of Abbotsford and Vancouver, western Canadian cities do rank below the United States’ baseline of 100, and even Abbotsford and Vancouver score below most other cities outside of Western Canada in terms of operating costs (see Table 5 below)105. However, we note that cost advantages of western Canadian centres are not significant, ranging from 2.4% for Red Deer, Alberta to 5.2% for Brandon, Manitoba.
In addition to cost structures, Gateway infrastructure is important to the Industrial Chemical sector as basic or commodity chemicals derived from natural resources are often shipped in bulk (by rail or sea) to intermediaries and subsequently to their final destinations. We therefore think that relative to competitor cities in Midwestern United States, centres such as Edmonton and Vancouver provide a strong value proposition when one takes into account all-in costs such as those for transportation and logistics.
103 Invest in Canada Bureau.
2009.
104 ibid. 105 KPMG. Competitive Alternatives. 2008.
Table 6: Ranking of Operating Costs of Specialty Chemicals Manufacturing in Selected Cities
Specialty Chemicals Manufacturing: Operating Costs – Rankings for Selected Cities Location Country Index*
Abbotsford, BC Canada 100.3
Brandon, MB Canada 94.8
Calgary, AB Canada 99.9
Cheyenne, WY United States 97.3
Edmonton, AB Canada 99.5
Greenville-Spartanburg, SC United States 97.0
Halle Germany 113.5
Kelowna, BC Canada 99.4
Lexington, KY United States 96.9
Little Rock, AZ United States 96.3
Melbourne Australia 101.9
Moncton, NB Canada 96.5
Oklahoma City, OK United States 96.1
Plymouth, Devon United Kingdom 106.6
Red Deer, AB Canada 97.6
Regina, SK Canada 96.7
Reynosa, Tamaulipas Mexico 86.6
San Diego, CA United States 102.7
San Juan, PR United States 94.3
Saskatoon, SK Canada 96.5
Seattle, WA United States 102.3
Sherbrooke, QC Canada 96.1
Shreveport, LA United States 95.6
St. John’s, NL Canada 96.6
Toulouse France 104.2
Utrecht Netherlands 109
Vancouver, BC Canada 101.3
Vicenza Italy 107.6
Winnipeg, MB Canada 97.0
*Business costs are expressed as an index, with the United States being assigned the baseline index of 100.0.
Source: KPMG. Competitive Alternatives. 2008.
Industry Structure and Competitive Dynamics: Refining Capacity Constraints and Headwinds in the Value Chain In our view, the key issue facing the western Canadian Value-added Industrial Chemicals sector is refining capacity in Western Canada. This is because refining capacity is at the core of supply dynamics to the downstream industrial chemicals industry. Currently, total refining capacity in all of Western Canada is about 625,000 bpd106. Compare this to “refiners’ alley” on the U.S. Gulf Coast (Texas and Louisiana), which, at about 20.9 million bpd, has about half of the U.S. refining capacity. ExxonMobil’s Baytown refinery in Texas
106 These include the following facilities: Lloydminster (Husky Energy): 25,000 bpd; Regina (Consumers' Co-operative Refineries Limited [CCRL]): 100,000 bpd; Edmonton (Imperial Oil): 187,000 bpd; Scotford (Shell Canada), 100,000 bpd; Edmonton (Petro- Canada): 135,000 bpd; Burnaby (Chevron): 52,000 bpd; Prince George (Husky Energy): 12,000 bpd. 78
alone has a refining capacity of 557,000 bpd, or 1.27x the entire current refining capacity in Alberta.
Part of the problem in justifying more refineries in Alberta is cost. The IBM-PLI and KPMG studies highlighted above do establish some cost advantages in favour of western Canadian centres, but these cost advantages are nowhere close to justifying major investments in refinery capacity in Western Canada. Also, we have to remember that until 2008, there was a severe labour shortage in Alberta. Shell Canada's Scotford refinery, for example, required 9,000 construction workers at peak construction107. While there have been studies showing that an integrated refinery does provide Alberta with a significant cost advantage over U.S. Gulf Coast refiners108, it is clear that other value chain factors continue to be top of mind among global industrial chemicals and refinery companies when thinking about value addition in Western Canada.
In addition to relative costs and scale of building a major refinery, the current momentum of oil and gas investment in Western Canada is geared toward the export of crude. Pipelines operated by Enbridge and Kinder Morgan, along with the Rangeland, Milk River and Bow River, and Wascana pipelines all carry crude oil from Alberta and Saskatchewan to destinations west (Vancouver), east (Sarnia) and south (Montana, Wisconsin, Illinois, etc.). Furthermore, newer pipeline initiatives such the Northern Gateway proposal by Enbridge (which will see a 525,000-bpd pipeline from Alberta to the tidewater port at Kitimat) are designed to meet increasing demand from the Asia-Pacific market. Kinder Morgan Canada already runs a crude oil pipeline from Alberta to Burnaby, recently expanding it to carry 300,000 bpd with expectations that capacity in this pipeline could reach 700,000 bpd109. This, combined with initiatives at Port Metro Vancouver to expand Panamax and Aframax vessel capacity, tells us that industry momentum is toward exporting crude rather than refining the crude in Western Canada.
107 See: Todd Hirsch. “Upgrading Alberta.” Policy Options. April 7, 2007.
Foreign Direct Investment Implications: Targeting Mid-Sized Specialty Projects The industry structure and broad competitive dynamics of the Oil and Gas sector in Western Canada have important implications for the industrial chemicals industry in the West. First, the lack of refining scale means that likely investments by global and Canadian industrial chemicals companies will be limited to mid-sized specialty projects that may be add-ons to existing capacity. Indeed, this appears to be the modus operandi of existing industrial chemical operations in the West.
Second, while our view is not based on a detailed analysis of cost structures (this was not in the scope of this study), it appears that the cost “advantages” in the West highlighted in various marketing collateral are, in fact, not very large. Indeed, the 2-5% cost advantage highlighted in KPMG’s Competitive Alternatives Report for 2008 has disappeared since that report was published (in March 2008), due to the rise in the Canadian dollar!
Third, both oil sands property owners and western Canadian pipeline companies have invested tens of billions of dollars in the creation of a value chain that is entirely driven toward the export of crude. This tells us that any shift in this value chain toward servicing a western Canadian industrial chemicals industry will likely start with only marginal deviations from the existing business model, i.e., toward specialty chemicals and specialty plastics applications.
Finally, global refiners face major supply-demand imbalances in the wake of the global economic recession. In fact, in Canada alone as of January 2010, two refinery closures have been announced, resulting in a 10% reduction in the Canadian refining capacity. These are the Shell refinery in Montreal East and the Petro-Canada refinery in Oakville, Ontario. This trend towards deep cuts in refining capacity globally will likely continue in the short term, again telling us that the likely investments being considered by global industrial chemicals companies for Western Canada may be limited to niche applications.
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Gateway-driven Competitive Sectors
Transportation and Logistics
81
Global Competitiveness Snapshot: Transportation and Logistics
IBM-PLI Quality Score Ranking IBM-PLI Profitability Index Ranking
Western Canadian Capabilities in Transportation and Logistics: Where East Meets West Western Canada’s Pacific gateway ports, primarily Vancouver and Prince Rupert, together with inland corridors to/from the North American heartland, are increasingly providing solid value propositions to shippers and carriers on both sides of the Pacific. Of the three NAFTA countries, Canada is geographically closest to Asia, with western Canadian ports such as Prince Rupert and Vancouver offering major transit time advantages over competing U.S. ports. For example, Prince Rupert has a 68-hour transit time advantage over Los Angeles for product shipped from Shanghai to the continental United States, while Vancouver has a 32-hour advantage over Los Angeles110.
Port Metro Vancouver (PMV), Canada’s largest seaport, handled 114.6 million tonnes of cargo in 2008 valued at $75 billion111. In 2008, 63.8% of PMV’s traffic was bulk cargo and another 17.9% was breakbulk. In 2008, PMV processed 2.49 million Twenty-foot equivalent units (TEUs) in container traffic, making it the 5th-largest container port in North America (after Los Angeles/Long Beach, New York/New Jersey, Seattle/Tacoma and Savannah)112. In addition to its bulk, breakbulk and container services, PMV also handles cruise ship operations and provides the full range of marine, rail and land shipping and logistics options to its domestic and international customers.
The Port of Prince Rupert handles both international and domestic traffic, and is Western Canada’s second-largest cargo port. In 2008, Prince Rupert moved
110 InterVISTAS Consulting Inc. Canada’s Asia-Pacific Gateway & Corridor: A Strategic Context for Competitive Advantage. p.13. 111 Port Metro Vancouver. Statistics Overview 2008.
10.6 million tonnes of cargo and 0.18 million TEUs in container traffic, and is quickly becoming an important choice for logistics and transportation companies worldwide.
Both of these western Canadian ports are linked to the North American heartland with an extensive road and rail network. Vancouver is the only West Coast port in North America with service by three major transcontinental railways: Canadian National Railway Company (CN), Canadian Pacific Railway (CP), and Burlington Northern Santa Fe Railway (BNSF). Prince Rupert is served by CN’s high-capacity northern mainline and the Trans-Canada Yellowhead Highway, which provides good road connections to the continental United States.
