fallout - The Globe and Mail

11 big thinkers on how to get cities moving | The most powerful man in rock ’n’ roll | Vancouver’s high-tech makeover | 9,000 bidders, $144 million, 10,500 pieces of heavy metal | Family dynasty or debacle?

fallout

Central bankers and the great panic of 2015

april 2015

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contents

04/15

23

COVER illustrated exclusively for report on business magazine by mark summers, photograph by jimmy jeong/cp; (above) tom griggs

Colombia’s moving solution to poverty and crime

11 big thinkers on how to get cities moving | The mosT powerful man

in rock ’n’ roll | VancouVer’s high-tech makeoVer | 9,000 bidders, $144 million, 10,500 pieces of heavy metal | family dynasTy or debacle?

Features

23 Get a move on

Ever-more people crowding into ever-bigger cities adds up to one big global traffic jam. Time for some brainstorming. /By Alex Bozikovic, Dawn Calleja, Omar El Akkad, Jeff Gray, Iain Marlow, Oliver Moore, Patrick White

fallout

Central bankers and the great paniC of 2015

april 2015

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38 The great central bank freak-out of 2015

Central bankers like Canada’s Stephen Poloz are slashing interest rates—even though there’s no economic crisis. What gives?

44 Can’t see the forest for the techies

Vancouver owes it all to a resource sector whose heyday is over. Good thing someone started a tech boom. /By Richard Littlemore

50 Peak boutique

Marriott, Sheraton…and Germain? How a Montreal family aims to outsmart the giants in the hip-hotel niche. /By Grant Robertson

/By Kevin Carmichael APRIL 2015 / REPORT ON BUSINESS 1

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04/15 CONTENTS

DEPARTMENTS

4 Feedback 7 The Interview

How is it possible to run four of the five biggest concert tours of all time and stay low-profile? Because you can’t take the Canadian out of Arthur Fogel

10 Graphic Details

The scion also rises—or wrecks the company. A comparative look, from brilliant (the Southerns) to embarrassing (the Bronfmans)

12 Venture

She started as a junior employee at Whitehorse’s Alkan Air, working on the books. Now she’s president and owner. A quick study, that Wendy Tayler

14 Heavy metal

Excavators by the hundred, dozers by the dozen—welcome to the world’s largest auction of industrial gear When to bring up the money question during the jobinterview process, and the importance of the right kind of pushy

18 Investing

The 2010s are replaying the history of the 1970s in reverse (except for disco, that is). What this means for investors in stocks is this: Cool it, baby

20 Reguly

All is not well under the golden arches. McDonald’s didn’t see the fast-casual trend coming, and now a company long famous for cachet is playing catch-up

56 Exit Interview

Calgary Stampede CEO Vern Kimball literally hangs up his hat (and sits down at the piano)

7

Have you rocked out with the Stones, U2, AC/DC? Thank Arthur Fogel

14

Need gear—big gear? Check out a Ritchie Bros. auction

PHoTOGRAPH (top) kourosh keshiri; (bottom) eve edelheit

16 Corporate Governess

2 APRIL 2015 / REPORT ON BUSINESS

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04/15 Feedback

April 2015, Volume 31, No.8

THE NUCLEAR DEBATE

In addition to a wave of highly charged web comments, Charles Wilkins’s March cover story about nuclearwaste disposal—and, by extension, the very future of the nuclear industry—inspired more letters to the editor than we have seen in many years. Since space considerations preclude publishing all the letters here, we have posted them at tgam.ca/r. BRAND SKEPTICS

Our third annual Top 100 Brands ranking (March) did not get much love from commenters. Several wrote that dominant companies like Rogers (No. 6) and Air Canada (No. 56) didn’t deserve their spots on the list. As one skeptic put it, What you call loyalty I call not having a choice. Another subject of scorn was the inclusion of Onex, which is not a consumer brand but a leveraged-buyout specialist. Onex? It’s some kind of stone, isn’t it? LOTS OF BLAME in the caribbean

Tim Kiladze’s examination of Canadian banks’ woes in their Caribbean operations (March) might have mentioned more factors contributing to the region’s economic malaise, according to commenters. The failure and corruption of local leadership in many of the small island nations has a great deal to do with the severity of the current situation, said one. According to

another, it’s also pertinent that island elites imitated social-welfare programs that they had learned about as students in North America and the U.K.; that some states suffered for their innocent purchase of bogus U.S. investments stamped AAA; and that the big banks infected the islands with the absurd idea of house-equity economics. it doesn’t stop with the self-driving car

Re: Ivor Tossell’s forecast on the demise of the private auto (Disuption, March), what will automation do to all the surrounding activities? No more traffic reports—the cars will follow computer instructions. What about the auto insurance industry? Who is liable when two computer-guided vehicles collide? No need for large police traffic divisions—no roadblocks, unless the computer has been imbibing. And what about the hundreds of auto publications that cater to all our fantasies about the driving experience? If we are not driving the thing, who really cares how it handles or accelerates or takes the curves? —Michael Clague, Vancouver

What you were reading on the Web this month

Why do central banks keep making the rich richer?

18% 20%

27%

24% 11%

Inside the race for Canada’s nuclear waste Trouble in paradise: Inside Canadian banks’ billion-dollar Caribbean struggle Canada’s Top 100 brands

FreshCo, Old Navy, Rexall: Joe Jackman helps retailers get their mojo back

Clarification

Our March story on the travails of Canadian banks in the Caribbean said Barbados was working on a restructuring plan with the International Monetary Fund. In fact, it is simply in talks with the IMF, which is recommending sweeping changes.

Editorial Editor gary salewicz Managing Editor Judith PereirA Senior Editors dawn calleja, john Daly, Ted mumford Copy Editor jeanette king Research catherine dowling, dawn promislow, charles rowland, anna-kaisa walker Art Art Director domenic macri Associate Art Director Emily vezÉr Director of Photography Clare vander meersch Contributors jennifer alexander, david berman, Steve Brearton, antony hare, Diane jermyn, joel kimmel, iain marlow, ian McGugan, brian milner, david morris, gordon pitts, eric Reguly, grant robertson, sean silcoff, sean stanleigh, Doug Steiner, ivor tossell, patrick white, shirley won Advertising Chief Revenue Officer ANDREW SAUNDERS Business Manager, Magazines rolfe jones Advertising Co-ordinator, Marketing Solutions Group sonja tasovska Production Director, Ad Production Services and Magazine Production sally pirri Production Co-ordinator isabelle cabral Publisher phillip crawley Editor-in-Chief, The Globe and Mail david walmsley Report on Business magazine is published 10 times a year by The Globe and Mail Inc., 444 Front St. W., Toronto M5V 2S9. Telephone 416-585-5000. Letters to the Editor: [email protected]. The next issue will be on April 24. Copyright 2015, The Globe and Mail. Indexed in the Canadian Periodical Index. Advertising Offices Head Office, The Globe and Mail, 444 Front St. W., Toronto M5V 2S9 Telephone 416-585-5111 or toll-free 1-866-999-9237 Branch Offices Montreal 514-982-3050, Vancouver 604-685-0308, Calgary 403-245-4987 General Toronto 416-585-5111, fax 416-585-5641; Montreal 514-982-3050, fax 514-982-3074; Vancouver 604-685-0308, fax 604-685-7549; toll-free 1-866-999-9ads(237); e-mail: [email protected] United States, Mexico and Caribbean Publicitas Inc., New York, New York 212-946-0219, fax 212-599-8292, e-mail: [email protected] Publications mail registration No. 7418. The publisher accepts no responsibility for unsolicited manuscripts, transparencies or other material. Printed in Canada by Transcontinental Printing Inc. Prepress by DM Digital+1. Report on Business magazine is electronically available through subscription to Factiva.com from Factiva, at factiva.com/factiva or 416-306-2003.

