Photo: Brent Winebrenner

Earnings announcements over the past weeks were checkered with signs of renewed corporate investment. Toshiba Corp. said in mid-May that it would nearly double its capital spending in chips for the current fiscal year started April 1. Last month, Honda Motor Co. pledged 18% more in overall investment this year, while Mazda Motor Corp. said it expected a 68% spending rise. Transport firm Yamato Holdings Co. said last month it expects to put 70% into capital expenditures this year to open new distribution bases and speed up its same-day delivery service.

“We are investing an incredible sum, particularly in new factories,” Honda Executive Vice President Tetsuo Iwamura told reporters at a news conference last month. The automaker two weeks ago said it would spend US$470 million on a new transmission plant in Mexico, positioning itself for brisk sales in the U.S.

Tints of euphoria are creeping into an economy that has had little to celebrate for over a decade. Capital-spending plans are on the table in board rooms, and economists say that record-low interest rates and stock prices at their highest since December 2007 may help companies to loosen their grip on hoarded cash and borrow money.

Corporate spending has been the missing link in Japan’s on-again, off-again economy. Once a big driver of economic growth, company spending in 1990 made up 20% of gross domestic product in what was then the world’s second biggest economy.

The bursting of Japan’s asset-inflated bubble in 1992 sent corporate spending reeling, after which companies invested in a series of short-lived spurts. Corporate investment made up 13% of GDP in the year ended in March 2012. In that year, capital expenditures remained 12% below the total Japanese companies had spent four years earlier.

Prime Minister Shinzo Abe is pushing to deregulate Japan’s economy and make it easier for companies to take risks here. The changes, aimed at lowering barriers of entry in finance, medicine, agriculture and tourism, while freeing up labour mobility, constitute Abe’s “third arrow” in his economic strategy, along with aggressive fiscal spending and monetary easing. Whether companies start spending for an extended length of time—and really put their money behind Japan’s recovery—is a key part of his plan to revive the economy.

A lift in stock prices, which raises both the value of companies’ shareholdings and their ability to borrow, will help nudge up corporate spending in Japan by at least 2.5% in the current business year and an additional 4.5% next year—which would be the biggest single year gain since the year started April 2006, according to Dai-Ichi Life Research Institute.

Equipment makers have been quick to feel this year’s lift. Orders at Mitsubishi Electric Corp. for tools to run factories jumped by a double-digit percentage in March, compared with February, prompting the company to project 10% growth in factory automation sales this year.

Part of that rise is catch-up on investment plans shelved after the 2008 Lehman crisis and the 2011 earthquake, so economists are quick to say that it is too early to call a recovery.

“After years of cutting costs and making do with old equipment, companies are finally investing in the equipment they wanted to. This is a good sign, but a far cry from aggressive investment to help companies gain an edge over foreign rivals,” said Nippon Research Institute Senior Economist Hideki Matsumura.

Small manufacturers plan to invest 2.5% more this year than the previous year, according to the Bank of Japan’s March tankan survey.

But large manufacturers in the same survey projected capital spending staying flat. They are likely to take longer to commit to new investments—and steer any new investment overseas.

Precision equipment maker Nikon Corp. said in March that it plans to build a new factory in Laos to help build entry-level single-lens reflex cameras there, after the Thai October 2011 floods stalled camera production just ahead of the holiday shopping season. This investment will help the company hedge against the risk of concentrating production in a single location and position it for demand growth in Southeast Asia.

Toyota, which expects to hit record sales this year, plans to raise capital spending by 6.7% this year, a figure that falls short of its previous capital spending plans. Toyota is lifting the efficiency of existing production lines and isn’t now considering new capital spending, Executive Vice-President Nobuyori Kodaira told reporters at a news conference Wednesday.

Japanese companies have weathered the collapse of the asset-inflated bubble of the 1990s, devastation by earthquake and tsunami, flood damage to factories, and near-collapse of the global financial system.

With factories running at about 80% capacity, executives may prefer to soak up excess capacity a bit longer, rather than build more.

“Will companies start making new investment plans? That depends on how strong the economy will be next year,” Roland Berger Senior Partner Takashi Hirai said. “They’ve learned to wait and be as sure as they can about demand before taking risks.”

Yoree Koh, Yuko Takeo and Daisuke Wakabayashi contributed to this article.

Emran Sheikh, president of Heys International Ltd.
Photo: Heys International

Since 1986, when Heys was born in a Mississauga, Ont., family basement, the company has floated to the top of the travel valise market in Canada with its innovative ideas. And now its founders are looking beyond borders to expand the business: to Dubai, to Russia, to China, perhaps even the United Kingdom.

The company has experienced double-digit growth every year since 2002, but president Emran Sheikh says it’s not all about the money. “It’s always been about building the brand,” Sheikh says. “It’s about building up what we started when we were very young, and building it to something very strong. We’re here to have fun and enjoy what we do.”

Heys started with the entrepreneurial spirit of Sheikh’s parents, Yahya and Raisa Sheikh, who moved to Canada in 1974. Raisa worked as a clerk in a Zellers store while Yahya worked in the finance department of the Ontario Provincial Police.

On the side, Raisa took a course on arranging flowers, and she filled their basement with her designs. “So we had to start selling them,” Sheikh says. The family opened storefronts in malls across the Greater Toronto Area, and then began selling other products, too, including luggage.

A year or so after the Sheikhs founded Heys, they cobbled together $5,000 to bring in a container of luggage from overseas. Sheikh was 18 years old at the time. He and his brother, Haroon, also known as Harry, gave up their social lives and hustled to sell it. Gradually the business grew to the point that the Sheikhs began selling luggage wholesale and designing their own brands. In 2000, Harry Sheikh moved to Miami and opened up Heys USA, their first expansion beyond Canada.

About the same time, Emran Sheikh, now the president and chief executive officer, says a game-changing thing happened: Premier luggage retailer Samsonite began to offer bags at bargain rates, such as $49.99 for a large 30-inch model. How could the Sheikhs compete? “That doesn’t bode well for us,” Mr. Sheikh thought. “We have to do something really different.”

So he began to design hard-sided luggage, though this option made up less than 1% of the market. The cases were lighter than any others, though this didn’t mean very much when travellers had the luxury of hauling 75 pounds (34 kilograms) onto planes. Now, at least on Air Canada, passengers have to pay extra for a bag that weighs more than 50 pounds (23 kilograms).

At the beginning Sheikh was taking a huge risk. “We were putting all of our eggs in one basket, thinking this is going to be the next big thing,” he says. “And it turned out that way.” Department stores resisted selling hard-sided luggage, however, and The Bay at first sold Heys in only a couple of its stores as a test. But when buyers snapped up the funky bags in fuschia and turquoise, it was clear that Heys was onto something.

The Sheikh family has positioned itself with careful planning and marketing. For instance, it designed custom bags for the Toronto International Film Festival. It doesn’t hurt when Brad Pitt and Angelina Jolie pull your luggage about, decked in a logo designed by Sheikh’s wife, Fariha, an interior designer. The company avoids mass market retailers. It sells online. “You have to pick your places,” he says.

Hard-sided luggage now comprises 30% to 35% of the market in Canada, and other companies are following Heys’ lead, producing hard-sided bags in all the colours of the rainbow. “The challenge for us is to innovate,” Sheikh says.

The company has also realized that the market in Canada is finite, although it is expanding by selling high-end handbags. But the future, Sheikh says, is in international markets, particularly those it sees as having an emerging class of travellers.

India is one such target. Heys also set up an office and warehouse in Dubai, and is working with distributors in Russia and opening an office in Shanghai.

Its biggest challenge? Copycats. It’s a big issue, Sheikh says. In Canada, Heys is protected by intellectual property rights, but the company must chase knockoffs in other countries. It’s an expensive process to register patents and designs and enforce them, he says.

“A patent is only enforceable as long as you’re willing to fight for it,” he says. “Some of our lawyers tell us that [the law] is like a toothless tiger.” The expenses mount when Heys takes companies to court. “But we have to do it,” he says.

Like other companies wanting to expand into international markets, Heys is making contacts. But it has earned such a reputation that sometimes potential partners come to them.

“You need really good developed partners who either have an existing history in the marketplace, or you work with existing distributors who already have their clientele and they add your brand to their line,” Sheikh says. “Or you work with people who are developing the business exclusively for us. They learn the business over time.”

The U.S. market is different from the Canadian experience, Sheikh says. His brother does his own designs, and because the market is even more competitive south of the border, Harry targets a higher-end market. With 10 times the population of Canada, it’s more possible to aim high, Mr. Sheikh says.

The Sheikhs are not resting on their laurels. They reinvest their earnings back into the business, they say. New technologies, plastics, asthetics and function are their passion. “We sleep, eat, dream luggage every day, so you’re always thinking of really cool ideas,” Sheikh says, smiling.