In addition to sea and land infrastructure, western Canadian centres have excellent air services, with Vancouver International Airport being the second-largest international passenger gateway on the west coast of North America, offering over 500 non-stop flights and 142,000 seats monthly to destinations in Asia113. Calgary International Airport also has direct air freight services to Asia-Pacific destinations.
An important future gateway development in Western Canada is Manitoba’s CentrePort. Intended to take advantage of Winnipeg's proximity to the geographic centre of North America, CentrePort Canada has quickly obtained the potential to become an important integrated logistics centre with comprehensive distribution, warehousing and manufacturing facilities, replacing capacity in higher-cost centres such as Northern Illinois/Indiana.
Western Canada’s strong capability in transportation and logistics has resulted in significant investments by foreign firms in this sector. In terms of shipping lines making calls on western Canadian ports, all of the Top 10 global shipping lines have offices in Vancouver, including APM-Maersk, Mediterranean Shipping Company, CMA GDM Group, COSCO Container Ltd., NYK, APL, CSCL, Hanjin, etc. In addition, some of the world’s largest 3PL companies have offices and distribution centres throughout Western Canada. These include DHL Logistics, Kuehne + Nagel, DB Shenker, Geodis and UPS Supply Chain Solutions, among many others.
Business Case Analysis: Transit Times and Lower Shipping Costs are Important Advantages for Western Canada Our analysis of IBM-PLI data shows that from a cost and quality point of view, Vancouver and Prince Rupert offer superior advantages over competitor U.S. gateway ports. In terms of cost structures, western Canadian centres come out quite competitive, compared to other North American destinations. Analysis by IBM-PLI shows that centres such as Vancouver and Prince Rupert have a 15-20% all-in cost advantage over other West Coast cities (such as Los Angeles or Seattle/Tacoma). Key- value propositions include the lower cost of marine and surface transportation and shorter “to/from” transit times between the Asia-Pacific region and Midwest North American destinations.
113 InterVISTAS Consulting Inc. Canada’s Asia-Pacific Gateway & Corridor: A Strategic Context for Competitive Advantage. p.12. 83
Survey work undertaken by consulting firm Oliver Wyman and IEMR also suggests that the transit time advantages of western Canadian ports is significant. Oliver Wyman’s on-line survey of 118 shippers, receivers, 3PLs, freight forwarders and logistics contractors (commissioned by Transport Canada) found that Canadian ports (in isolation from supply chain factors) are “moderately attractive” because of relatively low costs, shorter transit times and higher labour stability and customer service114. IEMR’s survey (commissioned by Foreign Affairs and International Trade Canada) of 339 shippers, receivers, freight forwarders, 3PL, 4PL, logistics contractors and shipping lines found that Vancouver ranked 5th among the Top 10 ports in North America, with key advantages in competitively priced rail transit options, customer service and transit times across the supply chain115. We think that these factors, together with capacity and labour issues in the U.S., have resulted in increased throughput into western Canadian centres.
Industry Structure and Competitive Dynamics: Shipping Lines and Shippers/Receivers Distribution Centres are Key Drivers of Traffic and Downstream Investments While the value propositions for Canada’s Asia-Pacific Gateway and Corridors are clear, there are a number of key ingredients missing that would help ensure the competitive success of the overall gateway strategy going forward. First, as far as marine and air transport is concerned, shipping lines and carriers (and, to a certain extent, shippers/receivers) remain the primary decision makers in selecting ports and continue to expand their role across the value chain.
Overall, these shipping lines make routing decisions (which ultimately drive volumes passing through gateways and corridors) based on a trade-off between transit time and total supply chain costs. Here, it is significant to note that the survey work done by Oliver Wyman and IEMR among executives in the logistics and transportation industry has shown that while Vancouver and Prince Rupert remain competitive on a pure-cost basis, western Canadian routes are not considered competitive on a supply-chain basis by these key decision makers. This is because of poor rail competitiveness, the fact that the port is not close to the origin/destination for shippers/receivers and poor perceived reliability in areas such as security. These are important factors, some of which can be influenced through marketing (such as security at the border), some through policy action (such as rail competitiveness).
A second factor that will continue to impact on the competitive success of western Canadian gateways and corridors is their ability to attract distribution centres of major North American retailers. These centres (such as those of Wal-Mart, Best Buy, IKEA, etc.) are already established at competitor ports offering clear advantages in terms of either distance to origin/destination or reduced distribution costs experienced by retailers.
Take the port of Savannah as an example. In 1975, Savannah was ranked the 14th- largest port in the U.S., and between 1975 and 2008 has grown at a CAGR of 12.1%. Savannah’s success is not based on a favourable location close to destination/origin or on a large population (Savannah has a population of 130,000 people and Georgia has
114 Oliver Wyman. Criteria of Choice. North American Heartland Infrastructure Requirements. February, 2009. 115 IEMR. Survey of U.S. Importers’ and Exporters’ Perceptions of Canada’s Asia Pacific Gateway. February, 2009. 84
a total population of 9.5 million), but on its strategy of attracting the distribution centres of major U.S. big box retailers. It is also the first major port of call on the East Coast for many all-water services from Asia, and has excellent intermodal rail connections to key distribution centres such as Dallas and Atlanta116.
The Georgia Ports Authority embarked on a strategy to attract big box retailers’ distribution centres in Savannah in about the year 2000. While Home Depot and Pier 1 Imports already operated facilities there, site selection decisions for distribution centre operators are driven by unique considerations of land availability, labour, local and state incentives, and port proximity. The Georgia Ports Authority set up a different department that worked with regional development authorities, private landowners, realtors and transportation firms to assemble a compelling argument for a location close to Savannah117. As a result, Savannah has been able to attract continental distribution centres of household names such as Wal-Mart, Bass Pro Shops, Kmart- Sears, Heineken, Best Buy, Target, IKEA, Hasbro, Petco, Dorel and Avon.
This strategy was underpinned by infrastructure investments. Savannah is the only U.S. East Coast port with two Class 1 railroads operating on-terminal. In addition, it is the only port in the U.S. offering two Intermodal Container Transfer Facilities: a clear reflection of how important intermodal rail traffic has become for the movement of goods118.
Competitive Dynamics: Demand Dynamics Shifting to Post-panamax vessels and supply dynamics see competing ports investing major resources There are a number of key demand- and supply- side trends that will have an impact on the success of Western Canada’s Transportation and Logistics sector. On the demand side, it is estimated that post-Panamax vessels (i.e., with a capacity greater than 5,000 TEUs) will be an increasingly important part of the global cargo fleet. Because of the size of these vessels, shipping lines operating them will be making fewer ports of call, which means that competition among the top ports in North America is going to heat up. Post-Panamax vessels also result in a spike in logistics needs over a shorter period of time, and shipping lines will only call on those ports that have the capacity to move goods to staging areas inland to minimize port wait times.
We think that this post-Panamax vessel trend will be generally beneficial to both PMV and Prince Rupert. PMV’s and Prince Rupert’s deep-sea terminals offer virtually no draft restrictions, super post-Panamax capacity and extensive on-dock rail facilities, although a trend towards inland terminals and staging areas could have a net negative impact on Vancouver in the short term.
Another demand-side trend related to the introduction of larger container ships is the fact that shipping lines are increasingly being involved in port operations and, indeed, across the entire supply chain. Multi-decade port lease agreements are now quite common in the industry, and work well for both shipping lines and port authorities since
116 Armbruster, W. and Powers, J. “Georgia’s Winning Strategy”, Shipping Digest On-line. January 19, 2009.
they allow for certainty in revenue and traffic flows through any given port. This, together with the formation of alliances (such as the Grand Alliance, the New World Alliance and the CKYH Alliance) among global shipping lines, means that shipping lines are using ports of choice that give them better visibility of arrival and transit times, and better control over the use of their shipping assets across their supply chains. The increasing presence of shipping lines in terminal operations means that the “common use” model of Vancouver and Prince Rupert does not afford the larger carriers and carrier alliances the type of certainty they need to dedicate resources to making port calls in PMV and Prince Rupert. On the other hand, competition among terminal operators does result in better shipment costs.
On the supply side, infrastructure developments at competitor ports and the Panama Canal will have a definite impact on the use of PMV and Prince Rupert. All of the major ports along the west coast of North America (including Mexican ports) and major east- coast ports are undertaking investments in port infrastructures, including new container terminal capacity, increasing harbour depth, developing logistics centres and developing on-dock rail infrastructure.
For example, estimated investment on the Punta Colonet project in Mexico is $5 billion and will result in a brand new port with a 2-million-TEU capacity, tripling to 6 million TEU by 2015. The Punta Colonet port will cover an area of 70 km2, making it as large as Los Angeles and Long Beach combined. The projected multimodal maritime centre would make Punta Colonet the largest port in Mexico and the third-largest in the world, after Singapore and Hong Kong. The project alone will require a population base of 200,000 people, a new power plant, a desalination plant, a 300-km rail line from the Port to the United States border and an intermodal facility. What is significant about this project for both PMV and Prince Rupert is that labour costs and labour regulations in Mexico will allow for significant cost savings for carriers wanting to divert traffic away from the congested Los Angeles/Long Beach/Oakland gateways.
Foreign Direct Investment Implications: Lumpy Investment Decisions and Lack of Awareness To a large extent, the growth and development of the Transportation and Logistics sector in Western Canada will depend on a wide range of actions, undertaken by various levels of government that will determine the extent to which foreign investments in transportation and logistics happen in Western Canada. A discussion of these implications has been very well covered in other reports, as part of the Government of Canada’s APGCI initiative119.