tgam.ca/r

4 april 2015 / REPORT ON BUSINESS


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04/15

Auction action Do I hear $75,000 for this gorgeous Caterpillar wheel loader? page 14

Business Intelligence

Family dynasty or debacle? • The real Arctic Air • Governess on interview etiquette

• Why McDonald’s is starved for customers

King Arthur at his office in Beverly Hills

The Interview

photograph kourosh keshiri

The king of rock

L

Arthur Fogel rules the world of live tours—which, in the post-Napster era, is where the dollars are

ady Gaga calls him her Oz—the man who saw enough potential in this modernday Dorothy to save her from bankruptcy. Bono says he’s George Clooney’s character in ER: “The operating room’s about to explode, and he keeps calm, doing open-heart surgery with a Swiss Army Knife.”

The man they’re praising so extravagantly is probably the most powerful behindthe-scenes figure in modern music: Arthur Fogel, the head of Live Nation’s global touring division. To date, the Ottawa native has helped run four of the five highest-grossing tours of all time. He has the clout to—as he did for Gaga—cut a performer a $40-million cheque and send her touring

to the world’s biggest venues (all currency in U.S. dollars). In the post-Napster era, live shows have become the rock star’s sole source of reliable income (music and licensing sales went from $14.6 billion to $6.3 billion from 1999 to 2009). As Fogel’s friend Guy Oseary, Madonna’s manager, has said: “You once toured to promote albums, now you release albums to promote

tours.” This has multiplied Fogel’s importance in a beleaguered industry. Interviewed in his L.A. office—hung with photos of himself with Madonna, U2, and his wife and five kids—Fogel is understated, his clothing dark and plain. But under that, he burns with what critic Walter Pater once called a hard, gemlike flame. This is a man who once told legendary promoter Bill Graham—the guy who brought Jimi Hendrix and Janis Joplin to the masses— to go f--- himself, who recently enjoyed showing off to a small-time Canadian promoter because the man long ago refused to help Fogel APRIL 2015 / REPORT ON BUSINESS 7

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$736

$558

$459

$441

$408

Top 1000

Check-in

Of the 38* ROB 1000 companies whose names include one of the cardinal compass points—firms like Great-West Lifeco [10], Northland Power [112] and SouthGobi Resources [976]—only 10 increased their share value over the past year**. While the average company stock price dropped by 26%, the S&P/ TSX Composite Index rose nearly 7%. The best performer was Westaim Corp. [634], with a 39% increase. East Asia Minerals [729] was the worst, with a 94% drop. Those featuring west in their name performed best, while those with a southern exposure didn’t fare as well. /Steve Bearton EAST IS LEAST, WEST IS BEST

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NORTH -29% EAST -66% SOUTH -36% WEST -21% * Five companies excluded, including George Weston **Feb. 21, 2014, to Feb. 20, 2015

photograph Kevin Mazur/wireimage

Paul Simon. His staff will often hire over 1,000 people in each city and book out 200 hotel rooms. When Bono had to get emergency back surgery midway through U2’s last tour, Fogel had to postpone all North American dates for a year, and place what one insider calls the highest insurance claim ever in this sphere. Most of the acts history’s top five tours Fogel represents are heading into that good night (though Mick Jagger et al. are hardly U2 Rolling Roger AC/DC Madonna going gently). What Stones Waters Sticky & does he see after they 360°* A BiggerBang* The Wall Live Black Ice* Sweet* (finally) retire? “People (2009-2011) (2005-2007) (2010-2013) (2008-2010) (2008-2009) have been moaning for a while that no artists million million million million million who came up in the digital era will be able * A Fogel-orchestrated Live Nation tour to fill the stadiums,” get his foot in the door. via local promoters in each he says. “It’s such shit.” He And why not? Fogel’s rise city. But CPI began booking name-checks Gaga, Ed Sheeran, looks inexorable only in venues for the Rolling Stones’ Adele and Rihanna. “There’s an retrospect. The headmaster international tours explosion of talent.” of his private high school, directly—giving rise to 2 The film Who Floor tickets near the the F*** Is Arthur Ashbury College, predicted Fogel’s confrontation stage for U2’s summer Fogel? efficiently that Fogel would never amount with Graham, who ran recounts the shows are posted at major changes to much, and for a while, that the San Francisco nearly $10,000. Aren’t swirling around prediction looked likely to concert scene. such prices exorbitant Fogel, from come true. After graduating The Edge’s former for one night out? the ’80s to the from McMaster in Hamilton, owner, Ron Chapman, present. “You have to look at his career as a drummer recently made a documentary the expenses that go into the faltered. He took a job as a night on Fogel (2), and comments: show, the number of people manager at Egerton’s—later “Until Arthur came along, the employed, the stages,” says the Edge—a club at the centre industry was full of promoters Fogel. “We don’t pull the prices of Toronto’s vibrant new wave who championed their own from the air.” scene. (“What didn’t I see there? brand more than the artists Fogel claims people are I had to learn how to fight— they booked—they were willing to pay more if the shows literally and figuratively.”) He large, public personalities like are high-octane. In short: Spend managed small bands on crossGraham. Fogel, meanwhile, is more, make more. (3) Not every tour goes as planned—to wit, continent tours, then worked the biggest in the industry, has Guns N’ Roses’ 2002 tour, where as an assistant for one of the been for some time, and until Axl Rose often no-showed and principals of CPI, the firm led recently he didn’t even have a fans rioted. “With by Michael Cohl that booked Wikipedia page.” 3 Live Nation the expenses acts into Canada for a time. (1) Fogel’s claim to posterity invested $3 of touring, the Fogel had become part will be that he helped some million to build of CPI’s leadership team by album-era artists lengthen their stakes are so much the stage for U2’s 360° tour, the time it careers. When we talk, higher. I can’t say which allowed 1 Live Nation and Cohl, its I’ve found myself revolutionized former chairman, parted he’s firming up tours the band to perform in ways in 2008 and recently in that situation the concertfor U2, Madonna and settled significant outstanding Rush, and overseeing since then, but you the round in tour industry. stadiums— litigation. “Michael is amazing never want to get Acts used to Australian shows only possible in with numbers, with deals,” arenas before. cocky.” /Alec Scott have to work featuring Sting and Fogel says carefully. U2’s 360° tour stops at the Rose Bowl in Pasadena, California