Photo: Bloomberg via Getty Images

But a funny thing happened on the way to the bank: foreign plant managers discovered flaws in the system. The long supply line between North America and the Far East involved rapidly escalating shipping charges, as the price of fossil fuels shot up. Knotty production problems had to be handled long-distance, and the production cycle dictated big outlays and slow-to-arrive profits.

Meanwhile, wages in China crept relentlessly upward. “Wages started rising as demand for workers grew,” says Harold Sirkin, senior partner for the Boston Consulting Group (BCG), a management consulting firm, which predicts a wave of “reshoring” in the next two years, as North American companies flee China. The average wage for Chinese labour a decade ago—about 58 cents an hour—has since multiplied by about five.

As a result North American firms that once operated in China are looking for production possibilities closer to home. Take 3D Robotics, a small aeronautics company based in San Diego. To secure decent pricing in China, the company had to order in thousands of units. “We had to write big cheques to make big batches of goods—money we wouldn’t see again until all those products sold, sometimes a year or more later,” Chris Anderson, CEO of 3D Robotics, an open source unmanned aerial vehicle (UAV) technology company, told the New York Times. Recently, that experience led the company to “near-source” its China-based operation to Tijuana, Mexico.

Economics are also in 3D Robotics’ favour. While China’s wages rose, those in Mexico have declined over the last decade in constant dollars by 20%, according to Bank of America Merrill Lynch.

This explains a new manufacturing paradigm that is rapidly coming into focus, particularly in North America: regional supply chains with goods produced and sold in the same geographical area of the globe.

“Offshoring to China is being replaced with nearshoring in Mexico,” says Christopher Wilson of the Mexico Institute of the Woodrow Wilson International Centre for Scholars.

What is suddenly China’s misfortune, being so far away from the North American market, is the good fortune of Mexico and, to a lesser extent, Central American countries like Costa Rica and Panama. Plant managers look at all the factors that go into the cost of production—wages, transportation, currency values, transit time—and then decide on a location.

For example, Tennessee-based Meco Corp., which manufactures outdoor furniture and grills, operated in China for more than 10 years. But it recently invested US$10 million in factories in Northern Mexico. Meco president Harrell Ward said that China’s higher wages, increasing shipping and inventory costs, and an unfavourable exchange rate forced Meco to near-shore. Florida’s Jabil Circuit also recently moved operations from China to Guadalajara, Mexico, where it is manufacturing BlackBerries and other electronics.

Canadian companies have taken full advantage of North American Free Trade Agreement (NAFTA) benefits, with some 2,500 Canadian affiliates investing more than US$11 billion in Mexico since 2000. Among the largest are mining company Goldcorp, which has anted up more than $2 billion for open pit gold mining operations in Mexico, and aircraft manufacturer Bombardier, which is investing more than US$450 million there, including $250 million to build its new Learjet 85 in Querétaro. Magna International recently opened an auto parts supply operation near the GM plant in San Luis Potosi.

Says Real Gervais, vice-president of Bombardier’s Mexico Operations: “The state of Querétaro offers quality industrial and educational infrastructure, a skilled population, dynamic economic development policies and a modern airport, providing Bombardier Aerospace and members of the Mexican aerospace cluster with excellent potential for growth and synergies.”

Small and medium-sized Canadian companies are following suit. Heroux-Devtek Inc., and Dishon Ltd., for example, which manufacture landing gear systems and produce computer-machines parts, have set up operations near the Bombardier plant in Querétaro, supplying Learjet 85 parts.

Mexico has long offered attractive incentives such as tax breaks and infrastructure perks to North American firms mulling new operations south of the border. The so-called maquiladoras, foreign-run factories that import parts, assemble products and re-export, have been in operation on the Mexico-U.S. border since the 1960s.

The Mexican government has now opened the interior to foreign investment, while the passage of NAFTA has prompted vibrant regional manufacturing arrangements, such as those that have been implemented by the automobile industry, Wilson says. Car parts that are built in one region are said to cross borders (including U.S.-Canada) eight times as they are produced: parts manufactured in one nation end up being assembled in another and often redirected to another nation for further work.

“The integration of the regional auto sector has allowed the creation of economies of scale and specialization in a way that uses each country’s comparative advantages to improve the overall competitiveness of the industry,” Wilson says.

In keeping with the regionalization of markets, most of these new cars are sold in the Americas.

Now, Costa Rica and Panama are stepping up as competitive manufacturing platforms. Both have ample numbers of well-educated, English-speaking workers and increasing infrastructure and government support for would-be relocatees, says Kenn Morris, president and CEO of Crossborder Group Inc., consultants in U.S.-Latin American business and political analysis.

Costa Rica in particular, with the Costa Rican Investment Promotion Agency (known as CINDE), a non-profit promotional organization, as the driving force, boasts that more than 200 “global” companies are now operating there, including its own burgeoning “Costa Rican Silicon Valley.”

Other Latin American and Caribbean companies, from Guatemala to Brazil to Chile to Jamaica, are wooing back-office operations, IT firms and call centers. For example, Concentrix, an international marketing and services company, has established call centres in Nicaragua and Costa Rica, and Ryder System Company has moved its service centre from Malaysia to Jamaica.

Of course, there are risks to doing business in Latin America, particularly in Mexico. Drug cartels continue to sow mayhem there. Crime groups reportedly steal municipal electricity lines to melt down their copper or highjack oil from the state-run petroleum monopoly, Petroleos Mexicanos. But security experts say most of the violence and crime are limited to particular regions—at this juncture, the northeastern border states.

And despite an ample supply of hard-working, bilingual labourers (Mexico is said to produce 130,000 new engineers a year), foreign entrepreneurs complain that these new techies are more likely to be operating engineers than more highly prized design engineers. Border problems persist, particularly between the U.S. and Mexico, where millions of dollars are lost because of long waits at border crossings.

Sirkin of BCG says that the trend of disengaging from the Far East and moving factory and service operations back to the Americas is in its early stages. But it will reach an “inflection point” around 2015, he says.

“We’re seeing more than we expected,” Sirkin says. “There’s already a significant ramp-up.”

Photo: wepix

“What has gotten more complex is the sheer volume of things that need to be integrated,” says CEO Emanuel Bertolin, “I have every gadget and I force myself to stay on top of them because if you don’t understand how consumers use technology and products, it is really difficult to deliver services that you think are compelling.” Armed with a management and technical staff of 75 in the home office, and sales and tech support sprinkled across B.C., the U.S. and Europe, Wmode sells about $10 million worth of infrastructure a year and counts Wind and Cricket in North America, and Europe’s KPN as clients.

Wmode was launched in 2000, before the world went hyper-wired, and for a time it was almost too smart for its own good. “We started off in billing and micro payments and we built out a lot of technology that allowed us to put charges onto a carrier’s bill for a non-voice type of service,” Bertolin says. “And we were a little bit early—it was like selling cash registers to people who didn’t have stores yet.” By 2004, Wmode, says Bertolin, paired technology with the virtual storefront and logistics environment and that package began to earn significant revenue. “We finally hit profitability in 2006. It was a long haul. We walked through the desert for awhile.”

Selling internationally was always the plan. Wmode set up in Calgary because the city has a history of telecom expertise and a ready talent pool of graduates from the University of Calgary, the Southern Alberta Institute of Technology and Mount Royal University. Using homegrown talent to sell abroad made sense. “We were all people who had been in the technology side of oil and gas for years,” Bertolin says. “And we had worked in Latin America, South-East Asia and Europe. All of us had a lot of international experience and we thought we could overcome the location barrier by using agents and partners in the U.S. and Europe, models we had been comfortable with in the past.”

As outsourcing gained momentum among the telecoms, Wmode found that clients were ready to trust the company to do what most were happy to hand on, but Wmode was also early in providing services that were hosted from far away. “With the first few sales, for example, we were selling to Orange, one of the big telephone networks in Europe,” Bertolin says, “and they were very concerned that our technology could run in Calgary and yet service their clients in the Swiss market in a timely way. So we did a bunch of benchmarking and set up timing tests to overcome the technical objection that there would be latency in the service.” Success built on success. “As we got second and third customers, we just pointed to the first one and it was no longer an issue,” he says. Still, Wmode was careful to segment its market and look for customers that were right-sized.

Regulatory issues were a little more intricate. “There is a lot of different privacy legislation around where consumer data can reside and not reside and there are safe harbour laws around moving data virtually across borders,” Bertolin says. “So if you are providing service in Europe, are you allowed to move certain data into Canada, for example, and have it stored? We had to overcome some of the regulatory interpretations of these things. Having to spend so much time and legal knowledge on that was something we did not expect.”

One ironic reality, given the nature of his business, is the sheer amount of travel involved in doing Wmode business around the world. Although at 50 he thinks it is not natural, Bertolin readily admits that he is attached to two or three mobile devices at all times (except when he is sleeping or at the dining room table where they are frowned upon). But physically getting in front of decision-makers is still the best way, he says, to conduct his business. “Nothing cements a relationship like having a meal with somebody. People still make purchasing decisions based on emotion—even with technology services.”