These policy options range from governance of port authorities, labour regulations, terminal operations and railway regulations to regulations surrounding the establishment of distribution centres, grain containerization, etc. Gateway development will also depend heavily on international air agreements that allow international air carriers to fly into Canadian airports, international cabotage and the development of integrated air distribution hubs such as Centre Port.
119 See Asia Pacific Gateway and Corridor Initiative (APGCI) Report and Recommendations to The Honourable David Emerson from Jeff Burghardt, Arther DeFehr, and T. Richard Turner. 86
We view two sets of constraints as being important considerations when it comes to FDI potential. First, logistics investments are very high fixed-cost investments. This means that the location of a distribution site or the decision to change the port of call to a western Canadian port will depend on expansion plans of big box retailers or shipping lines, and will be determined by factors such as land availability, labour, incentives, proximity to origin and destination, and congestion at existing port facilities. Factors such as supply chain reliability, rail transit costs, etc. can also have an impact on the decision to invest in a distribution facility. As such, these decisions are not taken lightly and are only “once-in-a-decade” or “once-in-a-generation” investment decisions. The natural inclination of large companies is to undertake capital expenditures near their existing facilities.
Second, we think that more resources need to be put into place to aggressively market western Canadian gateways to U.S. transportation and logistics executives. In a survey conducted by IEMR for Foreign Affairs and International Trade Canada, we found that 40% to 47% of U.S. executives in the transportation and logistics industry are not aware of Canadian-government-or private-sector-led infrastructure and transportation initiatives.
As we point out in the Savannah Case Study below, an important part of a successful gateway strategy is the type of incentives on offer to investors. In the case of Savannah, distribution centres receive a special job tax credit, a port tax credit bonus and investment tax credits for port facilities, in addition to various tax abatement and exemption programs. These, together with a well-thought-out strategy, have resulted in substantial growth and investments by national distribution centres in Savannah.
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Gateway-driven Competitive Sectors
Trade-related Financial and Business Services
88
Global Competitiveness Snapshot: Trade-related Financial and Business Services
IBM-PLI Quality Score Ranking IBM-PLI Profitability Index Ranking
Western Canada’s Capabilities in Trade-related Financial and Business Services: A Solid Niche Industry Base Western Canada’s financial and business services cluster is growing rapidly as the region develops as a global commercial gateway and the volume of international transactions increases. Western Canada’s strength in the sector is its solid industry base of financial and business service firms providing a wide range of services. They include banks, insurance companies, credit unions, trust and loan companies, securities dealers, finance and accounting firms, mutual fund companies, brokers, currency trading and hedging companies, commodity traders, business process outsourcing providers, management service companies and administrative service providers. All of Western Canada’s major cities, such as Vancouver, Calgary, Winnipeg and Saskatoon, have large clusters of these firms. Vancouver, for instance, has 11,900 banking and insurance firms: a significantly higher number, compared to San Francisco, Houston or Boston120.
Western Canada’s trade-related Financial and Business Services sector enjoys several significant advantages relative to other competitor destinations. The increasing flow of goods through Vancouver into the North American heartland makes this city an ideal location to establish and grow trade-related financial and business services. Indeed, the history of the development of major financial centres such as New York, Hong Kong and Singapore shows that these cities were, at first, gateways that then developed capital and foreign exchange markets to support their gateway trade activities.
120 Invest in Canada Bureau.
Employment Levels, Contribution to GDP and Key Foreign Investors The Finance and Insurance sector employs a significant proportion of western Canadians. In 2008, approximately 323,900 people in Western Canada were employed in the finance, insurance, real estate and leasing industry121.
British Columbia At the provincial level, British Columbia had 47% of western Canadian employment in the Finance, Insurance, Real Estate and Leasing sector, with 152,300 employees in this sector in November 2009122. Of course, these broad categories capture a wide variety of workers performing diverse tasks in the Financial and Business Services sector. For example, BC Stats reports that in 2008, there were 50,000 employees working in banking institutions; 30,400 employees in insurance carriers, funds and other financial vehicles; 15,300 employees in securities and commodity contracts; 12,400 employees in business services; and 7,500 workers in management of enterprises and other administrative services in 2008123. In terms of revenues, British Columbia recorded operating revenues of $1.59 billion in accounting and bookkeeping, $628 million in employment services, $2.97 billion in engineering services and $478 billion in advertising services in 2007124.
Leveraging its geographical advantage, Vancouver has become an international hub for financial services. There are at least 30 foreign banks and 15 international financial institutions in Vancouver125, and all of the major Canadian banks – the Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce – have a strong presence in the province. HSBC, the world's largest banking group, also has its Canadian headquarters in Vancouver. The credit union system is quite developed in British Columbia, and there are 48 credit unions and 51 trust companies authorized by the B.C. Financial Institutions Commission126. Leading insurance companies, such as Manulife Financial, also have large-scale operations in British Columbia, and the province attracts a large amount of venture capital investment. In 2008, B.C. attracted $259.8 million in venture capital funding, or 18.9% of total venture capital funding in Canada127.
As a result of both its status as a gateway and its connections with the Asia-Pacific region, Vancouver has attracted several global financial services firms. These include the Bank of China, the Bank of Tokyo-Mitsubishi UFJ, JP Morgan Asset Management, Merrill Lynch Inc., the Bank of America, Citibank and the Korea Exchange Bank of Canada.
121 Statistics Canada.
Alberta Alberta had 106,000 employees in the finance and insurance category in November 2009128. Alberta’s Financial Services sector has approximately 5,100 firms, including 12 of the world’s top 20 investment banks and Alberta Investment Management Corporation, one of Canada’s largest institutional investment fund managers129. The business services industry in Alberta is also large, with over 800 business services companies in Calgary alone130. Calgary is known as one of the fastest-growing economic regions in North America, as well as a key hub in energy finance, and the city’s Financial Support Services sector employs about 22,700 people131. In 2007, Alberta had operating revenues of $1.68 billion in accounting and bookkeeping, $1.49 billion in employment services, $5.04 billion in engineering services and $390 million in advertising services132.
Manitoba Manitoba had 36,700 employees providing services in the Finance and Insurance sector in November 2009133. Manitoba’s financial and business services companies are concentrated in Winnipeg, where approximately 25,000 workers are directly employed in the Finance, Insurance and Real Estate sector134, and more than 10,600 workers are employed in the Business Services sector135. Leading firms in the industry that have headquarters in Winnipeg include Great-West Lifeco Inc., IGM Financial Inc., Boyd Group Income Fund, The Wawanesa Mutual Insurance Company and Assiniboine Credit Union Ltd.
Manitoba’s Financial Services sector alone contributes close to $4 billion to the province’s GDP136. The 2007 operating revenues in some key categories include $326 million in accounting and bookkeeping, $61.1 million in employment services, $187 million in engineering services and $79.2 million in advertising services137.
Existing Government Programs At the provincial level, there are a number of incentive programs available to financial services companies establishing operations in western Canadian provinces. The Government of British Columbia offers a 30% tax credit to investors who provide venture capital to eligible small firms engaged in R&D in the province. In addition, British Columbia’s International Financial Activities Act (IFAA) is of particular interest to financial services firms. The International Financial Activities program gives a refund of up to 100%
128 Statistics Canada.
of provincial corporate income taxes to eligible firms engaging in international financial activities from British Columbia138, and it has already contributed to the provincial economy significantly. MMK Consulting finds that, because of the IFAA, British Columbia’s GDP increased by $0.5-$0.75 billion (which makes up 0.26-0.39% of GDP) and 5,000 to 8,000 new jobs were created in 2007. In addition, the Government of British Columbia offers IFA specialists a refund of up to 75% of B.C. income tax paid on net employment income earned from eligible international financial activities139.
In Saskatchewan, investors in shares of a provincially registered Labour-Sponsored Venture Capital Corporation (LSVCC) are eligible for a provincial tax credit equal to 20% of the cost of their investment in addition to a 15% federal tax credit on the first $5,000 of investment per year. Manitoba also promotes innovation by providing a 20% R&D tax credit to qualifying scientific research and development expenditures140.
Business Case Analysis: Cultural Connections will be Important Our analysis of IBM-PLI data shows that in terms of quality relevant to the Financial Services sector, western Canadian centres do not compare favourably with leading European and North American financial services centres. Vancouver ranked 12th on IBM- PLI’s quality score, significantly behind leading centres such as London, New York, Chicago, Toronto and Montreal. At the same time, however, we note that Vancouver does rank competitively with second-tier financial centres such as Raleigh-Durham, Jacksonville and Boston on the IBM-PLI quality score. Key weaknesses of western Canadian centres for the Financial Services sector were the relative lack of an industry cluster, a relative lack of potential to recruit skilled staff and real estate constraints. Key strengths were the availability of language skills and superior living environments in western Canadian centres.
On IBM-PLI’s Profitability Index, western Canadian centres (especially Winnipeg) provide a compelling value proposition. For example, Winnipeg has an 8.6% cost advantage over Jacksonville and a 13% cost advantage over Raleigh-Durham. However, we note that centres such as Vancouver and Calgary do not have a major cost advantage over U.S. centres such as Jacksonville and Raleigh-Durham, which have attracted recent back-office investments by U.S. financial institutions.