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THE


®

leaders green index

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04/15 Graphic Details

Does Junior measure up? In a boardroom shakeup at Bombardier Inc. in February, Pierre Beaudoin stepped down as CEO, and his father, Laurent, retired as chairman. Though there have been some spectacular crack-ups among Canada’s richest families, a 2012 University of Toronto study of 23 large family-controlled public companies found that many outperformed the S&P/TSX Composite Index. What separates dynasties from debacles? Here are a dozen snapshots. /John Daly

Paul Desmarais Jr. and André Desmarais Co-CEOs may 1996

today

Shaw Communications

Empire Co. Ltd., Sobeys

Jim Shaw CEO

Paul D. Sobey CEO

DEC 1998

NOV 2010

jul 1998

Na

DEC 2013

Jan 200

800

700

founder

Quebecor Inc.

CanWest Global

Pierre Péladeau

Israel (Izzy) Asper

600

500

JR Shaw

Paul Desmarais Sr.

Frank H. Sobey John W. Sobey Donald R. Sobey and David F. Sobey

400 Share price % change under heirs' leadership

300

Dec 1997

S&P/TSX Composite % change over same period

Leonard Asper CEO

Pierre Karl Péladeau Vice-chairman May 2013

jun 1999

Mar 2010

200

0

100

200

Paul Sr. sent his sons to good schools, mentored them on the job for years and then stepped aside to concentrate on the big picture. This is how you build a family business.

Pierre Karl took the reins after his father died of a heart attack. Often impulsive—like his dad—he bought the Sun newspaper chain and Vidéotron, but oversaw the bankruptcy of Quebecor World, the printing business, in 2008. He plunged into provincial politics in 2014, and is now the front-runner for the Parti Québécois leadership.

As a corporate strategist, Jim had a good run. As a front guy, he could be, uh, disruptive—he resigned after a tirade at a shareholder lunch. Brother Brad became CEO. Jim lives on a $16,000a-day pension. Lucky for him that profits in the cable and broadcast business in Canada are so fat.

Paul D. Sobey transformed his family’s Nova Scotiabased chain into Canada’s secondlargest supermarket retailer by acquiring the Oshawa Group in 1999, and 213 Safeway stores in 2013. He then handed the CEO job to Marc Poulin, a company veteran. Sobey and six other family members still sit on the board.

Izzy built the Global Television Network, and, in 1999, he named 35-year-old Leonard as CEO. But Dad then agreed to buy Conrad Black’s Hollinger newspaper chain for $3.2 billion. Izzy died in 2003. CanWest Global sank under a $4-billion debt load in 2009. TV is profitable; papers are not. Dad should have known that.


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(hasenfratz) mike cassese/reuters; (weston) Aaron Vincent Elkaim/cp; (bombardier) cp; paul chiasson/cp; (rogers) jack dobson/the globe and mail; chris young/the globe and mail; (bronfman) cp; eric thayer/reuters

900

Power Corp.

photographs (desmarais) paul chiasson/cp; Graham Hughes/cp; (péladeau) cliff bower/the globe and mail; Adrian Wyld/cp; (shaw) jeff m c intosh/cp; tibor kolley/the globe and mail (sobey) Wamboldt-Waterfield/the globe and mail; (asper) Tibor Kolley/The Globe and Mail

1,000

Ro

Dad an oi busin globa cong has g out a cont the b

t

r n.

nk

TV

a m e sh o f all h Atco Ltd.

Linamar

Loblaw Cos.

Nancy Southern CEO

Linda Hasenfratz CEO

Galen Weston Jr. Executive chairman

aug 2002

sep 2006

Jan 2000

today

today

Bombardier Inc. Joseph Armand Bombardier Laurent Beaudoin

Roy Thomson Kenneth Thomson

Ronald Southern

Frank Hasenfratz

Dad transformed an oil-field trailer business into a global infrastructure conglomerate. He has gradually eased out and Nancy continues to expand the business.

Pierre Beaudoin CEO

today

Kenneth inherited his father’s newspaper and broadcast empire. He steered the family into specialty publishing and data. David has attempted a great transformation of his own, buying Reuters in 2008. The share price, down 25% by late 2012, has soared in the past two years. (The Thomson family's holding company owns a majority stake in The Globe and Mail.)

Jun 2008

Frank, a machinist who fled Hungary in 1957, began making auto parts on a lathe in his basement near Guelph, Ontario. He was ambitious, and Linamar grew into a $1.2-billion-a-year company. Daughter Linda is even more ambitious. She’s tripled revenues and, by expanding globally, plans to get to $10 billion by 2020.

Rogers Communications Edward S. Rogers Sr. Ted Rogers

George Weston Garfield Weston Galen Weston

David Thomson Chairman Jun 2002

Piano-tinkling Edgar Jr. acquired movie studios and record labels, then merged the family booze business with ill-fated French conglomerate Vivendi in 2000. In 2004, he bought Warner Music, just as free downloading was strangling the industry. The whole experience “was a disaster,” said Uncle Charles.

today

Thomson Reuters

(hasenfratz) mike cassese/reuters; (weston) Aaron Vincent Elkaim/cp; (bombardier) cp; paul chiasson/cp; (rogers) jack dobson/the globe and mail; chris young/the globe and mail; (bronfman) cp; eric thayer/reuters

ar 10

Edgar Bronfman Jr. (CEO, June, 1994. Stepped down as CEO of Warner Music in August, 2011)

Samuel Bronfman Charles Bronfman and Edgar Bronfman

photographs (desmarais) paul chiasson/cp; Graham Hughes/cp; (péladeau) cliff bower/the globe and mail; Adrian Wyld/cp; (shaw) jeff m c intosh/cp; tibor kolley/the globe and mail (sobey) Wamboldt-Waterfield/the globe and mail; (asper) Tibor Kolley/The Globe and Mail

er

Seagram Co.

G2 stumbled after being put in charge of Loblaws. But results have improved, and he won kudos for the $12.4-billion acquisition of Shoppers Drug Mart last year. He also assumed the role of president in 2014, a job his father let others do for him.

FEB 2015

Laurent expanded the snowmobile company his fatherin-law founded into the world’s biggest train manufacturer and the third-largest civil aircraft maker. In 2004, he announced a new series of passenger jets, to be ready by 2010. Oops. Reeling from delays and debt, the board convinced Beaudoin the elder and son to step down this winter.