In a way, it’s nice to know that the good old-fashioned universe—even stuffed to the heavens with apps—is still unfolding as it should.

Paul Barber, chief executive officer
of Prophix Software Inc.

But when Barber, who is chief executive officer of Mississauga-based Prophix Software Inc., asked whether the man would like to become a reseller of the software in the big German market, the answer was “nein.”

The marketer explained that lots of U.S. companies come to Germany, and when they aren’t successful enough, they shut down, Barber recalls. “He said, ‘I can’t take that risk. Come back after you’ve established yourself for three years.’”

Undaunted, Barber continued on to Poland and Denmark, where potential partners embraced his product. These mid-market countries offered smaller profits, for sure, but there was less competition, so they quickly became big opportunities.

These mid-market niches have made Prophix one of the fastest growing tech companies in Canada. Its sales expanded 170 per cent in the past five years, according to Deloitte’s Technology Fast 500 survey. The company has grown to 160 employees from 40.

Prophix started in 1987 as a Canadian distributor of software from U.S. and British developers. But it needed a new approach after the 1994 North American free-trade agreement allowed U.S. companies to sell directly in Canada, eliminating the need for Canadian distributors, Barber explains.

He and his team saw the potential of developing a corporate performance management program that could run on Windows-equipped personal computers rather than on the mainframes that were used before. Barber and his team also decided to turn the business software sales model on its head.

“If you go back 10 years or more, if you wanted to sell to a company in Los Angeles, you had to have a sales team there. You needed to visit local businesses, demonstrate to potential customers and help them get it working.”

Prophix didn’t have the budget for that, so it decided to stick with just a single office in Toronto but sell by phone and over the Internet.

“With webinars, we could demonstrate to people what the software did and the support we can provide online. That gave us the ability to sell into mid-market companies where they’re more sensitive about the costs and have more worry about potential problems involved in getting technology operating than big companies,” he says.

As Prophix’s sales expanded so hasBarber’s appreciation of other countries’ cultures. “Our software is translatable, so clients in any country speaking any language can understand how to use it. The bigger challenge in selling it is understanding that the markets are all different,” he says. “One of the big mistakes companies make outside North America is reproducing the same kind of business they do here.”

Even Denmark and Sweden have important differences in the way people approach work and how they compute the economics of a business, he says. “In France they are reluctant to buy software that wasn’t developed locally. But in Italy, Spain or Brazil, companies have no problem buying products that aren’t developed locally.”

Prophix looks for local partners who understand the way things happen in their home countries and know what customers would find most compelling about the product.

Prophix has grown partnerships in the Czech Republic, Slovakia, Israel, Singapore, the United Arab Emirates, Bangladesh, Mexico, Puerto Rico, South Africa, Russia and Brazil. The company also has acquired controlling interests in resellers in Britain and Denmark.

“Because we were resellers to start with, I understand that we need to be generous with the partners,” Barber says. “That creates incentives to them to do their best to sell. You have to leave enough on the table to make it worth their while to devote their full effort into selling your product.”

Canadian companies have a natural advantage in going international, he says. “The multicultural character of the society has given Canadians an awareness of the cultural differences of people, much more so than Americans.”

Trust is one of the scarcest commodities in emerging markets, says Matthew Barney, vice-president and director for the Infosys Leadership Institute.

Photo: Dan Herrick

The emerging consensus is that for the common currency to regain its allure, eurozone institutions from regional bank supervision to the fund set up to rescue countries in trouble need to be significantly strengthened.

In addition, Poland will need to go well beyond the basic economic requirements for joining to ensure that it is fit enough to avoid the fate that befell Greece, Spain and the bloc’s other weaker members. “The danger of a breakup of the euro zone has dramatically receded,” Finance Minister Jacek Rostowski said in an interview. That clears the way for discussions about when and how to resume.

“We are thinking through the changes that we need to make, the things we would need to do,” he said. “We are looking for metrics that will allow us to convince ourselves—to convince Poles—that Poland is sufficiently well prepared to be able to really benefit from joining.”

Before the shock of the 2008 global financial crisis and the onset of Europe’s debt woes, Poland and the other post-communist nations of Central and Eastern Europe were racing to get into a club that they thought would help guarantee their economic and political security.

All had pledged to eventually adopt the euro as a condition of joining the European Union, but no deadline was set.

Now, with the 17-nation eurozone struggling to pull itself out of recession and to agree on new rules to prevent a repeat of its current woes, these countries have been reassessing the costs and benefits of membership and, with a few exceptions, delaying plans to join.

Nowhere has the public examination been sharper than in Poland. In a series of public discussions, parliamentary hearings and televised face-offs, Rostowski, central bank Governor Marek Belka and other senior officials and economists have been publicly wrestling with what changes need to be made for signing up to be beneficial.

The first televised debates in March received a lot of media attention. “Poland is an extremely pro-European country, but at the moment not a very pro-euro country,” Rostowski said. “People can see what a dreadful mess there is in the eurozone.”

Poles are deeply skeptical. A February survey by the public-opinion research firm CBOS found that 64% of Poles are opposed to euro adoption, while 29% are in favor and 7% said they were undecided.

CBOS interviewed 1,111 people between Jan. 30 and Feb 6. No margin of error was given.

The Solidarity labor movement wants euro membership to be subject to a referendum.

“Before the crisis, I thought it natural that we would enter the eurozone,” said Stefan Kawalec, an economist and former deputy finance minister. But “the costs of abandoning our own monetary policy and currency are immensely higher than we expected.”

Rostowski, who is also deputy prime minister, is more upbeat, arguing that if certain conditions are met, it still makes sense for Poland—the largest of the EU’s new member states—to adopt the euro.

But it is unlikely to happen very soon.

“Given enough time—and I don’t mean decades—the institutional structure of the eurozone will be robust enough for us to say Poland can join safely,” he said.

New fiscal rules will prevent more public debt problems, he said, but an effective banking union backed by deposit insurance is also needed.

Poland, too, needs to get itself into better economic shape, Rostowski said. For one thing, he thinks, Poland should pare its public debt outstanding back to about 40% of annual economic output. The EU target is 60%, although few countries meet that goal.

The finance minister arrived at the 40% figure by looking at the “extreme case” of a crisis that requires Poland to contribute its full share—equivalent to 9% of GDP—to the eurozone’s bailout fund, the European Stability Mechanism, while still having enough manoeuvring room to deal with a downturn at home.

Under Polish law, government debt cannot exceed 60% of GDP. When a 55% threshold is hit, sharp automatic spending cuts are triggered. The EU calculates Poland’s public debt now as 56% of GDP; the Polish government puts it at 54%.

Another critical area is competitiveness. “Countries that are competitive and strong and join the euro benefit from it. Countries that are relatively weak may actually lose,” he said. “We need to do now all the things the countries of the periphery wish they had done before they joined.”

As a proxy for what Rostowski refers to as “deep competitiveness,” he is looking at Poland’s unemployment rate. “The labour market is a good indicator—especially its state relative to others,” he said.

With a jobless rate of 10.7%, Poland now ranks 15th out of the EU’s 27 members. That is a marked improvement from 2007, when it had the second-highest jobless rate in the group.

But Rostowski thinks Poland needs to improve further, so that unemployment is in the lowest one-third in the EU.

A Vorum robot carves a spinal mould
Photo: Vorum Research

Vorum does not work directly with patients to fit prostheses. “We sell manufacturing equipment to companies that make the artificial limbs and orthotics. Ours is business-to-business,” Saunders says.

Before he could get his business off the ground, however, Saunders had to face what he calls “an inquisition” staged by Swedish scientists. Despite securing a licence from the University of British Columbia in the 1980s to monetize what he called “world-beating technology,” the company was in trouble. “We were in the classic story of being on the bleeding edge. We thought we were going to close the business after two years because we didn’t have enough going.”

At the 11th hour the company received a call from a Swedish firm that wanted to check out Vorum’s technology with the aim of producing custom medical footwear. They tested Vorum’s tech for a few months, then summoned Saunders to Stockholm for the verdict.

“It was a little bit like the Inquisition. Six chairs, six people sat down. The chairman stood up [and said], ‘So glad you came. I thought we’d get right to the point: Your technology is not appropriate for us… And each of my five colleagues here will explain in detail where it is unsuitable.”

Saunders endured the criticism—yet was rewarded. The Swedes liked the way he had taken something complicated “and put it into a system that’s easy enough for our non-technical people to use,” he recalled. They asked him to start from scratch and put together a system for the footwear.

The Swedes then allowed Saunders to own that technology and build on it for other parts of the body – neck braces, body jackets, limbs—and market it worldwide. And thus Vorum was born, launched with a $200,000 grant from the Swedes.