One key advantage in favour of Vancouver over other centres in North America is the large Asian population in the city. While this factor may not have a quantifiable impact on the decision to invest by foreign investors, we think that having a large population base that speaks the same language as do clients in the Asia-Pacific region cannot hurt the prospects for the development of this sector in Vancouver. In fact, it is probably the main reason why HSBC established its Canadian HQ in the city and undertakes significant international commercial and wealth management business from its base in Vancouver. Also, several Asia-Pacific banks have chosen to establish retail locations in Canada only in Vancouver, because of the large Asian immigrant populations in the city.
138 The International Financial Centre British Columbia.
We think that as the Asia-Pacific region continues to grow, there will be increasing demand for transactions related to international trade. Key investors will include banks and financial institutions based in the Asia-Pacific region, and we already see the beginnings of these investments in Vancouver (on the retail side). Further, attendant business services such as legal services, accounting services, etc. will also see growth as Vancouver becomes a relatively important gateway city compared to competitors on the U.S. West Coast.
Industry Structure and Competitive Dynamics: Opportunities in Gateway-related Growth Canada’s banking and financial services industry is regulated at the federal level. Part of the regulatory requirement is that Schedule II and III banks have certain operating and ownership restrictions that act as a deterrent to large-scale investments by foreign banks in mainline businesses such as retail banking. Under Bill C-8 (2001), institutions with over $5 billion in equity cannot have any person or entity owning more than 20% of the voting shares or 30% of the non-voting shares (effectively eliminating foreign bank entry into Canada on a large scale). Further, Bill C-8 stipulates that institutions with equity of $1 billion to $5 billion are subject to having a public float of 35% of voting shares (which precludes financial institutions that do not want to enter public markets in Canada). Only institutions with less than $1 billion in equity have no ownership restrictions.
These ownership restrictions and the dominant market share of Canada’s “Big 5” banks in retail and commercial banking markets will remain in effect for the foreseeable future. Consequently, most foreign banks in Canada have chosen to focus on specific niche segments of the Canadian market, in areas such as trade finance, credit card issuance, wealth management and institutional and commercial leasing and lending. Where there are retail operations, these are mainly focused in a handful of cities in Canada, where specific retail niches can be developed for immigrant communities.
We generally do not view these ownership restrictions as being too onerous as far as running sizable international banking operations is concerned. Additional investments by financial institutions based out of the Asia-Pacific region will likely begin to exploit specific niche segments, such as retail banking, mobile banking and/or wealth management for specific immigrant populations. Over time, these will mature to international commercial relationships. As such, existing ownership limitations of $1 billion in equity is high enough that niche operations continue to be established in Western Canada. Indeed, several Asian financial institutions have established retail operations in Western Canada.
Foreign Direct Investment Implications: Targeting Niche Trade-related Investments Given this industry structure, we think that there is a real opportunity to attract foreign banks to undertake niche trade-related financial and business services activities in Western Canada. Leveraging the growth of representative offices by shipping lines, transportation and logistics companies, and 3PL and 4PL service providers, Vancouver provides the natural location for the processing of financial instruments such as pre- shipment financing, PO financing, Letters of Credit, Buyer Financing, Documentary
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Collections, Buyer/Supplier credit, post-shipment financing, inventory financing, invoice and A/R factoring, etc.
This is because, despite having a cost structure that is not more competitive than that of other Tier 2 centres (particularly Jacksonville or Raleigh-Durham), Vancouver does have a large Asian population that will increasingly be needed to process transactions with counterparts in the Asia-Pacific region. Also, Vancouver’s position on the west coast gives it a two- to three-hour window of opportunity to work with Asia-Pacific partners, which does not exist for Eastern or Mountain Time Zone competitors.
The experience of HSBC over the past two decades in Western Canada is telling. HSBC chose to establish operations in the region first, because it saw an international commercial opportunity there. However, the bank only began to grow its operations after it acquired the assets of a failed financial institution, the Bank of British Columbia, in 1986. The Bank of British Columbia had a strong retail presence in the B.C. market. By acquiring it, HSBC gained 41 branches in British Columbia and Alberta, and went from being Canada’s 20th-largest to its 9th-largest bank. HSBC then leveraged its strong retail presence in the Asia-Pacific region to service its retail clients in Western Canada. It then chose to grow its commercial and international operations in the region.
We think that the potential entry of other financial institutions will be based on a similar model. They will be compelled to invest in Western Canada first, because of its large immigrant population, and then to attract key international commercial accounts. As such, the key to investment attraction for western Canadian policymakers is to ensure that these institutions establish their Canadian or North American regional headquarters in Western Canada, and that the business case for establishing back- office operations in Western Canada is clearly articulated to investors.
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International Best Practices: Picking Winners or Shifting
Competitive Advantage?
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Attracting FDI is big business. According to the United Nations Conference on Trade and Development (UNCTAD), global FDI flows in 2008 were US$1.7 trillion, with global FDI stock amounting to US$14.9 trillion141. In 2008, Canada attracted US$44.7 billion in FDI investment, and the total stock of FDI in Canada for that year was US$412.3 billion142.
A perennial question facing policy makers in all jurisdictions is what set of tools, strategies, and policies need to be in place in order to encourage the growth and development of high-value-added economic activity in their jurisdictions. One of the objectives of this project was to identify best practices in international jurisdictions that show how government and private sectors work together through economic programs, regulations and/or policies to attract FDI and to see which of these strategies could be applied within the western Canadian context.
It should be noted that, in order to attract foreign investors, jurisdictions across the world have put in place programs and policies to improve enabling environments in host countries. For example, countries have employed low corporate tax rates, implemented preferential tariff regimes, reduced business transaction costs (such as permits) and increased investments in infrastructure and R&D measures – all in an effort to attract increasingly mobile foreign investors. Some of these measures have been sector-specific (such as the Auto sector or the High-tech sector), while others have been region-specific (such as Free Trade Zones or special economic zones).
While many of these policies and strategies rely on the participation of foreign investors, they do not favour foreign firms explicitly, especially in the context of most developed countries such as Canada. To the extent that such policies and programs are not discriminatory in favour of foreign investors either de facto or de jure, we classify such as “low-risk” policies, since they are well within the policy framework used by governments around the world and are within existing international trade and investment agreements.
Explicit FDI incentives and programs come in two basic forms: rules-based or specific approaches143. Rules-based FDI attraction programs rely on investors’ nationalities to provide investment subsidies applicable to foreign investors, and are generally stipulated in a country’s tax code. For example, Ireland’s tax code allows a reduced
141 UNCTAD. FDI Stat®.
Specific approaches use a wide variety of incentives that are specifically negotiated with foreign investors and can range from grants and soft loans, real estate incentives and employment subsidies to specific tax and regulatory derogations and exceptions, and R&D support specific to a foreign investor. We term these specific approaches “high-risk” policies, since they may not only result in regime competition, but have the potential to drive up the economic costs of attracting FDI beyond reasonable levels.
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Table 7: Risk Profile of FDI Attraction Policies and Programs
Risk Profile of FDI Level of Discrimination Attraction Policies toward Foreign Investors Examples and Programs Low-risk policies Low: Low-risk policies do not General policies and programs to enhance business target foreign investors environments, such as infrastructure investments, specifically. Although the de R&D spending, reductions in corporate tax rates, facto beneficiaries may be streamlining red tape, etc. foreign investors, especially in a developing-country context, Sector-specific incentives for particular sectors, such most low-risk policies and as R&D spending in the Auto sector, education programs in countries such as spending on sector-specific training, etc. Canada allow domestic companies to benefit just as Region-specific incentives for particular regions, such much as do foreign direct as the establishment of Free Trade Zones or special investors. economic zones in which tax abatements and credits for export activity are provided.
We also consider marketing and investment attraction missions and trips as low-risk.
Medium-risk policies Medium: Medium-risk policies Specific tax measures, such as tax credits and do not target foreign investors deductions on earned income, for specific activities de jure, but given the historical such as trading income in manufacturing or income context, foreign direct earned from specific activities. investors are major beneficiaries. Specific marketing and business development efforts, where subsidies or incentives are given to domestic and foreign companies to collaborate on R&D or business expansion projects.
We would classify B.C.’s International Financial Activities Act as a medium-risk FDI attraction policy, since it provides tax credits on income earned from “international” activities defined specifically under the Act. While the Act does not discriminate in favour of foreign direct investors, it has the effect of attracting foreign investors.
High-risk policies High: High-risk policies are Specific incentives negotiated with a particular specifically directed at domestic investor. These include grants and loans, real estate and/or foreign direct investors. incentives (such as free land), employment subsidies, They can and do result in specific tax and regulatory derogations such as non- regime competition between payment of municipal property taxes or electricity jurisdictions, both within a surcharges, etc. country and between countries
Source: OECD, IE Market Research Corporation.
This spectrum of low-, medium- and high-risk strategies is important to keep in mind when considering the type of FDI attraction strategies needed to enhance value-added activity in any given cluster. Clearly, low-risk strategies are not enough on their own. The toolkit must and does contain medium- and high-risk strategies to attract both domestic and foreign investments.
The downside of medium- and high-risk policies and programs, of course, is that they can quickly lead to the slippery slope of competition between jurisdictions, also referred to “beggar thy neighbour” or “investment poaching”144.