Edward Rogers III Chairman, Rogers Control Trust DEC 2008

today

Ted let his son run the cable side of the company in the early 2000s, but picked Nadir Mohamed to run wireless. Wireless did much better. When Ted died in 2008, Rogers' board chose Mohamed as CEO. Edward shouldn't feel bad—the Rogers' family trust holdings are now worth about $5.2 billion.

april 2015 / REPORT ON BUSINESS 11

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Wendy Tayler at an airstrip outside Whitehorse (that’s a Twin Otter in the background)

w To m bo bu

ne in an its ex in sa ch of

Solutions, at -40

To understand Alkan Air better, Wendy Tayler learned to fly herself. That devotion just might explain why the onetime accounts clerk now heads the Yukon’s premier charter airline

T

he planes never stop coming and going outside Wendy Tayler’s window. Spend an hour in her office at Whitehorse’s Erik Nielsen International Airport, and you’ll see everything from a Cessna two-seater to a Boeing 737 rolling by en route to takeoff or shedding speed after landing. And no, says Tayler, it doesn’t matter how long you stay in that office: She’s never stopped being transfixed by the planes. Tayler is the 41-year-old president and majority owner of Whitehorse-based Alkan Air, a 12-plane operation that has become the Yukon’s pre-eminent charter service. She’s worked in plenty of industries besides aviation: She’s run a cable company and a radio station, owned a hotel, and worked in real estate and retail. She owns the local Ford dealership. But aviation, Tayler says, is “by far my first love.…It really does get in your blood, and without a blood transfusion you can’t get rid of it.” She got her first taste of the industry in 1994, arriving at Alkan as a young mother schooled in accounting. The company was founded by a trio of Yukoners with a few planes in 1977—“the three of them sat around with the phone in the middle of the desk and waited for it to ring,” Tayler says, citing company lore—and grew through

the late 1980s, expanding from charters to medevac contracts and scheduled passenger flights from Whitehorse to the Yukon’s far-flung smaller communities. By the time Tayler signed on, the scheduled service was fading out—mine closures and reduced traffic meant that regular flights to villages like Faro or Mayo made less and less sense. That’s when Alkan Air took on its current, specialized form, as an air charter service devoted to serving the mining and exploration industries, and government. After starting out in accounts receivable, Tayler spent seven years working her way through the company, making herself useful and learning about all aspects of the business. “I built our first website, I worked in operations, I did all of the accounting,” she says. “When a company’s that small, you get an opportunity to do a little bit of everything.” In 2001, she moved on to the Hougen Group of Companies, a family-owned hydra of Yukon businesses whose roots reach back to the 1940s. It was at Hougen that she learned the ropes of radio, cable,

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photograph Chris MacArthur

Venture

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retail, real estate and automotive sales. By 2007, one of Alkan’s original owners was looking to sell his shares and retire. Together with long-time Alkan pilot and minority partner Hugh Kitchen, Tayler bought in. She was back in the flying business. Tayler returned to the charter business at a wild time. Gold prices spiked in the wake of the 2008 economic crash, and from 2009 to 2011 the Yukon found itself in the grip of a massive mining exploration boom. Alkan’s flight hours increased 40% in 2011 alone, Tayler says—“which you can appreciate is a challenge when you’ve got a set number of aircraft to work with.” That challenge—matching aircraft to demand—remains the biggest one Tayler faces each year. “At the start of the year, we need to look in our crystal ball and try to predict how much flying all the different exploration properties are going to do, what the price of gold is going to be, and how much traffic we’re likely to see—and then we have to plan our fleet around that,” she says. “So if we think it’s going to be busier than our current fleet is, we have to go out and invest in a million, million-and-a-half-dollar aircraft, get the aircrew for it, get them trained, get everybody online. Then everybody’s here and the aircraft’s parked here and you’re waiting to see if you were right. … You are forced to make decisions that are capital-intensive well before you know for sure what the market will do.” Alkan’s long-standing medevac contract makes it easier for Tayler to make those million-dollar gambles. Since 1986, the company has provided air ambulance services to Yukoners, flying

rs ed he s. he ne at or t’s ece o-

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photograph Chris MacArthur

vng ng all st all a org.” en ed ts en le,

them from the territory’s remote communities into Whitehorse General Hospital—and, when necessary, from the hospital south to Vancouver, Calgary or Edmonton. The contract forms between 40% and 50% of Alkan’s business. The company has three planes and dedicated aircrew on standby 24 hours a day; Tayler estimates that they fly 40 to 45 medevacs each month. On both sides of the business, Tayler focuses on providing seamless, trouble-free service to the client. For instance, the company installed several large freezers and fridges alongside its hangars, so that groceries won’t spoil before they’re flown out to crews in the field. And on the medevac side, Alkan is having a “bariatric door” installed in one of its air ambulance planes, at its own expense—as Tayler explains delicately, an increasing number of North American patients don’t easily fit through the standard door of a small aircraft. Not long after she returned to Alkan, Tayler got her private pilot’s licence. She did it, she says, both for personal and professional reasons. Flying had its hooks in her, but also, she wanted to understand what her employees were up against. (“Fuelling an airplane at minus 40? It’s awful,” she says, laughing.) That obsessive attention to detail is something Hugh Kitchen has been marvelling at ever since Tayler’s earliest days in accounts receivable. “She’s a quick study,” he says. “Give her a few days, and she’ll have it figured out.” /Eva Holland

Two Alkan Air pilots load a plane bound for Kaminak Gold Corp.’s Coffee project, south of Dawson

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04/15

Heavy Metal

Going, going...

Nine thousand people from 81 countries bidding on 10,500 pieces of equipment equals the world’s largest auction

photograph eve edelheit

T

The excavators look like they are bowing in prayer. Four hundred and fifty-five of them, organized by model, are frozen in the same position—hydraulic arms arch out from the cabs and bend down to buckets resting on the ground. There are also dump trucks, packers, dozers and their heavy equipment brethren, all resting on this 200-acre site in Orlando. Ritchie Bros.—the Canadian company that first started auctioning furniture some six decades ago before graduating to industrial auctions—will unload 10,578 pieces of equipment at the sale, making this the largest auction of its kind in the world. Auctioneers in orange shirts rat-a-tat-tat prices higher. “Don’t let him beat you out on $1,000, neighbour,” one says, nudging a bidder going after a Caterpillar 980G wheel loader. Buyer No. 1074 snatches the 1998 edition of this machine for $76,000 (all currency in U.S. dollars). In some cases, successful bidders pick up multiple pieces of equipment in one go by paying the winning price for however many similar machines they want. Over 9,300 bidders from 81 countries are either here in person or playing along online. Orlando may seem like an odd place to sell 496 compactors, 48 directional drills and 26 vacuum trucks, but the city has access to ports—a necessary feature for global sales. Buyers outside Florida will spend $144 million, with $48 million of that coming from beyond U.S. borders. Buyer No. 32530, the one nudged by the auctioneer to pony up another $1,000, secures the 1995 version of a Caterpillar 980G wheel loader. It has a new coat of yellow paint. “Sold it—$41,000,” the auctioneer says. “Headed to the Kingdom of Saudi Arabia.” /Carrie Tait