Today, Vorum’s business is divided about evenly among Europe, Asia and North America. Canada accounts for a tiny portion of the North American market—the amount spent on prosthetics and orthotics here is a small fraction of spending in the grand scheme of all health care.

On the revenue side, he describes Vorum as a typical small company—20-plus employees, with revenue in the $5 million range. The field is not a cheap game to get into, he says. “If someone was to buy all our software à la carte, with all the different modules we have, you’d easily spend $80,000 to $100,000.”

But the company also offers an option for mom-and-pop facilities. It makes the technology available to small customers for about $2,000 and a $25-per-device fee. “The little guy comes in and has high tech just as much as the big guy, but he does it on a per-use basis.”

This kind of scheme also figured in the expansion of the business, Saunders says. He went to the early adopters and asked whether they would be willing to have other companies and prospective customers look over their shoulders.

“If they go in and see a colleague use the technology every day, the same stuff your guy is going to have to learn, and see that it works well, efficient, clean …” Saunders suggested. Some of them drew back and said, “Let our competition in? Are you nuts?”

“But fortunately there was someone in every market we went into who was willing and confident enough in what they were doing.” The program brought in many new customers.

Expansion to other markets has had distinct advantages, Saunders says. “If you go to Spain, France, Italy, the government has said, ‘We are going to squash the prices for you guys. We think you’re getting paid way too much for what you’re making.’

“When that happens, businesses have two choices: be more efficient and thrive or die. We have actually been more successful in markets where cost containment has been a huge driver and people have had to look for how to do things differently.”

Available transit means a larger labour
pool for clustering, such as on Toronto’s Bay Street
Photo: Jean Heguy

While experts agree that industry clusters remain beneficial in many instances, a report published by Statistics Canada in February that analyzed data from Canadian manufacturing businesses between 1989 and 1999. “Not all manufacturing plants benefit from localization and urbanization economies,” write Mark Brown and David Rigby. While manufacturing in Canada has changed vastly in the decade since the data was collected, the findings of this analysis can still provide valuable insight for businesses.

The theories behind the industry clusters that Brown and Rigby tested originally developed around the manufacturing sector, where situating similar businesses in the same geographic area was thought to have a variety of benefits: access to a larger skilled labour pool, improved supply chains, and opportunities for knowledge sharing between different companies in that same industry. These benefits did exist for the companies in the Statistics Canada study, but in different capacities that were dependent on the sizes and ages of the companies included.

Notably, Brown was surprised to find that newer and smaller businesses didn’t make productivity gains when they were geographically close to upstream suppliers, particularly when compared to more established businesses. “Older firms, apparently, had gained more in terms of their productivity by having a dense network of suppliers around them,” Brown says in an interview. “It may be that these older and larger firms have, effectively, been able to discern what their production processes are and what particular inputs they need. Therefore, they’re able to take better advantage of local suppliers.”

An area where younger and smaller businesses did benefit and larger businesses did not, was from knowledge transfers. “There may be more of a need, in the sense that these younger, smaller firms haven’t, necessarily, built up the internal capacity to generate knowledge themselves,” says Brown. “Therefore, they would benefit more from learning from their neighbours.”

However, being neighbours with a company, or multiple companies, in the same industry doesn’t create automatic knowledge transfers. Companies need to foster an atmosphere of collaboration to reap such benefits. David Wolfe, a professor who holds the Royal Bank Chair in Public and Economic Policy at the University of Toronto and has studied industry clusters extensively, says this can be done formally, through industry groups or organized mentorship programs. Knowledge transfers can also happen more informally, though conversations or social gatherings, such as an industry pub night.

When companies are open to knowledge sharing with neighbours, all parties can benefit. Wolfe recalls an example from some of his research in the Kitchener-Waterloo area, where two companies that considered themselves direct competitors became collaborators, with one producing a component for the other’s next-gen device. “Being open to that kind of potential makes for more effective collaboration within the cluster and makes the cluster more successful,” Wolfe says.

When it came to benefits relating to labour pools, the Statistics Canada research found the smaller businesses benefitted more from the specialized labour that develops within an industry cluster. Brown says this finding could be explained by the fact that larger or multinational companies already have internal resources to attract the labour they need, whereas smaller companies would have to rely more on what is already available in their region.

The employee working in an industry cluster can potentially benefit as well, notes Wolfe. “Someone once said to me: ‘I know I have a cluster when someone will come to work for me, in this or that city, not for the job I’m offering but because they know they’ll be able to get their next job here, as well.”

On the other hand, Brown points to the fact that a well-developed industry cluster in an urban area can push wages up in the entire industry. This could make it harder for a smaller company to be competitive. Besides wages, well-developed industry clusters can increase other costs of doing business, notably real estate.

Still, Sheila Botting, a national leader for Deloitte’s real estate division, says companies can reap other benefits, even when a successful industry cluster increases real estate costs. She points to Toronto’s financial services sector. Bay Street offices come with a Bay Street price tag, but the transportation hub a company is connected to—and added benefits of nearby retail, hotels and entertainment—increases the potential labour pool a company can draw from. “The access to the transportation network—in this case, Union Station and Go Transit and the subway—allow those businesses to gather talents from across Ontario, not just from one specific geography.”

Industry clusters are apparent domestically in examples including energy in Calgary and high tech in Kitchener-Waterloo, and clusters can be valuable in global operations as well, points out Harald Bathelt, a University of Toronto professor who holds the Canada Research Chair in Innovation and Governance and has studied industry clusters for the past 20 years, in both Europe and Canada.

While globalization and communication technology make vast geographic distances seem smaller, the value of geographic proximity still holds and industry clusters are actually strengthening in an era of globalization, Bathelt points out. “There is no real competition between Internet tools, and being able to communicate over large distances, and then being located in the same region, or the same place,” Bathelt says.

He uses the example of developing countries, particularly China and Taiwan, where governments have fostered huge industrial clusters in high-tech manufacturing, many of which are linked to the high-tech cluster in Silicon Valley. For North American companies, connecting with a specific industry cluster in an overseas market means better access to qualified labour and the guarantee of good market information. “The less that is known about another country, or another area they want to move into, the less uncertainly they will have if they move to a cluster,” Bathelt says.

Whether it’s internationally or domestically, being located in an industry cluster doesn’t guarantee success. “There is a whole shopping list of things that companies would typically look for when they try to plan a location: access to labour, access to capital, access to clients, well-placed and well-located real estate. Then, of course the cost of doing business in that market place,” says Deloitte’s Botting. While clusters can have advantages, they will differ for each company and industry clusters remain only part of the equation when it comes to location.

EDC chief economist Peter Hall’s weekly view on current trade issues and the prospects for Canadian business abroad.

Qu Hongbin, co-head of Asian economics
research and chief economist for Greater China
for HSBC Markets (Asia) Ltd.

So what impact will an increasingly international Chinese currency have on China’s economy and on those who trade with it? Qu Hongbin, co-head of Asian economics research and chief economist for Greater China for HSBC Markets (Asia) Ltd. offered cautious notes of optimism during a recent private presentation in Toronto.

Why is China suddenly proceeding so slowly? In the first quarter of 2013 its performance was below economists’ expectations, Qu said. Investment demand has been only modest, with continuing resistance to new factory investments. The only bright spot, he said, has been property development.

To counter the slowdown, Chinese leaders have eschewed the U.S. strategy of quantitative easing in favour of infrastructure investment to support growth. Qu said that it has worked well during the past five years but some observers question whether it has overshot China’s need for roads and rail. It raises doubts that China may have overbuilt in the manner that Japan did in the 1980s, relying on new bullet-train lines to undersized cities, and expressways and bridges to nowhere, masking a lack of business and consumer appetite for growth with a lot of pointless thoroughfares.

Qu said that whereas in the West the bulk of local government spending goes to personal transfers such as social welfare payments and programs, 62% of local Chinese spending goes into infrastructure. China is making the world’s largest railway investment and has gone on feverish program of subway construction akin to Japan’s. Qu, for his part, believed that the growth is warranted—China has 100 cities in which more than 1 million dwell and 70% of those cities have no underground rapid transit. Meanwhile, China’s intercity railway investment still doesn’t have the capacity of the U.S. railway system back in 1890. (Qu’s comparison is somewhat inapt, given that the U.S. railway overbuilding frenzy at the end of the 19^th Century resulted in bank failures that sparked the so-called “Panic of 1893,” a serious depression.)

Qu admitted that there are real risks in the Chinese economy—a property bubble, a credit bubble and soaring municipal debt—but he warns against exaggerating their potential for causing systemic risk. Beijing has worked to cool the property sector and there has been a resulting slowdown in price rises. In the west, trouble in the housing market is driven by over-leveraged homeowners, hock for huge mortgages they can’t afford. But in China, he said, mortgages account for less than 15% of bank assets.