We also need to keep in mind that Canadian policy regarding the offering of incentives to lure business investments, in competition with other jurisdictions within Canada, is governed by the Agreement on Internal Trade (AIT) and legislation in most provinces that prohibits Canadian municipal governments from offering “bonuses” or firm-specific incentives to lure businesses to their jurisdictions from elsewhere in Canada145. Article
144 OECD. Incentives-based Competition for Foreign Direct Investment: The Case of Brazil. Working Papers on International Investment. Number 2003/1
607 of the AIT stipulates that “parties to the agreement may not discriminate against an enterprise on the basis of ownership, control or location of an enterprise within Canada.” Annex 607.3 of the AIT establishes a code of conduct on incentives, which requires parties to the AIT not to offer “poaching incentives” and to make “best efforts” to avoid incentives that distort economic activity146.
Despite the AIT and municipal acts in most provinces in Canada that have specific legislation prohibiting “bonusing” of firms, our view is that there are enough holes in existing legislation to cause municipalities to engage in high-risk strategies. For example, Section 182 of British Columbia’s Local Government Act prohibits assistance such as “grants, benefit, advantage or other form of assistance, including an exemption from a tax, fee or charge”. At the same time, however, Section 183 of British Columbia’s Local Government Act states: “Despite section 182 and in addition to the power under section 176 (1) (c), a board may provide assistance under a partnering agreement.”147
Policy-Global Integration Matrix Based on our analysis of the global competitiveness of western Canadian sectors, we have devised a Policy-Global Integration matrix that outlines the types of policy actions needed, depending on the level of integration of a globally competitive sector in Western Canada (see figure below). For example, while the Financial Services and Electronics sectors in Western Canada have important advantages over other domestic and international centres, it is clear from our sector profiles above that further development to these sectors in Western Canada will require a combination of high-, medium- and low-risk policy and programming actions. Here, we would like to point out that out of Canada’s 55 Global 2000 companies, not a single financial services or electronics firm is headquartered in Western Canada.
146 ibid. p. 14. 147 For a legal opinion on municipal bonusing, please see: Steven J. O’Melia, Rick F. Coburn and Thomas S. Melville. “Municipal Bonusing: What’s Permitted and What’s Not.”. Miller Thomson LLP. June 2006.
We consider sectors such as wireless communications and aerospace as niche sectors also in Western Canada. As with financial services and electronics, firm-level activity in these sectors is usually limited to developing and/or providing niche technology solutions and services for/to domestic or global customers. However, these sectors are more established and have numerous “anchor tenants”, both domestic and international. To the extent that horizontal or vertical integration will be important to the development of these two sectors, we think that a combination of medium- and low-risk policies and programming approaches needs to be adopted for them.
Policy-Global Integration Matrix
Source: IE Market Research Corporation.
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In our view, the Gaming, Software Services, Logistics and Transport Services, Industrial Chemicals, and Grain and Food Processing sectors in Western Canada could be characterized as being either horizontally or vertically integrated into the global economy. The presence of large foreign investors and large domestic companies with headquarters located in western Canadian centres contributes to our view. For example, Electronic Arts has its largest global development studio in Vancouver and, over the past 20 years, has spun off numerous start-ups and established gaming companies that are an important part of the global new media value chain. Other examples include the headquarters of Enbridge, Suncor, PetroCanada, Husky Energy and Talisman Energy, and the presence of ExxonMobil, Dow Chemical, Shell Chemicals and Canadian Pacific Railway headquarters in Alberta, resulting in a strong cluster of petrochemical, transportation and logistics firms located in Alberta. What this means, is that the level of engagement needed to develop these clusters and attract FDI further is likely limited to low-risk policies that are already being implemented in Western Canada. Below, we highlight five case studies of international best practices that show how the government and the private sector work together through economic programs, regulations and policies that improve competitiveness, attractiveness to foreign direct investment and opportunity for economic growth through value-added activity that could apply to the western Canadian context.
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Case Study #1: New Mexico’s Investment Attraction Initiatives in Aerospace
New Mexico provides a good example of the use of a combination of low-, medium- and high-risk investment policies and programs to attract investments to its Aerospace sector. While we are not advocating the use of high-risk policies and programs, it is nonetheless instructive to see how they are applied in other Tier 2 aerospace jurisdictions that face a global competitive environment and an industry structure similar to those in Western Canada.
In 2005, New Mexico ranked 33rd in terms of total number of employees in the Aerospace sector in the United States, with just over 1,000 people employed in the Aerospace sector that year. By 2008, total aerospace employment in New Mexico had been ratcheted up to over 8,000 employees, with companies such as Boeing SVS, Northrup Grumann, Lockheed Martin, Honeywell Defense Avionics, Raytheon, Goodrich and Virgin Galactic establishing operations in New Mexico.
In terms of low-risk investment policies and programs, New Mexico has the following ones in place, which it markets to the aerospace/aviation industry:
. New Mexico has a Job Training Incentive Program that it markets as “one of the most aggressive training incentive packages in the country”148. This program reimburses classroom and on-the-job training costs, plus 50-70% of new hires' wages for up to 6 months. . The state also has a High Wage Job Tax Credit that we would classify as a low- risk incentive scheme. This scheme provides a tax credit for 10% of the wages and benefits for each new job paying at least US$40,000 in a metro area and US$28,000 in a rural community. Again, while not specifically directed at the aerospace industry (hence low-risk), the incentive is marketed very prominently to aerospace companies. . The Manufacturing Investment Credit allows manufacturers in New Mexico to take a credit equal to 5% of the value of qualified equipment imported and put into use in a manufacturing plant in New Mexico (provided the manufacturer meets the criterion of hiring additional workers to earn the credit). . New Mexico’s Rural Jobs Tax Credit is available to companies operating outside of the metropolitan areas. Employers are typically eligible to receive US$1,000 per employee per year, for up to four consecutive years. . In addition, the state government and local municipalities have jointly funded comprehensive training programs at local universities and colleges.
148 See New Mexico Aviation & Aerospace. < http://nmpartnership.com/pdfs/Aviation.pdf>. pp. 13. Downloaded December 15, 2009. 102
Some of its medium-risk policies and programs specific to the aerospace industry include:
. Metro New Mexico, which consists of six communities – Albuquerque, Belen, Estancia Valley, Los Lunas, Rio Rancho and Santa Fe – established the 300-acre Aerospace Technology Park (ATP), with Albuquerque investing US$36 million in utility and airport upgrades at ATP and speeding up the construction process for aircraft-related companies. . Aircraft Maintenance or Remodeling Tax Deduction: Receipts from maintaining, refurbishing, remodeling or otherwise modifying a commercial or military aircraft over 10,000 pounds gross landing weight may be deductible from gross receipts. . Aerospace R&D Tax Deduction: Aerospace R&D services performed directly for, or sold through an intermediary to, the U.S. Air Force is deductible from gross receipts tax. . Aircraft Manufacturing Tax Deduction: Receipts of an aircraft manufacturer or affiliate from selling aircraft or aircraft parts, or from selling services performed on aircraft or aircraft components, or from selling aircraft flight support, pilot training or maintenance training services may be deducted from gross receipts.
In addition to the above low- and medium-risk strategies, New Mexico aggressively pushed a number of high-risk policies and programs directed at specific investors:
. Spaceport America is the world’s first purpose-built commercial spaceport, and is intended specifically to promote space activity, including commercial space flights, payload launches, experimental racing teams and research centres. In December 2005, Governor Bill Richardson and Sir Richard Branson announced their intentions to make New Mexico the world headquarters for Virgin Galactic. In exchange for an agreement to lease Spaceport America for 20 years, state lawmakers conditionally approved US$100 million in funding for the design and construction of the facility. The total project cost is US$225 million. . To further promote investments in Spaceport America, New Mexico instituted four tax deductions connected with the operation of a spaceport in the state. Businesses may deduct the receipts from launching, operating or recovering space vehicles and payloads; from preparing a payload in New Mexico; from operating a spaceport in New Mexico; and from providing R&D, testing and evaluation services for the U.S. Air Force’s space program149.
New Mexico’s example of how the state went about marketing its aerospace industry also provides an interesting contrast to how Manitoba goes about marketing its industry cluster. While both jurisdictions market the key-value propositions specific to the Aerospace sector (such as labour costs, availability of skilled labour, corporate tax rates, training programs, presence of an industry cluster, etc.), New Mexico markets very specific incentives that it highlights within its core marketing collateral. Manitoba’s marketing collateral is very general (at best), with very little attention paid to specific incentives and tax deductions (if any) that may be available to aerospace companies investing in Manitoba.
149 ibid. pp.13. 103
We use New Mexico, not as an example of what to do in Western Canada in terms of FDI attraction policies and programs, but as an example of the types of low-, medium- and high-risk incentives and policies available to investors in other Tier 2 jurisdictions. New Mexico is clearly positioning itself to attract aerospace and defense companies that are rapidly exiting high-cost Tier 1 centres such as California. Western Canada’s Tier 2 aerospace clusters live in a world of these types of incentives.
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Case Study #2: Savannah’s Move into the Distribution Centre Business
In 1975, Savannah was ranked the 14th-largest port in the U.S. Between 1975 and 2008, container volume in Savannah has grown at a CAGR of 12.1%. In the midst of the global economic recession, in 2008, total container traffic in Savannah increased to 2.616 million TEUs, up a marginal 0.5% from 2007, but significantly higher than the 3.5% drop in container traffic across North American ports. Today, Savannah is ranked 4th in North America for containerized cargo moving through its port (after Los Angeles/Long Beach, New York/New Jersey and Seattle/Tacoma)150.