DM151408_Pg14-15_ROB_APR_2015.indd 14

15-03-06 10:36 AM

photograph eve edelheit

Buyers size up rows of excavators on day 2 of the fiveday auction in Orlando

APRIL 2015 / REPORT ON BUSINESS 15

DM151408_Pg14-15_ROB_APR_2015.indd 15

15-03-06 10:36 AM

04/15 140-character reviews Forgot there’s a world underneath the ice and snow? Science and nature books explain all this and more

Corporate Governess

The Narrow Edge By Deborah Cramer Crabs lay eggs, birds eat them in mid-migration. Crabs’ blood used to make medicine. #Nature is amazing. (Spoiler: Humans ruin everything.)

Pay it forward —Kelly N., Toronto

Dear Kelly In a 2014 survey of over 300 senior managers by California-based staffing agency Robert Half, about 38% thought it was okay for candidates to ask about money during the first two interviews. But while a lot of companies might find this acceptable—since it immediately allows them to tell whether a candidate is affordable—is it really the best thing for you to do? After all, you could easily blow your chances by coming off as rude rather than confident. “It’s like walking into someone’s house and saying, ‘What’s for dinner?’ ” says Gary P. Latham, a professor at University of Toronto’s Rotman School of Management. Instead, he says you should build the love: The more time and effort employers put in looking over the applicant, the more committed they are about hiring. So go ahead and let them put in the effort. When the employer is ready to talk about salary, be prepared. Do some research on sites such as Glassdoor Canada to get an idea on ranges, but always let the other side make the first offer. “If you say it first, you’ll never know if they would have offered something higher. Once the offer is on the table, it’s okay to up it by another 5% to 7%. And, at that point, you’re likely to get it.”

Dear Corporate Governess I’m a recent immigrant, and my culture considers it rude to be pushy. But I’m frustrated that my ideas aren’t being heard. How do I learn to speak up? —Miko T., Toronto Dear Miko As a third-generation Canadian, I thought it better to ask someone who’s been there and succeeded. Ratna Omidvar, a professor at Ryerson’s Ted Rogers School of Management, has not only lived your experience, she’s shy as well. While she encourages you to stay true to yourself, she also believes it’s important to find your voice. “Start by asking questions. When a shy person asks a question, people take it seriously. Because we’re such polite Canadians, the team will respond. And so you bring yourself to their attention, not as someone who has lots to say, but as someone who has intelligent questions,” she says. To improve your grammatical and idiomatic English, Omidvar recommends listening to the radio—particularly CBC Radio One, which has more conversation than music. It will also ground you in local issues. Then take some public speaking courses, as Omidvar did: “I was petrified but after a few times, it was easier. There’s nothing like sitting with others who share the same shyness but all want to come out of their shell.” You could try to find a mentor in your organization or take a colleague out for a coffee. There’s nothing quite like finding a friend, and that can work for anyone.

The Road to Relativity By Hanoch Gutfreund & Jürgen Renn 100 years on, big smartypants’ discovery explained via annotations, historical context. Display on coffee table next to @sportsillustrated.

The Wandering Mind By Michael Corballis Kiwi psychologist’s light, droll take on how and why we’re easily distracted, even in mid-senten… hey, is that a cat riding a Segway? /Dave Morris

illustration antony hare

Dear Corporate Governess I’m going through a bunch of interviews for a contract job and am wondering when to discuss salary. Is it okay on the second round?



15-03-05 9:57 AM

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15-03-09 10:21 AM

04/15 Smart Money

Investing

Cecilia Mo

Stairway to stagnation

We may be living the 1970s in reverse, yet markets may be just as miserable There is also a growing wariness among professional investors. Capital Economics, a respected research firm, thinks the Standard & Poor’s 500 Index will finish this year at 2,100—pretty much where it stands now—and only inch ahead in 2016. GMO LLC, a muchfollowed investment manager in Boston, sees both U.S. and international stocks as a fine way to lose money over the next seven years. The pros are fond of observing that this bull market has been the most hated rally in history. It’s been fuelled by the low, low interest rates engineered by central banks in the wake of the 2008-09 financial crisis. The capacity S&P 500 INDEX FOR THE 1970s

1972

1974

1976

1978

1980

for further monetary stimulus is limited. If rates stay low, it would be because the economy is sputtering, which is not good for stock prices. But if interest rates and bond yields move up because of an improving economy, bonds will offer more competition for investors’ dollars. That should limit further stock gains. One lesson from history is that sometimes investors get paid well to take risks, and sometimes—like now—they don’t. That’s not to say a crash is imminent. However, remember that stocks have climbed in recent years despite a lacklustre economy. It would be no big surprise if the situation flips over the next few years, and the market stagnates as the economy improves. /Ian McGugan

sound investing advice Carl Icahn, hard-boiled corporate raider

“One of the hidden ‘assets’ in many companies is top management: Get rid of them, and the value goes up.”

Yield-hungry baby boomers are still looking for dividend plays. We asked value investor Cecilia Mo, who oversees the $1-billion Dynamic Dividend Advantage Fund, how she finds promising stocks with payouts. Why don’t you own lots of Canadian bank, utility and telecom stocks? Most are fairly expensive, given their muted top-line and bottom-line growth. I look for reasonably valued companies that can grow dividends in excess of the market [4% to 5% annually over the past two years], and have strong balance sheets and management that I can trust. I own defensive and cyclical names. What sectors look the most interesting now? In Canada, I like non-bank financials such as CI Financial, which has strong organic growth, and insurer Manulife Financial, which is shifting to rely more on fee-based income from wealth management. In the United States, the health care sector is attractive. Obamacare has changed the landscape, and it has accelerated consolidation in the insurance and hospital industry. I own medical device makers like Medronic, insurers such as Anthem and pharmaceuticals like Pfizer. What are some of your other dividend plays? Cineplex, a big holding, will benefit from a strong boxoffice slate this year, and growth drivers like its preshow advertising business and Scene loyalty card. Others include K-Bro Linen and Whitecap Resources, which is likely to make accretive acquisitions in the energy downturn. /Shirley Won