Only around 6% of all Chinese actually have a mortgage. Before 1998 there was little property ownership in China—most people paid token rents for government-owned flats. But the Asian financial crisis of the late 1990s, the central government gave residents a one-time wealth effect by privatizing publicly owned flats. These entitlements could be exchanged on the open property market and allowed people to move into new neighbourhoods without have to pay anything or, if they wished to trade up, taking on a relatively small mortgage.

Meanwhile, municipal debt is running at 23% of GDP. The central government is responsible for another 15%. Qu said that, combined, the debts are not unmanageable. There have been suspicions that Chinese government officials are less than reliable with their statistical reporting and that billions of yuan more in debt may be buried inside thousands of Chinese state-owned enterprises. Then there is the rise of a shadow-banking system, which has been making heavy investments in consumer loans.

THE ROLE OF THE YUAN

Against this slowing but not terribly worrisome backdrop, China’s nation currency—formally known as renminbi (RMB), although the currency unit is called the yuan—is playing a bigger role than ever in trade. From virtually nothing in July 2009, cross-border trade settlement in RMB has soared to 350 million in early 2013. By 2015, Qu said, 30% of China export-import traffic will be settled in RMB, and the currency will take to the world stage as one of the top-three trade-settlement currencies, along with U.S. dollars and euros.

All this has been made possible by the creation of an offshore RMB market. Canadian companies can benefit from not having to trade via U.S. dollars, reducing their FX costs. The offshore market in Hong Kong has begun and is already worth US$200 billion to $300 billion.

One of the big holdups for using RMB has been the matter of convertibility. Chinese policy makers have said it’s their ultimate goal, Qu said, but they have yet to announce any timetable. For it to have several financial conditions have to be in place first, and reforms had been stalled pending a changeover in Chinese ultimate leadership late last year. The new Communist leadership, under HU TK, has signaled it wants to accelerate those financial reforms, and Qu said to watch out for an expanded bond market that would enable long-term financing. He predicted that within five years the RMB will be fully convertible.

Qu was joined on a panel with other HSBC experts who weighed in on matters of how renminbi’s greater presence in world trade will affect business. Spencer Lake, co-head of global markets for HSBC Bank plc, said that the Chinese have been studying U.S. and European Union recent history for lessons on how—and how not to create an agenda. They have shown particular interest in the creation of the euro in the late 1990s and how it obliged the world’s businesses to adapt.

The problem, Lake said, was that neither the U.S. nor the EU had to work with a non-convertible or semi-convertible currency. “The real challenge,” he said, “is how to open an account, facilitate payments and get trapped cash out of China.” He commended Canadian businesses for their interest in the RMB and for grasping that the fast-evolving currency will be an “alpha” in their businesses.

Bruce Alter, head of trade for HSBC Bank’s China unit’s global trade and receivables finance department, said that the FX efficiencies that Qu mentioned are a competitive advantage. Trading RMB to RMB reduces charges “by several percentage points, although the costs may be nebulous and poorly understood.” He said that large retailers have been telling him that by importing using RMB they are shaving 1% to 3% off their FX charges.

His colleague, Apratim Chakravarty, managing director of offshore Asian product distribution global markets for HSBC markets (Asia) Ltd., noted the speed with which internationalization of RMB is taking place. “If you get an RMB exposure in an invoice,” he said, “there is a booming offshore market to help you.”

All this spells a shrinking role for U.S. dollars in facilitating trade. “Over the next year,” Chakravarty said, “people will start to circumvent the U.S. dollar and go directly to RMB.” He noted that the Australian government recently signed an agreement with China to bypass U.S. dollars in country-to-country trading. And he said that he knows of one German corporate that has already transacted with a French counterparty using only RMB.

But how will internationalization affect the RMB’s value. Qu Hongbin said that greater foreign use of RMB will raise its demand. “The net-net result is impossible to measure,” he said. But there is also a decoupling taking place between currencies and the economies backing them, Lake said, partly because of distortions caused by economic stimulus. “The euro is expensive relative to its underlying economy. It’s the same with U.S. dollars and the pound. As stimulus disappears the currencies will start to reflect underlying national values.”

He said that that preoccupation with when the RMB will become fully convertible is not nearly as important as the issue of how “tradable” the currency is. Thanks to the offshore market and a growing bond market, Lake said, the RMB is “approaching fully tradable status.”

Photo: Image by Adam Young

China is Canada’s second-biggest trading partner and Canadian companies doing business with the Asian giant and managing their cash and transactions in RMB are realizing pricing discounts and other cost savings—in addition to the appreciation factor of the currency. The RMB, which has appreciated 30% against the U.S. dollar since exchange rate reforms in 2005, is still gaining, albeit at a more measured pace. Forecasts are for another 2% gain this year.

More bankable though is the push by China’s policymakers and businesses to conduct trade in the RMB, and the resulting incentives. A recent survey by HSBC found that 41% of Chinese companies were offering discounts of up to 3% for doing business in RMB. Six percent said they were offering price breaks of 3%-5%, while a further 2% said they were offering discounts of 5%-7%. Some large Canadian companies have secured discounts as high as 15% from their Chinese partners by settling in RMB.

Despite the mystery that still surrounds the renminbi, the reason for the price breaks is simple: The cost of doing business with China is lower when transactions are conducted in China’s own currency instead of the U.S. dollar.

Lewis Sun, head of sales, global payments and cash management for HSBC in China, said the reduction in currency exchange risks and costs, as well as the convenience, are big incentives for U.S. companies to switch to the RMB when doing business with Chinese companies.

Traditionally, sales or expenses conducted in U.S. dollars had currency exchange exposure built into the pricing, he explained. “So the price would contain a currency exchange premium. But if the whole settlement is switched into RMB, the price buffer can then be removed,” Sun said in an interview on a recent visit to Toronto to talk about China’s rapidly changing currency regulations and how North American companies can benefit from the RMB. HSBC, the largest foreign bank in China, is promoting 2013 as the “Year of the renminbi.”

Sun noted another selling point for switching to the RMB: Determined to increase the circulation of the RMB in global markets, China’s authorities look favorably on trades settled in RMB, which could mean more convenient treatment for companies when it comes to getting their paperwork approved.

Indeed, China’s central bank, the People’s Bank of China, is forecasting one-third of China’s trade will be settled in RMB within the next two to three years, up from 13% today. As the world’s top exporter, the sheer volume of transactions could propel the RMB into one of the top three global currencies.

The RMB’s race to internationalization—four years ago it was a rarity outside China’s borders—and the relaxation of most of the rules around trading in RMB, is helping to demystify the currency among American companies, Sun said. “Many of the locally based companies have already started to use the RMB for trade-related collections and payments.”

More important, multinationals are beginning to incorporate the RMB into their global operations. “Traditionally, companies considered China on a standalone basis. It was not easy to integrate the RMB into other operations,” Sun said. “But companies should feel confident their cash in China is not trapped.”

Sun outlined three RMB cash management strategies for companies:

Bringing RMB into China: The world’s largest destination for foreign investment, it has become relatively easy for companies to inject capital into China. Increased RMB liquidity in offshore financial centers such as Hong Kong, London or Singapore, has made it even easier. Companies can raise RMB funds offshore to invest in their China operations, usually at more favorable rates than onshore, because interest and exchange rates in these centers are market driven. This strategy eliminates FX exposure, and approvals are not required when injecting RMB into foreign enterprises in China.

Working capital for China operations: Increased access to an expanding number of high-quality, low-cost financial vehicles in China, such as RMB money market funds and cash deposits, are providing more options for foreign companies to fund their China operations. As well, intercompany loans in China are fairly straightforward and the automation to do them is becoming more sophisticated.

Getting cash out of China: A main area of concern for multinationals, Sun said there are already a number of ways to get excess cash out of China and into other areas of a company’s operations, such as transfer pricing, intercompany loans and dividend payments. But a pilot program launched last year in Shanghai promises to breach this last psychological barrier for U.S. companies. In the pilot, an automated process allows companies to use the RMB for overseas project financing or direct overseas investment—without the need for government approvals. The expectation is China will soon be rolling out the program nationwide.

With the controls being lifted, the main holdback for North American companies switching to the RMB is a lack of knowledge, Sun said. “Four years [for the internationalization of the RMB] is not a long time and companies need to prepare for the transformation. But they can benefit from using the RMB,” he said.

Illegal excavators in Bolivar state
Photo: Paul Harris

In Colombia, gold is the new cocaine.

“The relatively high price of gold, the fact that the final product is legal and its production sources cannot easily be traced, means that illegal groups can operate large, profitable operations without the risks involved in the drug trade,” said Daniel Linsker, vice-president of global services for Latin America, at Control Risks, an international business risk consulting firm.

It’s estimated that illegal mining accounts for most of Colombia’s gold production. Production was an estimated 66 tonnes in 2012, according to the country’s National Mining Agency. About 10 tonnes comes from legal mines and about 10 tonnes from scrap such as old jewellery, meaning more than 40 tonnes is produced illegally, estimates CIIGSA, one of Medellin’s gold refineries.