Savannah does not have a distance or transit time advantage over its competitors on either the Atlantic or Pacific coasts. A container moving from Shanghai to Savannah takes 30 days to make its journey through the Panama Canal, compared to 16 days for Vancouver and 18 days for Los Angeles. Rotterdam to Savannah transit times are 12 days compared to 11 days for the Rotterdam-New York route or 10 days for the Rotterdam-Montreal route151. Savannah does not have the natural advantages of L.A./Long Beach, New York/New Jersey or Seattle/Tacoma, i.e., a well-populated hinterland. Savannah has a population of only 130,000 people and Georgia has a population of 9.5 million. And yet, Savannah has seen its market share of container traffic more than double, from 2.4% in 1990 to 5.1% in 2008.
The “secret sauce” of Savannah’s success was a proactive and strategic approach to moving on trends in the global shipping and distribution business. The Georgia Ports Authority embarked on a strategy to attract big box retailers’ distribution centres to Savannah in the year 2000. While Home Depot and Pier 1 Imports already operated facilities there, site-selection decisions for distribution centre operators are driven by unique considerations of land availability, labour, local and state incentives, and port proximity.
The Georgia Ports Authority set up a different department that worked with the Savannah Economic Development Agency, private landowners, realtors and trucking and rail companies to assemble a compelling argument for a location close to Savannah152. One such location is the Savannah Port Authority Industrial Park (SPAIP), which is a site specializing in satellite activities such as container and chassis storage and repair, thereby reducing the pressure on the container terminal153. About 10 km from the port terminals are two large logistics zones: the Crossroads Business Park (CBP) owned by the Savannah Economic Development Agency and the Savannah River International Trade Park (SRITP) owned by the Georgia Port Authority. Both parks have a revenue-generation landlord model, where facilities are built by the landlord and leased to tenants.
This type of strategy can help attract customers, since their entry costs are lower. On the other hand, the risk taken by the Savannah Economic Development Agency and
150 All statistics calculated from:
the Georgia Ports Authority is higher, since tenants can decide to break their leases and move elsewhere. For instance, in 2008, due to a drop in retail volumes, Wal-Mart decided to break the lease on its 800,000-square-foot distribution centre in CBP and consolidate its activities in Statesboro, about 70 km inland154.
An additional incentive provided to retailers is that both the SPAIP and the CBP are considered, in their entirety, as Free Trade Zones (FTZ). Retailers are able to use this to delay payments on their imports until they leave the FTZ and head for their stores or regional distribution centres.
This strategy was also underpinned by infrastructure investments. Savannah is the only U.S. East Coast port with two Class 1 railroads operating on-terminal. In addition, it is the only port in the U.S. offering two Intermodal Container Transfer Facilities: a clear reflection of how important intermodal rail traffic has become for the movement of goods155.
The strategy has worked so far. Savannah has been able to attract continental distribution centres of household names such as Wal-Mart, Bass Pro Shops, Kmart- Sears, Heineken, Best Buy, Target, IKEA, Hasbro, Petco, Dorel and Avon.
In terms of low-risk investment attraction policies and programs, Georgia has a full complement of programs and policies in place that it markets in a 15-page brochure titled Georgia: Business Incentives. These programs are quite extensive and include:
. Low corporate tax rates and credits: Georgia’s state corporate income tax rate is 6%, one of the lowest in the U.S. This is heavily promoted in Georgia’s marketing collateral, in addition to other advantages conferred on firms operating in the state. Georgia also offers corporate income tax credits based on the “tier status” of the community in which a company operates, which allows companies to potentially eliminate all Georgia corporate income taxes. . Quality jobs tax credits: Companies that create at least 50 jobs and pay wages equivalent to at least 110% of the county average are eligible to receive a credit of US$2,500-US$5,000 per job per year for up to five years. Credits may be used to offset the company’s payroll withholding once all other tax liability has been exhausted and may be carried forward for 10 years. . Retraining tax credits: A company’s expenditures in training can be claimed as a tax credit of up to US$1,250 per employee per year, with the credit used to offset up to 50% of a company’s state corporate income tax liability. . Child care tax credits: Georgia offers child care credits ranging from 75% to 100% of costs. A child care tax credit can be used against 50% of a taxpayer’s income tax liability in a given year. Employers who provide or sponsor child care for employees are eligible for a credit against their Georgia income tax equal to 75% of the employers’ direct costs.
154 ibid. 155 ibid. p. 3 106
Georgia has a number of medium-risk policies and programs specific to what it terms “strategic industries”. These include distribution, technology, manufacturing, telecom and processing companies. For these industries, Georgia offers:
. Job tax credits: For companies operating in these strategic industries and their headquarters based in Georgia, the state offers the Georgia Job Tax Credit. Depending on a community’s tier, companies that create between 5 and 25 net new jobs per year qualify for this credit. For each year (up to five years) the jobs are maintained, qualified companies can claim a tax credit of between US$750 and US$3500 per job per year. Unused job tax credits can be carried forward for ten years. These credits can be taken against 100% of corporate income tax liability in Georgia’s Tier 1 and Tier 2 counties, and against 50% in Tiers 3 and 4. Savannah is a Tier 1 county in Georgia, and a distribution centre operating in Savannah with a staff complement of 50 will receive US$156,250 over 5 years that it can credit towards eliminating its Georgia income tax (US$1,250 x 5 years x 50 jobs x 50% of tax liability = US$156,250). . Port Tax Credit Bonus: In addition to the Job Tax Credit described above, Georgia offers a Port Job Tax Credit Bonus. The port tax credit is a US$1,250-per-job bonus for taxpayers that increase imports or exports through a Georgia port by 10% over the previous year. Unused credits can be carried forward ten years. For our distribution centre example above, establishing in Savannah gives a distribution centre employing 50 people an additional benefit of US$156,250 over five years. . Port Tax Credit Bonus for Investment Tax Credits: Georgia has an investment tax credit of between 1% and 3% of new capital investments that are bonused up to 8% for eligible investments in manufacturing, telecommunications, recycling, pollution control and defense conversion.
We note that while the Port Tax Credit Bonus and Port Tax Credit Bonus for Investment Tax Credits could be construed as high-risk policies, they are not high-risk, because they apply to all companies eligible to receive them and are not negotiated with individual companies.
In addition to the above, Georgia has a number of tax abatements and exemption programs, including sales tax exemptions for materials handling equipment, pollution equipment and manufacturing machinery, and tax-exempt industrial revenue bonds for manufacturing facilities. Other programs include electricity rate discounts, county inventory tax exceptions, a rapidly expanding business tax credit for Georgia companies growing faster than 20% per year and eligibility for the HOPE Scholarship and HOPE Grant (tuition and fees at Georgia public and state technical colleges).
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Case Study #3: Collaborative R&D Targeting SMEs through the Technology Innovation Program (TIP) in the United States
Some of the best R&D funding programs are collaborative in nature, involving “rich teaming” of the public and private sectors. A good example of this is the Technology Innovation Program (TIP) of the United States, administered by the Department of Commerce's National Institute of Standards and Technology. Its predecessor program (Advanced Technology Program) was set up to fund R&D in a wide range of sectors, including civil infrastructure, materials manufacturing, personalized medicine research and green chemistry.
This unique government-industry partnership program helps companies accelerate the development of emerging or enabling technologies that lead to new products and industrial processes and services. Over the past decade, the TIP and its predecessor program have funded over $5 billion in R&D activities across the United States and it is one of the leading R&D funding programs in the world. The unique feature of this program is the attention paid to “high-risk, high-reward” technologies, and the “rich teaming” involving individuals, firms, joint ventures between firms, research institutions, foreign firms and not-for-profit research organizations.
TIP funding is based on a competitive process. The competition itself is very transparent and subject to U.S. government bidding rules. In terms of foreign companies, TIP does not restrict funding to U.S. companies. In broad terms, however, to receive funding from TIP, a company must be incorporated in the United States, and do the majority of its business in the U.S. The company may be owned by a parent company incorporated in another country, but in that case an evaluation is done on whether or not the company's participation in TIP would be in the economic interest of the United States (for example, leading to investments in the United States in research, development and manufacturing, and increased employment in the U.S.), and if the parent company is incorporated in a country that affords comparable opportunities to United States-owned companies and adequate and effective protection for the intellectual property rights of United States-owned companies156.
TIP funding is geared toward SMEs. No large company can benefit from TIP funding, although its predecessor ATP program had provisions for participation by large companies and 40% of funding under the ATP program went to Fortune 500 companies157. Funding can go to a single company project led by a small or medium- sized enterprise (large companies are excluded) or to a joint venture. Higher-education institutions can be the lead partner in the venture, and resulting intellectual property may reside with any member of the venture, including universities and non-profit research institutions. Large companies may participate in a TIP joint venture as unfunded partners.