photograph Brendan McDermid/reuters; illustration joel kimmel

A

s I recall the 1970s, there were many reasons to think that society was falling apart. The decade burst into being with an outbreak of violence in Quebec, blasted complacency with Richard Nixon’s resignation and then smacked us with runaway inflation. Mix in disco and you have an era many of us wince to remember. So maybe I should be grateful we are now in the anti-’70s, a period when the dominant economic and political themes of my teenage years are reversed. Somehow, though, I suspect the 2010s won’t shine in memory either—at least, not from an investor’s perspective. One of the biggest challenges for both decades has been the impact 120 of baby boomers. During the 1970s, boomers poured into the labour force, helping to create stagflation. 100 Fast-forward 40 years and those same workers are starting to flood out, helping pull down the poten80 tial growth rate of the economy. Perhaps as a result, prices are now headed in the opposite direc60 1970 tion. Inflation was the bogeyman of the 1970s; deflation is the villain of the 2010s. The 1970s were the decade of soaring energy prices and all-powerful OPEC. The 2010s have been marked by OPEC’s fading power and by the recent crash in oil prices. For investors, these developments raise fundamental questions. The 1970s were a generally miserable time for stock markets, but set the stage for big gains in the 1980s. Are the 2010s—wonderful so far—setting us up for a big letdown in the years ahead? One reason to think so is valuation. Stocks are trading at lush multiples of their long-term earnings, as measured by the so-called cyclically adjusted price-to-earnings ratio (CAPE). This ratio has been a decent predictor of future returns, and right now it’s suggesting that gains over the next few years will likely be paltry.



15-03-06 10:49 AM

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15-03-06 1:00 PM

Eric Reguly

Where’s the organic beef? McDonald’s needs a new game plan to compete with rapidly growing fast-casual chains—and better-tasting fries with that

photograph GREG FUNNELL

W

hen my sisters and I were kids, our rency in U.S. dollars). In the United States, guest counts—the parents never took us to McDonald’s number of customers—fell by 4.1%. The company’s shares just because it was fast and cheap, have been flabby underperformers, despite a recent uptick on though that helped. They took us the arrival of new CEO and touted turnaround man Stephen because McDonald’s was a treat. Easterbrook. Over the past year, in a raging bull market, they The burgers, shakes and fries— were up 6% by early March, only about half as much as the especially the fries—were tasty and the restaurants them- Standard and Poor’s 500. selves had a cheery, all-American feel. Going to McDonald’s in Fixing McDonald’s won’t be easy. If it goes upmarket through our Ford Falcon station wagon was like taking a mini-holiday. the use of higher-quality ingredients, it will have to raise prices But that was more than 40 years ago, and McDonald’s and the and risk losing the mass market. If it cuts costs and prices to try fast-food market it still dominates have changed. In early March, to rebuild market share, it risks relegation to the bottom rank I went to a McDonald’s for the first time in almost a decade. of ultracheap joints milling out bland factory burgers. The rather gloomy outlet was on a busy high street in North Already, McDonald’s cool factor is a thing of the past. The London. It was late afternoon and the place was almost empty, bulk of the growth in the industry is in the fast-casual market, save for a few teenagers in plaid school uniforms. I stared at the where the emphasis is on fresh, high-quality, locally sourced menu for two or three minutes before I could decipher all the ingredients. You still line up to place your order, but most fastoptions—too much choice—and ordered a casual chains offer some service, making regular hamburger with small fries. them a hybrid between a classic stuff-yourThe meal was not particularly fast or face-and-run franchise and a proper sitYou still line up cheap, but that wasn’t the point. The point down restaurant. to place your order, was the burger tasted like cardboard and McDonald’s didn’t anticipate the shift in but most fast-casual the fries had almost no taste at all, despite customer demand in recent years. As society chains offer some the salt, sugar, fat and other ingredients in general became more affluent, consumlarded into them (the fries have 19 ingrediers became more willing to spend money in service, making ents including an anti-foaming agent called restaurants. But they also wanted food with them a hybrid dimethylpolysiloxane, should you be keen flavour that was healthier. North American between a classic to spice up your next barbecue). families became foodies, and learned to The next day, I went to two of the new buy organic beef, free-range chicken and stuff-your-face-andbreed of American “fast casual” burger growth-hormone-free milk. Supermarkets run franchise and joints, Shake Shack and Five Guys Burgers like Whole Foods—stock market value $20 a proper sit-down and Fries, in London’s buzzy Covent Garbillion—are spreading across the land. den area. They were definitely slower than As fast-food consumers went upmarrestaurant McDonald’s, though not by much, and cerket, they were eagerly followed by the tainly not cheap by McDonald’s standards. fast-casual restaurants and mysteriously But that wasn’t the point either. Compared with McDonald’s, ignored by McDonald’s. It responded by tweaking its menu (not the meals were delicious, and because they use high-quality always for the better, like getting rid of the yummy beef tallow ingredients, such as Shake Shack’s hormone-free beef, I felt used for the fries), its decor and not much else. Along came pretty sure it was healthier, if equally fattening. And the decor Five Guys, Shake Shack, Habit Burger Grill, Panera, Chipotle was definitely more pleasing. and others. Some became stock market sensations. ChipoIn the United States, Elevation Burger says it uses “100-per- tle, with 1,780 restaurants—just 5% of McDonald’s total—has cent USDA -certified organic, grass-fed, free-range beef.” a market value of $21 billion, about 21% of McDonald’s total. McDonald’s signature gut filler, the Big Mac, offers 100% pure, Shares in Shake Shack’s IPO in January doubled on their first USDA-inspected beef: “no fillers, extenders or preservatives.” day of trading. I’ll take an upscale burger, please, even at twice the price, and McDonald’s isn’t going to disappear any time soon, if ever. I don’t want to know what extenders are. But millions of other The question is how to make its meals tasty and healthy while people don’t share my reservations. McDonald’s—born in Cal- keeping them cheap and fast. It might be impossible to satisfy ifornia, then launched as a franchise by Ray Kroc in Illinois, in all those goals. 1955—now has more than 36,000 outlets in 119 countries. Yet all is not well under the golden arches. In 2014, McDon- Eric Reguly is an award-winning columnist with The Globe and Mail. ald’s global revenue was down 2.4% to $27.4 billion (all cur- He is now based in Rome and can be reached at [email protected] 20 april 2015 / REPORT ON BUSINESS


15-03-06 10:56 AM

Congratulations to these recent appointees Phillip Crawley, Publisher & CEO of The Globe and Mail, extends best wishes to the following individuals who were recently featured in the Report on Business Section of The Globe and Mail newspaper. Congratulations on your new appointments.

Ian J. Boyd, P.Eng. to President and CEO Bird Construction Inc.

Greg Dowdall, CFA to Head of the Private Client Group Burgundy Asset Management Ltd.

Joe Rooney, CFA to Head of the U.S. Client Group Burgundy Asset Management Ltd.

Dr. Sherry Cooper to Chief Economist Dominion Lending Centres

Thomas Haig to President and COO Giant Tiger Stores Limited

Joel Feldberg to President and CEO The Global Group

Jim Bertram to Executive Chair Keyera Corp.