For the many Canadian and international junior mining firms operating in Colombia, illegal mining threatens the development of a legitimate, modern gold mining sector as security issues inhibit the work of small exploration outfits. At least 50 Canadian-listed juniors are exploring for gold in Colombia and several said they have seen illegal miners invade their exploration properties.

“The excavators got closer and closer and then overran the property,” said one executive with a Canadian junior operating in Bolivar department who requested anonymity. “We counted over 200 excavators. You have to leave because you get no support from the government,” he added.

Canadian juniors also face increasing difficulties from excessive government controls and delays in permits. “The environmental authority gave us a hard time over water permits for drilling but 300 metres away, excavators were destroying the river banks. The amount of damage the excavators are doing to the rivers is catastrophic,” said the executive.

Colombia’s weekly newsmagazine Semana dedicated eight pages to illegal mining in April, highlighting that it is becoming a key political and social issue. Colombia’s gold production is being called “blood gold,” echoing the depiction of African diamond mining as “blood diamonds” in the 1990s.

The Colombian government is now moving to take on illegal mining operations. The air force was mobilized in April to take action against illegal miners in Antioquia and Caldas, Medellin-based newspaper El Colombiano reported recently. The newspaper published a sequence of images taken from warplanes that showed excavators in the cross-hairs before being blown up. President Juan Manuel Santos gave the green light for the attacks, the government said.

In Segovia, a turf war between two organized gangs to control the gold and cocaine trade saw 300 people killed between January and October, 2012, the local government said. A vice-president of a TSX-listed company who requested anonymity said “Our drillers were advised by the [one gang] not to move after 7 p.m. They killed a woman near one of our drills. There are no soldiers because they know they will have problems.”

For President Santos, finding a solution could be key for possible re-election next year. “The top levels of government are aware of the situation, and all concerned are hopeful that actions will soon be made effective in the combat against these bandits,” said former defence minister Jorge Alberto Uribe.

As illegal mining moves up the political agenda, some observers call for a greater military response similar to that employed against cocaine production and guerrilla groups. “Why is the mining ministry asked to deal with criminal mining when it is a public order issue? The ministry of agriculture is not asked to deal with coca plantations which is criminal agriculture,” said former mining minister Luis Ernesto Mejia at a recent mining conference.

But others disagree. “Dynamiting excavators gives the same image as destroying cocaine labs. This is not the image we want,” said Representative Juan Diego Gomez, head of a Chamber of Representatives committee that overseas mining issues.

One focus of government has been restricting the importation of excavators. “Restrictions on the import of heavy machinery will probably not have an impact as the mafias will find ways to circumvent the restrictions, such as setting up fake construction companies,” said Control Risks’ Mr. Linsker.

A DIRTY BUSINESS

Illegal mining is easier, quicker and less risky than cocaine production or kidnapping and has overrun Colombian regions such as the Serrania de San Lucas in Bolivar, the El Bagre river basin of northeastern Antioquia, Choco, Cauca and other areas where high-grade gold veins and alluvial gravel deposits have been mined for generations by artisanal miners.

Illegal groups send excavators into areas with potential for alluvial gold, small grains of gold that have washed out of rocks over many years and been deposited in riverbeds. Excavators rip the river banks to pieces to extract the gold-bearing sands and gravels, each machine surrounded by a couple of dozen people panning the gold from the gravel and heavily guarded by gunmen.

Toxic mercury is then used to amalgamate the gold into a ball that can be smelted. In a short space of time, criminal mining destroys the land, leaving it scarred.

Treasury consultant David Blair says emerging-market multinationals come from difficult and regulated countries, so encountering the West with its streamlined business environments gives them a fleet-footed advantage.

Photo: AFP/Getty Images

With its distinctive hump and four big engines, the 747, nicknamed “the queen of the skies,” has been a symbol of jet travel for much of the past four decades. But in recent years, as airlines have chosen to fly passengers in more fuel-efficient, two-engine planes, the 747 has increasingly become an aviation packhorse. Most new 747 orders have involved freight carriers, which have been weighed down by two consecutive years of recession in global air cargo.

Earlier this month, Boeing said it would cut production of the 747-8, its newest model, to 1.75 airplanes a month in 2014 from two a month now because of weaker demand for large passenger and freighter airplanes.

Since it launched the 747-8 passenger model in 2006 with a longer body and new engines in hopes of rekindling sales, Boeing has sold just 31 of them to airlines, plus another nine to VIP users. “It’s a market that hasn’t delivered like we’d anticipated,” Randy Tinseth, Boeing’s vice-president of marketing, says. Meanwhile, the company has sold 70 freighter versions.

Boeing would like to keep producing 747s even as it lays plans for a new model of its twin-engine 777, which could eventually supplant the older plane. As early as this month, the Chicago company is expected to seek permission from its board to formally start selling new stretched models of the 777, dubbed the 777X, with additional lucrative under-cabin cargo space and the 747′s 16-hour range.

The new 777X, often dubbed a “mini-jumbo,” arriving in 2019 or 2020, will seat around 35 more passengers and fly thousands of miles farther than the first “jumbo” 747 flown by Pan American Airways in 1970.

Boeing Chief Executive Jim McNerney says he doesn’t “see the 777X introduction cannibalizing” the 747-8 significantly because the jets are different sizes. But analysts believe the 777X will be attractive to buyers who want many of the same capabilities with more fuel efficiency.

Launched in commercial service in 1970, the 747 was widely credited with making global travel more accessible. At the time Boeing estimated that the 747 halved the cost to airlines of flying a single passenger, compared with its smaller 707. Sales boomed, with Boeing receiving more than 1,400 orders between the 747′s launch in 1966 and 2005.

But economic volatility and swinging oil prices made big bets on big aircraft with four engines seem increasingly risky. Sales surged for big twin-engine jets that could fly just as far. Boeing introduced the twin-engine 777 in 1995 and added subsequent models that stretched the jet’s capacity and range, cutting into 747 demand.

Meanwhile, Boeing faced new competition in the jumbo-jet market from Airbus’s A380, introduced in 2007, which had two full-length decks that could hold 30% more passengers than the 747. Airbus, a unit of European Aeronautic Defence & Space Co., delivered its 100th A380 last month.

By contrast, Boeing has delivered 72 747s, including 46 747-8s, since 2007. But retirements have outpaced deliveries, and the 747 fleet has fallen to 685 operating globally as of last month from its peak of just over 1,000 in 1998, according to Ascend aviation consultancy.

The current version of the 747 also was costly for Boeing. Design changes, supply-chain woes and other issues delayed delivery of the 747-8 freighter from 2009 to 2011, and the passenger model from late 2010 to early 2012. The delays forced Boeing to record charges totaling more than $2 billion in 2008 and 2009.

Two complex deals that Boeing engineered last month illustrate the manoeuvring required to keep the company’s 747s flowing. It sold two passenger 747s to Air China Ltd. and three freighter 747s to Hong Kong-based Cathay Pacific Airways Ltd.’s cargo arm. To get the deals done, it agreed to sell Air China eight 777 freighters that were announced as cancelled by Cathay days before and to buy back four aging 747 freighters from Cathay to make room for the three newer 747-8 jets.

Air Lease Corp. CEO Steven Udvar-Házy, who is working with Boeing on the design of the 777X, says the 747-8 is probably that jet’s final iteration. Still, he says the 747 fills a valuable niche because of the way it is built: With the jet’s flight deck above its cargo bay, the 747 can open its nose door to load abnormally sized items like construction cranes, and it can be loaded and unloaded quickly.

Boeing says the 747 program is no longer losing money on each airplane sold, but “profitability is challenged” and it is trying to make production more efficient. Tinseth adds that Boeing is planning more improvements to enable the 747-8 to fly farther with more cargo.

In announcing the production cutback this month, Boeing said it expects air cargo to resume long-term growth next year, and it reiterated its forecast of global demand for 790 large airplanes like the 747-8 over the next 20 years, a forecast that is still significantly below Airbus’s estimate. The 747-8 “is well positioned to benefit our customers once cargo-market conditions improve,” McNerney says.

The International Air Transport Association says that February cargo data analyzed earlier this month indicated a seasonally adjusted 2% rebound from a year earlier, part of a “weak recovery that began in the fourth quarter of 2012″ and is “expected to pick up moderately as the year progresses.”

Some analysts are more pessimistic. A recent report from Sanford C. Bernstein Research suggested a fundamental shift away from air cargo that could slow the resurgence of cargo jets like the jumbo 747. Higher commodity prices, rising wages in China, and less sought-after consumer electronics like laptop computers are placing “less emphasis and reliance on fast forms of transportation” such as air cargo as manufacturers look for ways to reduce costs.