156 Technology Innovation Program. < http://www.nist.gov/tip/revised_faq_website_1_7_2010.pdf>. Downloaded November 26, 2009. 157 Richard Benedetto. USA Today. < http://www.usatoday.com/news/washington/2005-02-06-advanced-tech-program_x.htm>. Downloaded December 15, 2009. 108
TIP can fund single-company projects for up to US$3 million over three years, and joint ventures for up to US$9 million over five years. TIP will fund no more than 50% of total project costs, and its funds may be used only for direct costs, not indirect costs (such as overhead), profits or management fees.
Several high-tech products were created with the help of TIP/ATP funding. These include the world's first digital mammography machine, the world's first laser-guided boring machine used to make engines, the world’s first desktop-size bioreactor for growing stem cells effectively and several ground-breaking technologies related to e- health, photonics, optical technologies, genome sciences, stem cell research, cancer research and materials research.
There are many aspects of TIP/ATP that are unique and some of these can be improved upon in the western Canadian context to help attract FDI, create value-added activity and engage SME participation in high-value R&D. These include:
. The “high-risk, high-reward” nature of the research targeted very specific niche technology areas. This feature is important, since it can allow policymakers in Western Canada to target R&D in specific value-added activities. This targeted approach is very different from the more passive approach adopted by Canada’s Industrial Research Assistance Program (IRAP), where proposals are developed collaboratively between IRAP consultants and SMEs, and can be in any sector of economic activity. . Both TIP and ATP competitions target private enterprise. This creates a direct link between the research conducted and the commercialization potential of the research, since the incentive structures of private companies is very different from those of universities or not-for-profit research institutions. This model is very different from the university-dominated research model in Canada, where commercialization is of secondary importance to funding organizations. However, we note that the IRAP completely targets private enterprise. . TIP/ATP’s competitive nature and focus on paying direct costs such as salaries and equipment costs only is also an important feature of the program. Paying direct costs only provides private companies with the incentive to rein in R&D costs such as overhead and management fees, and the formal competitive nature of the program ensures that ideas are assessed in a systematic manner. . While TIP/ATP did not specifically exclude foreign firms, funding was effectively limited to U.S.-based companies. We think that this aspect can be improved upon in the western Canadian context. For example, a lucrative program of the same size as TIP/ATP with a lead firm being a Canadian firm or a Canadian subsidiary of a foreign firm (with a Canadian joint-venture partner) could go a long way in attracting R&D and investment activity to Western Canada. We think that the size of the funding matters as well. TIP’s US$3-million/US$9-million formula attracted some leading U.S. companies to invest their own resources in leading-edge R&D activity.
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Case Study #4: The European Union’s Competitive Marco Polo Program, Directed at Intermodal Transportation
Marco Polo is the European Union's funding program for projects that shift freight transport from the road to sea, rail and inland waterways. The policy objective of the Marco Polo program is to move more trucks off European roads, leading to less congestion, less pollution and more efficient transport of goods. In terms of funding levels, the current Marco Polo program runs from 2007-2013, with total available funding of €450 million. Infrastructure projects, research or study projects are not eligible for support, so the Marco Polo program is specifically directed at live commercial projects158.
In terms of private-sector participation, both single undertakings as well as consortia, established in an EU Member State or coming from EFTA/EEA countries or Croatia, can receive support. The commercial undertakings involved in a consortium can also be subsidiaries159.
Funding under the Marco Polo program is measured based on “Modal Shift Actions”. Marco Polo provides funding for start-up services: a subsidy of €2 per 500 tonne-km shifted, with a minimum of 60 million tonne-km shifted on average per year per contract. Marco Polo also covers ancillary eligible infrastructure costs, up to 20% of total eligible costs. It also requires that a project be viable after the subsidy ends. The term of the subsidy is up to three years.
Funded projects in the past have mostly included short-rail, inland waterway and short- sea shipping freight services. The basic premise of Marco Polo is that even if rail, short- sea shipping and inland waterways offer a greener alternative and can compete with trucks on commercial terms, the case for switching still needs to be made160. Logistics providers and freight forwarders accustomed to road transport fear that change might mean unnecessary risk. Marco Polo aims to promote innovation in the European logistics industry and use more efficient and greener transportation modes.
An example of a project funded by Marco Polo was a €1.7-million grant given to MacAndrews & Company, London (U.K.) and ABRA Terminales Maritima SA (Spain). For this project, the total estimated volume of goods shifted off the road was 857 million tonne-kilometers over three years. Essentially, refrigerated produce from southern Spain is transported to Bilbao, where it is transshipped into refrigerated containers and loaded onto a vessel bound for Sheerness and Rotterdam. The service, operating on a fixed-day weekly schedule, was launched in July 2007 with one vessel. A second connection was added 12 months later. General cargo, including tires, tiles, foodstuffs, sanitary products, electronics and domestic appliances, is also carried. The main cargo on southbound journeys consists of paper, beer, foodstuffs, metals and chemicals. The traditional shipment route would have been all-road transport161.
158 European Union.
Marco Polo offers a number of features of a targeted program in the Logistics sector, with a very specific policy objective: to move freight trucks off European roads. While the specific policy objectives may not necessarily be in line with the current APGCI initiatives in Canada, we think that a number of features of the Marco Polo program need to be kept in mind:
. The metrics by which successful Marco Polo projects are judged are very clear. Basically, a project gets funded based on how much freight traffic it moves away from roads. This is a very attractive evaluation method, as it leaves little room for speculation about a project’s quality. . Marco Polo is a competitive, proposal-driven initiative. Like the TIP/ATP program, an annual competition is held and private-sector participants are encouraged to apply. Unlike initiatives in Canada (that tend to be more passive), both Marco Polo and TIP/ATP are proactive in attracting private-sector participation. . The very nature of the EU means that Marco Polo was an international effort. As such, the program took a very open approach to qualified projects, notwithstanding the overall policy parameters of the initiative.
We think that all of these features are important to have, to encourage intermodal transportation projects, which will be increasingly important in North America, both for marine and air gateways.
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Case Study #5: Moving Corporate headquarters into Kansas
Incentives are an important decision-making factor when companies choose to locate in another jurisdiction. Among economic development agencies, incentives and bonusing are regularly applied to attract potential operations. Furthermore, attracting corporate headquarters, regional headquarters or regional/global R&D headquarters is considered an important win for any city, given that the specific nature of the investment tends to attract higher-paying jobs and the investment itself tends to be sticky in the event of a downturn. Simply put, headquarters are considered “high-value targets” by the site location community.
Given its status as a Tier 2 U.S. state, the particular competitive dynamics facing Kansas are similar to those of most western Canadian centres. For example, mergers and acquisitions have caused a number of national U.S. firms that started in Kansas to relocate their headquarters out-of-state; others have been “demoted” to regional headquarters. For example, in a 2001 study, Michael Porter identified ten national headquarters in Wichita that were removed from Kansas or demoted to secondary administrative status as a result of mergers or acquisitions162. These included Lear (acquired by Bombardier and HQ moved to Dallas), Pizza Hut (acquired by Pepsi), Beech Aircraft (acquired by Raytheon and HQ moved to Denver), Cessna (acquired by Textron), Bank IV (acquired by Bank of America), etc. This has been typically the case for countless western Canadian companies, especially in the Electronics and ICT sector.
Kansas recognizes its Tier 2 status and has instituted a good mix of incentives to attract and retain companies’ headquarters. In a detailed study commissioned by Kansas Inc. on the rationale for HQ moves, it was found that: . National headquarters constitute only a small share of all business establishments, and provide a small share of the economic base in Kansas; . National headquarters are not very likely to move between regions; . When national headquarters do move, the causes are typically outside the reach of state policy; and . When national headquarters move for reasons that can be affected by state policy, the appropriate policies typically are ones that should not be targeted to headquarters only.
The Kansas Inc. study also found that many national headquarters are closely attached to a major operational unit. Their location is primarily determined by the requirements of that unit, rather the specific HQ requirements163. About one-fourth of national headquarters are located in a cluster of headquarters belonging to the same industry. Most of the rest are located in metropolitan areas near other headquarters and business services. The three most important location requirements for stand-alone national headquarters (which would be important in the western Canadian context) are a concentration of professional business services, good airline connections and a high
162 Porter, Michael. 2001. Wichita-Clusters of Innovation Initiative, Council on Competitiveness. 163 David Burress. 2006. Attracting and Retaining National Corporate Headquarters in Kansas.
quality of life. National headquarters in very small metropolitan areas or rural areas are nearly always collocated164.
These are important points to keep in mind when thinking about the types of strategies and tools needed to attract Tier 1 players in different sectors to invest in Western Canada.
As in Western Canada, Kansas’ economic development strategies have traditionally opposed aggressive incentive programs, but supported incentives that maintain regional competitiveness. In 2001, the state instituted a strategic plan whereby it put more emphasis on tax incentives than on previous strategies, but it was in the context of a taxation strategy seeking to "neutralize tax impacts on industry" rather than having the lowest effective taxes in the region165.
Furthermore, under the Kansas Constitution, headquarters are not eligible for local property tax abatements. However, Kansas has achieved outcomes similar to those of other states by providing credits against the state corporate income tax, based partly on local property taxes paid. More consistently than any other nearby state, Kansas has made headquarters establishments eligible across-the-board for all state-level economic development tax incentives.