Douglas Haughey to Independent Lead Director Keyera Corp.

David G. Smith to President and CEO Keyera Corp.

Antoine Chagnon to President and CEO Lallemand Inc.

William (Bill) Nankervis to Executive VP and COO Lallemand Inc.

Angela Austman to Partner, Vancouver Office Lawson Lundell LLP

Vincent Bérubé to Principal, Worldwide Partnership McKinsey & Company

Erez Eizenman to Principal, Worldwide Partnership McKinsey & Company

Maryse Bertrand to Board of Directors Metro Inc.

Stephanie Coyles to Board of Directors Metro Inc.

Réal Raymond to Chair, Board of Directors Metro Inc.

Stuart Hay to Partner, Odgers Interim, Calgary Odgers Berndtson

Stephen Solursh to VP and Associate General Counsel Ontario Teachers’ Pension Plan

Dr. Kevin Imrie to President The Royal College of Physicians and Surgeons of Canada

Neil Ross to VP, National Sales Sentry Investments

APRIL 2015

To make arrangements for an Appointment Notice, please call 1-800-387-9012 or email [email protected] View all appointment notices online at www.globeandmail.com/appointments


15-03-05 2:18 PM

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transportation

get a move on

by Alex Bozikovic Dawn Calleja

More than half of the world’s seven billion inhabitants live in cities—a figure that is projected to grow to 66% by 2050. And as our urban centres grow, so too does the demand for more efficient means of moving the people who live in them. We talked to 11 urban planners, economists, business leaders and big thinkers for their vision on creating the cities of the future.

2050

2045

Omar el Akkad Jeff Gray Iain Marlow Oliver Moore Patrick White

Total urban population worldwide, 1950-2050

6,338,611

6,030,924 2040

(000s)

5,715,413 1950

2035

746,481

5,394,235

1955

872,134 1960

1,019,495 2030

5,058,158

1965

1,183,910

1970

2025

1,350,281

4,705,774

1975

1,534,721 2020

4,338,015 source un world urbanization prospects 2014 study

1980

1,749,539 2015

1985

3,957,285

2,003,050 2010

1990

3,571,272 2005

3,199,013

2000

2,856,131

1995

2,285,031

2,568,063


DM151408_Pg23-37_ROB_APR_2015.indd 23

15-03-09 11:50 AM

toronto chicago

new york

los angeles miami

mexico city

bogotÁ

lima

rio de janeiro

buenos aires

—Gil Penalosa is chair of the non-profit group 8-80 Cities and former commissioner of Parks, Sport and Recreation for Bogotá, Colombia

Average number of hours commuters spend stuck in traffic annually

m

London commute zone

Brussels

Antwerp

Los Angeles

Rotterdam

Honolulu

Milan

San Francisco

Paris

New York

Greater Manchester

Washington D.C.

Toronto

3

montreal

3

U.S. average

38

Vancouver Calgary

29.5 16.4 20


DM151408_Pg23-37_ROB_APR_2015.indd 24

sources inrix traffic scorecard, world bank, world health organization,census canada

t r a n sp o rtat i o n

“There’s no major city in the world that has solved the issue of mobility through the private car. None. And the only way to move people is through public transportation. For that, we need to improve buses. Wherever you see a traffic jam, that’s where you should have dedicated bus lanes. And people need to be able to walk to the station. We’re not going to be able to get people out of their cars unless transit is cheaper, faster, more convenient or all of the above.”

City population growth

15-03-09 11:50 AM

(000s) 1950 2015 2050

moscow

neiro

sources inrix traffic scorecard, world bank, world health organization,census canada

london

paris beijing

madrid

Tokyo Shanghai

cairo riyadh mumbai

lagos kuala lumpur kinshasha

Los Angeles

10,883 12,308 13,257

Mexico City

15,642 20,843 23,865

Chicago

7,374 8,739 9,493

Miami

3,969 5,771 6,554

Toronto

3,807 5,901 6,957

New York

16,086 18,591 19,885

Bogotá

4,740 9,558 11,915

Lima

5,837 9,722 12,221

Buenos Aires

10,513 15,024 16,956

Rio de Janeiro 9,697 12,825 14,174

JOhannesburg

82.9

78.1

64.3

62.6

60.8

57

56.5

ROAD RAGE

The term originated in 1987– 1988 when a rash of freeway shootings took place on L.A.’s 405, 110 and 10 freeways

54.8

54.2

46.9

$121 billion (U.S.)

40.5

Annual cost of all wasted time and fuel from being stuck in traffic in the U.S.

38.5 38.1

11 billion litres

38 29.5

40

60

That’s how much extra fuel Americans consume due to all that traffic—adding up to 25.4 billion kilograms of carbon dioxide released into the atmosphere by idling cars

4,414 6,133 6,707

London

8,054 10,189 11,467

Paris

9,330 10,764 11,803

Lagos

4,764 12,614 24,239

Kinshasa

3,683 11,116 19,996

Johannesburg 3,709 9,176 11,573

83.4

Madrid

Moscow

8,987 12,063 12,200

Cairo

9,892 18,419 24,502

Riyadh

2,325 6,195 7,940

Mumbai

12,436 20,741 27,797

Kuala Lumpur 2,098 6,629 9,423 Beijing

6,788 19,520 27,706

Shanghai

7,823 22,991 30,751

Tokyo

32,530 37,833 37,190

80 april 2015 / REPORT ON BUSINESS 25

DM151408_Pg23-37_ROB_APR_2015.indd 25

15-03-09 11:50 AM

Janette Sadik-Khan Transit guru

New York isn’t known for its friendly streets, but as transportation commissioner under ex-mayor Michael Bloomberg, Janette Sadik-Khan made them a lot more welcoming. Many of the changes were controversial at first, but public support grew. The shift showed that, to the surprise of some, removing space for vehicles needn’t worsen congestion. And making life easier for cyclists can help local businesses. Now a principal at the former mayor’s consultancy, Bloomberg Associates, Sadik-Khan tells us how she brings the lessons of New York to the world.

Over seven years, we added almost 400 miles of bike lanes to New York City streets to create a true cycling network. On top of that, we launched CitiBike, the largest and most popular bike-share system in the United States. It was really the first new transportation system in New York in 60 years, and it’s already become a permanent part of the city fabric. We also built 60 pedestrian plazas across all five boroughs and reworked hundreds of corridors and intersections. Our streets are safer than they’ve ever been. The health of the city’s economy is linked to the health of a city’s streets—we saw proof in numbers. We saw really impressive growth in retail sales by localrun businesses, up 172% in the more walkable parts of Brooklyn. Commercial vacancies near Union Square dropped 49% when public space was added. And closing part of Times Square to cars boosted safety while increasing overall vehicle travel speeds in the area. In the global race to build safer and more sustainable communities, cities that don’t innovate and give people choices will be left at the starting line. No two cities are exactly alike, but we now have the opportunity to show what worked in New York. You know, tailor it to meet the needs of a particular city. If we can introduce world-class streets to New York, Toronto and Calgary and Ottawa can too. It takes new thinking to change streets, though. And in a lot of places, streets have been the same for so long that people have forgotten what’s possible. The attraction to the status quo is incredibly powerful and you really need to show people something even stronger to break that bond.