Eric Melka, Redline chief executive officer

For Redline Communications Group Inc. of Markham, Ont., this perception couldn’t be further from reality. The company specializes in providing broadband wireless connectivity to businesses and governments, especially in wide-open areas and harsh environments.

Redline, which started in 1999 and has annual worldwide revenue of $50 million, has found success in Mexico amid a highly skilled work force, healthy public-sector spending, a burgeoning middle class and a get-tough attitude on crime that has municipal officials using its wireless products to link networks of video surveillance cameras to improve public safety.

The company also has significant markets in Mexico’s energy sector, where its technology connects sensors and machinery spread across vast oil fields, as well as in education, where it connects teachers and students in some of the country’s most remote schools.

“Mexico’s a great place to do business for us,” says Redline CEO Eric Melka, noting that 90% of the company’s revenue comes from outside Canada. Sales in the Americas rose last year to 53% of its total, from 50% cent in 2011, largely as a result of growth in the oil-and-gas sector and in Mexico.

Melka, who is responsible for turning Redline around three years ago, says its strategies include building strong ties with local partners and focusing on local needs.

The company has a staff of 135, just a third of them working abroad, he says. Indeed, Redline does business in about 80 countries but has employees in only 17 of them, with the software-driven platform able to be controlled remotely, for instance directly from Canada.

Even in a country such as Mexico, where Redline has a “large footprint,” he notes, the company has just five employees, with local service providers and system integrators responsible for installations, application enhancements and network rollouts.

Its manufacturing is also mostly done on contract, with a large part of its products made in Mexico, such as the core AN-80i wireless technology used to link the security cameras wirelessly. Some 150,000 of the devices have been produced there and shipped around the world.

“We actually build our products in Mexico over building them in China,” Melka says, adding that Mexico’s large manufacturing facilities have strong management teams, good working environments and talented employees. “These are not sweatshops.”

Johane Séguin, chief representative for Export Development Canada in Mexico, says the country is “underplayed” compared with China or Brazil, but it is Canada’s fifth-largest export market and the fourth-largest market for Canadian investment abroad. The major sectors for 700-plus Canadian companies operating there include mining, oil and gas, car parts, aerospace and technology.

Mexico has a highly educated population and strong infrastructure, as well as regulations and incentives that welcome investment, she says. It has also become an important part of the global supply chain, with more than 40 free trade agreements involving countries around the world.

Mexico presents a number of advantages for Redline, from its proximity and similar time zones to the fact that it has a “business mindset,” Melka says.

“Mexico has a fundamentally North American approach; they understand that there’s a problem, they’re looking for a solution…whether it’s hardware or software, they understand it,” he says. “They don’t sit around waiting for months and months to debate or figure out what needs to get done.”

Relationships can take some time to develop, he notes. When Redline first came to Mexico in 2005, it proved itself with its first few deployments of surveillance systems in tourism hotspots, and by 2009 it “started to see some growth,” he says. Forty towns are now using the systems. “We never assume a deal, but it’s a heck of a lot easier when you can go to a customer and say, ‘I have 20 other municipalities that rely on this, let me show you how it’s done.’”

Canadians are seen as leaders in high-tech, he points out, which also appeals to such customers. “Canada’s a great place for technology; it’s a great place to build, it’s a great place to develop and innovate,” he says. “Redline has been able to take advantage of that reputation and has done a great job of helping drive that reputation, as well.”

Mexico can be a challenging place for a wireless company, given the different rules and regulations governing spectrum allocation, he says. There are also concerns about periodic political uncertainty and currency devaluations. Security is a critical issue, but it can be blown out of proportion, given “the CNN-sort-of-press about what we see in Mexico: the kidnappings, the drug war,” he says.

“There’s a perception that Mexico’s not a safe place—it’s difficult, there’s corruption,” he comments. “But we see it’s a very good place to do business … and the investment that they’re making to protect their community, their citizens and their borders is quite advanced.”

Smaller companies looking to move to Mexico find it “difficult to digest the security aspect,” Séguin says. “Those who are more established here don’t hesitate to expand.”

She says the security situation has improved, although companies should work with consultants on the ground, familiarize themselves with regions where there might be more trouble, build relationships with local officials and develop a security-preparedness plan.

Melka says it helps that Redline’s staff includes people of 40-plus nationalities, who know how to work in different contexts and countries.

“This is about understanding the local needs, the local community, the local ways of doing business and the cultures,” he says. Adaptability is important, changing products, approaches and methodologies rather than “just going in and doing whatever you think is right, because … it’s probably not.”

Redline’s core staff travel widely and meet directly with customers, says Melka, who was on the road for 186 days last year.

“Our customers are in the best place to understand local customs, local needs,” he says. “We’re a global company who thinks locally.”

TIPS FOR DOING BUSINESS IN MEXICO

Find a partner: Almost all Canadian companies intending to do business in Mexico will need a local partner. This could be a joint venture partner, a sales representative, a distributor or, if you are investing in Mexico, a suitable legal firm.

Do your due diligence: Carry out careful due diligence before committing to a sales agreement or other business relationship. Investigate the Mexican company’s creditworthiness, its financial record, the quality of its management, its business history and its reputation in the local and international marketplace.

Offer post-sale support: Mexican buyers are both service- and price-sensitive, but in many cases the most important factor in a successful sale is a supplier’s ability to provide reliable after-sales service, maintenance programs and product training and support. Also important are uniform quality control, compliance with international standards and reliable delivery.

Relationships matter: Like their counterparts in other Latin American cultures, Mexicans do business on the basis of trusted personal relationships, and these must usually be established before business can be carried out. Business decisions may often be based more on the Mexican participant’s degree of comfort with the relationship than on purely objective criteria.

Source: Export Development Canada

If its rise stuttered for the first few years (FreshBooks has exploded from 10 paying customers in 2005 to five million and counting), going global was never as hard for FreshBooks as it can be for brick and mortar companies. “By virtue of being accessible on the Internet, people from everywhere discovered us,” says McDerment. “On day one we were an international business.” Even starting up in the middle of the dot-com bust made sense. As McDerment points out, ordinary folks, the ones he calls “ingenious people at the coal face every day trying to put food on the table for their families”—tend to launch their own businesses—and need accounting help—when they lose their jobs in big corporations. Others prefer working for themselves no matter the economic climate. Being vital in good times and bad, and launching updated products, including a mobile app last summer, has built FreshBooks a client base in 120 countries.

“We had some challenges and in fact they have changed over time,” McDerment says. “Very soon we encountered different currencies that people like to use to bill their customers. And we discovered that they have different ways they want to articulate their date and time when they see it, or the way their address is organized. We even have different spellings in different countries.” Another, perhaps bigger, challenge for FreshBooks has been the rising Canadian dollar. “We started collecting in U.S. dollars,” says McDerment. “We have had the good fortune of lots of growth over the years but it is not to be taken lightly when every dollar went from a $1.50 to $1.00.” FreshBooks collects 100% of its revenues in U.S. dollars over the Internet and hedges its business in currency fluctuations by paying expenses both in Canadian and U.S. dollars. “Our biggest expense,” adds McDerment, “is head count here in Toronto where we are building product and serving customers.”

And FreshBooks promises to serve like crazy. On its web site, it guarantees that its employees will pick up the phones before they ring twice during business hours five days a week. If customers have invoicing, time tracking or expense management questions, a real live person will get them an answer within two hours. As for its employees, FreshBooks offers the welcoming environment of a snazzy tech firm with one additional perk—four stress-relieving dogs, including Munroe, McDerment’s “shadow CEO,” come to work with their owners every day.

At this stage, where FreshBooks is second only in size to QuickBooks Online in the U.S., McDerment is busy designing his own role as CEO. “I have enough humility to know that I don’t know the answers and enough courage to seek help,” he says. On top of learning to delegate, he has this advice for fellow entrepreneurs: “The first thing I would encourage Canadian businesses to think about is that Canada is a small market. Don’t look at winning Canada as success.” Selling internationally should not be a stumbling block, he says, it should be a logical leap. And once the leap is made, “and you realize you are competing with the rest of the world,” he adds, “you better pull up your socks and compete hard.” Along the way, he says, stay humble, hang onto your perspective, serve your customers well and don’t spread yourself too thin.

And bring dogs to the office.

Photo: Don Bayley

AFP of Canada is part of the Bethesda, Maryland-based AFP global community of treasury and financial professionals who work in a wide range of industries and sectors all over the world. Globally, AFP represents more than 15,000 members, providing them with daily news, data and research about their field, certification programs, networking opportunities, financial analytical tools, training and more. AFP of Canada has been operating for 10 years and has grown to about 800 members here.

The Canadian event is separate from AFP’s annual conference in the United States. As opposed to that more typical trade show, AFP of Canada’s forum, which runs from June 11 to 13 at the Intercontinental Toronto Hotel, is a much more scaled-back event but with a full schedule of professional development activities for people in finance and treasury functions from all kinds of organizations.