As to influencing the location decision following a merger, one policy option a number of states and localities have adopted is a "clawback" of economic development benefits, in some cases charging interest, if a business involved in a merger relocates166. For start-ups, these clawbacks can sometimes be considerable. In the case of Kansas, local governments have the authority to impose recapture conditions on property tax abatements that they grant, with Wichita, Overland Park and others beginning to use it. The Kansas 2004 Bioscience Authority Act requires recapture of benefits if an assisted firm relocates out of Kansas within ten years. Other municipal jurisdictions in Kansas have policies such as doubling the cap on royalties for firms, in which the state has made an equity investment, that move out-of-state. However, Kansas economic development income tax credits do not have recapture rules.
In our view, Kansas provides a good case of non-“beggar thy neighbour” policies at the state level. Kansas recognizes that firms that are likely to locate or relocate their headquarters in Kansas are likely to do so because a major operational or R&D unit already exists in the state. Attracting the location of operational and R&D units seems to be an appropriate strategy that is very much in line with the global positioning of western Canadian clusters.
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164 ibid. p. 67. 165 ibid. p. 62. 166 ibid. p. 67. 113
Conclusions
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Our analysis of western Canadian value-added sectors shows that across the West, strong clusters of economic activity exist, each with its own industry structure and competitive dynamics. These global competitive dynamics have impacted – and will continue to impact – on not only the ability of western provinces to attract FDI, but also on their ongoing place in global value chains.
For some resource-driven sectors such as industrial chemicals, it is clear that there is no dearth of resources or capability in Western Canada. While developing refining capacity will be important in making this sector more attractive to FDI, it is also clear that bigger market issues, such as existing refining capacity in North America and the current momentum in Alberta’s Oil and Gas sector in favour of shipment of bitumen, will continue to have an impact on the development of a larger industrial chemicals cluster in Western Canada.
In other sectors such as electronics, it is clear that western Canadian capabilities are in niche sub-sectors such as photovoltaics and Power Smart technologies. The typical modus operandi of a leading western Canadian firm would be getting acquired by a global player because of the particular IP it has developed. There is a very strong business case to be made for this strategy, simply because western Canadian firms do not have the scale to vertically integrate and compete with the “big boys” in electronics. In the Electronics sector, therefore, the cost structures in Western Canada and the structure and size of clusters will likely lead to niche mergers and acquisitions by large global players rather than the establishment of plants and operations by large IDMs or SATS.
To a certain extent, the key issue is historical. While sectors such as value-added electronics, wireless communications and aerospace have developed in Western Canada over the past 10-15 years, these sectors lack the global status conferred on them by the presence of significant operations by global players, be they IDMs or SATS in electronics, handset OEMs and global carriers in wireless communications, or a Tier 0 aerospace manufacturer. Western Canada, therefore, competes in these sectors not with Tier 0 centres such as Seoul, Helsinki or Seattle, but with Tier 2 centres such as Orlando, Austin and Albuquerque.
Regardless of the sector, policymakers in the West need to keep their objectives clear when making decisions on how to attract investments. FDI lives in a world of big incentives. And western Canadian clusters compete with other destinations around the world. Our case studies show that the nature of incentives in U.S. states is quite extensive. Some best practices to keep in mind include:
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. Co-ordinate tax incentive schemes across Canadian provinces: Our sampling of tax incentive structures in New Mexico (aerospace), Georgia (distribution centres) and Kansas (corporate headquarters) show that sector-specific or activity-specific tax incentives are quite common among various jurisdictions. From a western Canadian perspective, we would note two points. First, western Canadian clusters exist in a world where their competitor jurisdictions highlight their incentive packages very prominently. These incentives and bonusing schemes are an important consideration for the site selection community. Second, any incentive program has the effect of creating a “beggar thy neighbour” or “investment poaching” scenario between jurisdictions. We think that high-risk FDI incentive schemes need to be coordinated as much as possible between provinces or at the federal level, to avoid any sub-optimal policies of this nature.
. More targeted marketing: Most national tax incentive schemes in OECD countries do not explicitly target specific sectors, but R&D activities that may be more important to value-added sectors such as aerospace, wireless and electronics. For example, South Korea’s tax code allows mid-size to large enterprises to benefit from a 40% tax credit granted for excess R&D and personnel training costs. Ireland’s tax code allows for a 25% tax credit in addition to a 12.5% tax deduction for eligible R&D expenses. While these tax incentives are applied across all sectors, they are marketed to foreign investors in targeted sectors, e.g., semiconductors and aerospace in South Korea and ICT in Ireland. In contrast, our analysis of how western Canadian provinces go about marketing their specific clusters shows that beyond general value propositions or general tax incentives, there is very little targeting of specific sectors.
. Limit HQ location incentives to operating and R&D units: While many local jurisdictions attempt to attract national and international headquarters using incentives, there is strong evidence to suggest that incentives such as property tax abatements do not work to attract stand-alone global or national headquarters. National or international HQ locations’ effectiveness usually depends on a network of face-to-face contacts that is not easily uprooted. Research in the United States suggests that about 25% of national headquarters in the U.S. are located in a cluster of headquarters belonging to the same industry. Most of the rest are located in large metropolitan areas in the U.S. What this means for Tier 2 western Canadian centres is that the chances of attracting international headquarters of global investors are limited to M&A situations. Therefore, any program targeting HQ location in Western Canada needs to focus on operating or R&D units of international investors, or on incentivizing western Canadian firms to keep their operating or R&D headquarters in Western Canada.
. R&D funding programs should be collaborative: Some of the best R&D funding programs are collaborative in nature, involving “rich teaming” of public and private sectors. A good example of this is the U.S. Technology Innovation Program (TIP), which was set up to fund R&D in a wide range of sectors, including civil infrastructure R&D, materials manufacturing, personalized medicine research and green chemistry. This unique government-industry partnership program helps companies accelerate the development of emerging or enabling technologies that leads to new products and industrial processes and services. Over the past 116
decade, the TIP and its predecessor program have funded over $5 billion in R&D activities across the United States and it is one of the leading R&D funding programs in the world. The unique feature of this program is the attention paid to “high-risk, high-reward” technologies, and the “rich teaming” involving individuals, firms, joint ventures between firms, research institutions, not-for-profit research organizations and foreign firms.
. Let investors compete for funding: Some of the best-performing programs have a competitive application process, through which stakeholders present their funding requests and are judged by an evaluation committee of subject-matter experts. For example, the EU’s Marco Polo program is the European Union's intermodal transportation funding program for projects that shift freight transport from the road to sea, rail and inland waterways. Each year, the EU announces a call for proposals meeting their specific policy objectives. These proposals are then evaluated on the basis of specific criteria, namely sustainability, innovativeness and volume of freight moved away from road to other transportation modes.
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List of Abbreviations
ACAMP Alberta Centre for Advanced Microsystems and Nanotechnology Products ADG Alberta Deal Generator AERI Alberta Energy Research Institute AICISE Alberta Ingenuity Centre for In Situ Energy AIT Agreement on Internal Trade AMPEL Advanced Materials and Process Engineering Laboratory APGCI Asia-Pacific Gateway and Corridors Initiative ARC Alberta Research Council ATP Aerospace Technology Park BNSF Burlington Northern Santa Fe Railway B.C. British Columbia BCIT British Columbia Institute of Technology CAGR Compound annual growth rate CBP Crossroads Business Park CCRL Consumer’s Co-operative Refineries Limited CHORUS University of Calgary Consortium for Heavy Oil Research by University Scientists CIC Composites Innovation Centre CN Canadian National Railway Company CP Canadian Pacific Railway CRC Canada Research Chair CSLS Centre for the Study of Living Standards DDGS Wheat Distillers' Dried Grains with Solubles DFAIT Foreign Affairs and International Trade Canada EA Electronic Arts EU European Union FDI Foreign Direct Investment FTZ Free Trade Zone GDP Gross Domestic Product GEEP Global Electric Electronic Processing Inc. GPS Global Positioning System HDR High Dynamic Range HPC High-performance computing ICT Information and Communications Technology
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ICTC Information and Communications Technology Council IDA Infocomm Development Authority of Singapore IDM Integrated Device Manufacturers IEMR IE Market Research Corporation IFAA International Financial Activity Act IRAP Industrial Research Assistance Program ISEEE University of Calgary Institute for Sustainable Energy, Environment and Economy IRC Intelligent Robotics Corporation LBS Location Based Services LSVCC Labour-Sponsored Venture Capital Corporation MDA MacDonald, Dettwiler & Associates MRO Maintenance, Repair and Overhaul NEWT Network for Emerging Wireless Technologies NINT National Institute for Nanotechnology ODP Overseas Development Program OECD Organization for Economic Co-operation and Development OEM Original Equipment Manufacturer PLI Plant Location International PMV Port Metro Vancouver PTRC University of Regina Petroleum Technology Research Centre PV Photovoltaics SATS Semiconductor Assembly and Test Services SBVCA Small Business Venture Capital Act SMEs Small and Medium Enterprises SOC System-on-a-Chip SPAIP Savannah Port Authority Industrial Park SPIF Service Provider Investment Forum SRC Saskatchewan Research Council SR&ED Scientific Research and Experimental Development program SRITP Savannah River International Trade Park TIP Technology Innovation Program TEUs Twenty-foot equivalent units UBC University of British Columbia UNCTAD United Nations Conference on Trade and Development WD Western Economic Diversification Canada WINBC Wireless Innovation Network of British Columbia
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120 © HER MAJESTY THE QUEEN IN RIGHT OF CANADA (1996) as represented by the Minister of Western Economic Diversification