The forum is structured into various types of sessions, according to Alberto Nunez, chairman of AFP of Canada and treasurer of IAMGOLD Corp.: Keynote presentations, educational sessions and roundtables. The roundtables are moderated by practitioners and people who work in the corporate world dealing with financial and risk type of issues for their companies, says Nunez. They share their stories with people from other industries and discuss lessons learned, best practices and so on.

This year’s forum features three keynote speakers, as well. Amanda Lang, senior business correspondent for CBC News, will be speaking at the opening session about her book, The Power of Why, and productivity and innovation in Canada. Warren Jestin, senior vice-president and chief economist for Scotiabank, takes the luncheon keynote to address the “New World Rising” and Canada’s fiscal position. The closing talk comes courtesy of Chris Mathers, former RCMP agent and fraud expert, who will speak about “Crime and Business and the Business of Crime”—“very timely in this day and age,” says Nunez, “with new anti-money-laundering legislation coming in.”

Among the topics in the educational sessions: financial modelling, short-term forecasting, combating fraud, e-payments and more. Roundtables include forecasting, commodities hedging and restructuring global cash management, among other topics.

This is the sixth year of AFP of Canada’s event, and Nunez says they are hoping to attract as many as 200 CFOs, treasurers, assistant treasurers, treasury managers and the like. “We’re not looking to attract thousands,” he adds. “That’s not the nature of the forum.”

What it is, says Nunez, is a uniquely Canadian forum in terms of professional development for finance and treasury people. “It speaks to the professionalism of the function within the company. The forum can really allow people to really tackle and learn about very unique issues and risks that are out there and learn from people in other industries.”

Photo: Richard Gillard

Between government interference, political instability and labour strikes, doing business in Africa can be difficult. But MHI, created in 1985 to offer management and training services to foreign clients, has found a niche as a turnaround specialist, a kind of Dr. Phil for the power sector. With the Nigerian contract, it serves 28 million households, compared to 542,000 at home.

“The Transmission Co. of Nigeria, well, it’s pretty huge in terms of users,” says Arthur Melet, an analyst with IDC Energy Insights based in Dubai. The contract places MHI in a favourable position for winning future contracts in Nigeria, the continent’s second-largest economy.

MHI has already met with challenges, however. Although it first landed the contract last July, just as work was about to begin in September, CEO Don Priestman said MHI did not have authority to proceed. Then in November, Nigerian President Goodluck Jonathan announced the contract had been cancelled, saying the correct procedure wasn’t followed. The uncertainty continued until last month, when Transmission Co. CEO Olusola Akinniranye finally announced that MHI had “fully taken over the company.” Today, the handover is so fresh Manitoba Hydro spokesman Glenn Schneider says “the issue is sensitive” and that “no one is available authorized to comment.”

The Canadian company is engaged in a battle for the African power market as countries sell off state-owned utilities in an effort to upgrade their infrastructure. America’s Blackstone Group, China’s Sinohydro, Germany’s Siemens and Korea Electric Power Corp. are just some of the firms jostling to get in on the action. Though Africa has 15% of the world’s population, it accounts for only 3% of energy consumption. Most sub-Saharan African countries have an electrification level under 30%. Excluding South Africa, the entire installed generation capacity of the region is 28 gigawatts, equivalent to that of Argentina. Experts see privatization as necessary to shift the continent’s economies from commodities and agriculture to industry.

“They’re going to have a difficult job,” Melet says of MHI’s Nigerian contract. But given the potential upside, it’s worth the trouble.

Photo: Klaas Lingbeek- van Kranen

The population of Uganda is roughly 36 million. Of these, only 12% are connected to the national grid. But even those with access to electricity regularly experience power outages due to load-shedding.

The country’s installed generation capacity is 818.5 megawatts (MW), but the generation capacity fluctuates around 558MW. Most of this comes from three major hydropower dams. Electricity peak demand is currently around 450MW, growing 10 to 15% a year. The Economist Intelligence Unit (EIU) projects that at this rate demand will outpace supply by 2014, when frequent power outages should increase.

Uganda has an estimated hydropower potential of over 4,500MW, 1,650MW for biomass cogeneration and 450MW in geothermal energy. The country also has power potential in solar, peat and wind. Despite this huge energy potential, Uganda experiences load-shedding. Benon Mutambi, executive director of the Electricity Regulatory Authority, the country’s energy regulator, says the economy could lose nearly US50 cents per unit of load-shedding, or about US$262.8 million annually.

Yet these challenges present opportunities. Take Toronto-based Naanovo Energy Inc., an alternative energy technology company established in 2001 that focuses on concentrated solar power and waste to energy projects in Canada and globally. Naanovo just set up a solar power project in Uganda, also known as the Namugoga Concentrated Solar Power project, to meet national electricity demand. The company has completed a feasibility study for a 50MW concentrated solar plant facility, according to Steven J. R. Brant, the company’s president and CEO.

The plant is the first of several concentrated solar power systems to be developed by the company, which are expected ultimately to generate some 250MW of solar energy in Uganda. Energy from the project, valued at over US$247 million, will be supplied to the grid via a 30-year power purchase agreement with state-owned Uganda Electricity Transmission Company Limited.

The additional energy supply is needed. The EIU expects Uganda’s economy to grow 5% in 2013, more than double projected world GDP growth of 2.3%. Energy infrastructure has been among the fastest-growing sectors of the economy, thanks in part to Uganda’s favourable investment climate. This stems from the relative political stability Uganda has enjoyed over the last two decades.

To increase the use of modern renewable energy from its current 4% share of total energy consumption to 61% by 2017 and boost total electricity generation output, the government approved its renewable energy policy in 2007. Its implementation has created immense opportunities for the design, construction and service of biomass plants; in the assembly and marketing of solar systems; for the acquisition, construction and service of micro hydropower stations; in the manufacture and marketing of charcoal briquettes; and for the co-generation and construction of geothermal plants.

The government has also initiated rural-electrification schemes. According to the Uganda Bureau of Statistics household survey report, more than 80% of the country’s population lives in rural areas, where only about 3% are connected to the national grid. Components of these schemes include the extension of the existing electricity distribution network, and the installation of independent distribution systems, small-scale renewable energy generation plants, and household and institutional solar systems.

While these trends are encouraging for both foreign direct investment (FDI) and the energy sector, challenges remain for foreign companies looking to fill Uganda’s energy-production vacuum.

Risk factors that have dampened growth in the energy sector include corruption, complex bureaucracies, court injunctions, investigative probes, political tensions and global economic stagnation.

The Namugoga Concentrated Solar Power project, for example, was initiated in 2007 and projected to be completed in 2011. Brant attributes the delay to the global recession ”Many renewable energy projects around the world were affected, not just the Namugoga Project,” he says. With the recession over, Brant adds that “several financial parties have already expressed interest in providing financing.”

Similarly, a government-initiated project, the Karuma Hydropower project, was envisaged in 2005 to meet ever-increasing energy demand. The project has a potential of about 600MW. But a series of repeated evaluation processes curbed procurement.

Finally, another government project, the 250MW Bujagali Hydropower project, suffered continuous delays and increased project costs of 56% from US$550 million at its inception, to more than US$860 million at completion in 2012.

According to the latest US National Intelligence report, ”Worldwide Threat Assessment of the U.S. Intelligence Community,” presented to the Senate select committee on Intelligence in March 2013, “the [African Great Lakes] region endures the chronic pressures of weak governance, ethnic cleavages and active rebel groups,” singling out Burundi, Congo (Kinshasa) and Uganda as ”at risk of violent instability during the next year.”

Meanwhile, the Inspectorate of Government was created in 1995 to eliminate corruption, abuse of authority and of public office. The Inspectorate has a mixed record of successful investigations, convictions, fines and misuse for political partisanship.

To eradicate bureaucracy, the government has set up institutions to act as checkpoints. The Uganda Investment Authority (UIA) was created in 2001 to assist investors in registering a business and obtaining the relevant paperwork, all under one roof. This has reduced the time and number of steps required to start a business.

To alleviate inefficiencies in the energy sector, the government has established a regulatory agency, the Electricity Regulatory Authority. The agency is also charged with ensuring a competitive environment, which will enable the entry of small-to-medium-scale investors.

Finally, Uganda has adopted a comprehensive feed-in tariff policy. This is an internationally recognized regulatory mechanism to promote and increase the amount of electricity generated from renewable resources through a fixed tariff based on the levelized cost of production (i.e., the constant price per unit of energy that causes an investment to just break even), costs of constructing new power plants including their capital and financing charges, for a guaranteed period of time. Globally, this mechanism is a powerful policy promoting renewable energy technologies because it provides investment security for developers while promoting industry competition.

With the discovery of oil in the country, Uganda will enjoy a large economic boost after oil production gets under way. As a result, the energy sector is expected to attract unprecedented levels of investment.