DM151408_Pg23-37_ROB_APR_2015.indd 26

15-03-09 11:51 AM

i

t

k b

m

th

u

photograph (left) andrew eccles; source statistics canada

t r a n s p o rtat i o n

New York takes the mean out of mean streets

1

s m a rt i dea

THE ZIPPER MERGE

o

Go ahead—butt in. Polite merging, in which drivers dutifully move over as soon as they’re aware the road will narrow, can send a ripple effect back 30 kilometres as cars brake to let others in. That’s why more jurisdictions are encouraging the zipper merge— vehicles stay in both lanes as long as possible, and then one car merges and one car advances. Maximizing the use of road space can cut backups by 40%.

ds

e

my

s.

n c rt

s

e

k

photograph (left) andrew eccles; source statistics canada

d

—Jan Gehl is a Danish architect and public space guru whose firm has worked on projects in cities around the world

15.4 million

Number of Canadians who commute to work, according to the 2011 National Household Survey—and about 80% of them drove in a private vehicle drove 74% transit 12% walked 5.7% passenger in vehicle 5.6% biked 1.3% other 1.4%

63.5% bus 25% subway or elevated rail

of that 12%

11.2% light rail, streetcar or commuter rail 0.3% ferry

Partner up Jascha Franklin-Hodge Chief information officer of Boston

, y

t

“Canadian cities have been too influenced by American city planning, which until recently was nothing to brag about. There has been too much focus on the automobile. In Copenhagen, the strategy is to be a good city for people. It has to do with the physical design of the streets. People are amazed at what they see here: Things have been getting better for 50 years, and that is a feat. You Canadians can do it, for God’s sake.”

In a previous life, Jascha Franklin-Hodge worked on the digital strategy for Barack Obama’s two presidential runs. Today, he’s trying to breathe new life into the way Boston deals with an age-old annoyance—traffic management. In January, the city teamed up with Uber to try and use the data the company collects to solve some of its traffic woes. The following month, Boston partnered with Waze, a Google-owned traffic app that collects congestion data from its millions of users. We took the Waze feed and integrated it with our Geographic Information Systems platform to create a map that can be viewed inside the city’s traffic management centre. It allows the people who control the signal system to see where there are incidents that they may need to respond to.

For example, Waze may notify them that there’s a brokendown truck blocking a lane on a particular street. If they have a camera in the area that they can access, they can say, Okay, I see what’s going on, I’m going to extend the green cycle on the light ahead of this truck. Roadways are used by buses, cyclists, private vehicles. And

now there are things like Uber and Lyft, and while they’re not public transportation in the traditional sense, they are part of the transportation network. In some ways we’re catching up on the data front for more traditional road users, because the public transit system has been providing detailed route and service data for years.


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photograph tom griggs


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HOW TO TRANSFORM A C ITY: PART 1

Medellin, Colombia | $7 million

photograph tom griggs

For generations, the city of Medellin, Colombia, was known for its drug violence and intractable poverty. Home to Pablo Escobar, it was the murder capital of the world in the 1980s and ’90s. Steep hills and clogged streets stifled the city’s social and economic mobility; those who grew up in the slums rarely escaped. But a decade of unorthodox transit planning is changing all that. In 2004, the city launched its Metrocable system of soaring gondolas that usher 40,000 people a day between hillside slums and the rest of the city. In 2013, the city finished its latest quirky effort to integrate the once-divided city: a 384-metre escalator that cuts a half-hour hike up to the impoverished Comuna 13 district down to five minutes. Free to use, the $7-million escalator is believed to be unique in the world. The city’s campaign to fight crime through transit seems to be working. A Columbia University study found that murders declined by 66% in areas where Metrocable stations were built. Dubbed “the cable car of the poor,” the Metrocable system is now being replicated by other South American cities that are embracing the notion that mobility equals prosperity.

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2

sma rt i d e a

Give traffic signals a brain

Anders Kofod-Petersen Scientist

Researchers around the globe are in a race to develop intelligent traffic signals to manage traffic woes. Norwegian artificial intelligence expert Anders KofodPetersen is one of them: He built a prototype using the camera from an Xbox lying around his lab in Trondheim and says the device will ease traffic congestion, helping to reduce pollution from idling engines, and discourage jaywalking.

I get annoyed when I drive to an intersection and I get a red and there’s no pedestrian for miles. Why do I have to sit here, waiting for this invisible pedestrian? Our signal looks at the body language of people near the traffic light. We look at certain points on a pedestrian—their hips, shoulders and gaze direction—and calculate a predicted path. If this path indicates that the pedestrian wants to cross the street, we know that. We track these people moving about and do calculations that inform the system that here are, let’s say, seven pedestrians who have the intention of crossing the road. And that will go into the scheduling

system, which will also know something about how many cars are about. And then the decision is made to give the green to the pedestrians or to the cars. We are also interested in knowing how long we should keep the green light for the pedestrians. If it is some young sporty guy who runs, he needs the green for five seconds, but if old Mrs. Johnson is arriving with her wheeled walker, she probably needs slightly more time. So we are also trying to classify these pedestrians—are they children or old?—so we can adjust the length of the green-red cycle. There’s no way we can actually solve traffic. But we can make it better.

Before the Transitmix app, transit planners sketched out bus routes on pieces of paper, plugged them into Google Earth and then put the mileage into Excel to tally the cost. But that didn’t take into account population density and demand. Transitmix— created by former NASA developer Sam Hashemi—does. When he put a beta version online, 50,000 maps were created in the first month. “It’s not sexy to start a company focusing on tools for government agencies,” says Hashemi, “but the impact you can have is incredible.”

80,832 Number of licensed rickshaws in Delhi

500,000 Estimated number of total rickshaws in Delhi

13,437

Number of yellow-taxi medallions in New York City

13,700

Cars affiliated with Uber 30 april 2015 / REPORT ON BUSINESS

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15-03-10 2:06 PM

Fa

Ge

photograph (left) kai t. dragland (ntnu); sources new York city transit, fastesttrains.org, the telegraph, discovery news

transportation

THE PLANNING GUIDE

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It pays to go private In the 1980s, state-owned Japan Railways was wheezing under mounting debt and ridership was stagnating. In a bold experiment, the Japanese government spun off the railway assets into several private companies, the biggest of which was East Japan Railway, known as JR East. Freed of the state’s shackles, JR East became a lean, hyper-competitive transit corporation—it launched new routes, slashed travel times and made transit hubs ultra-efficient. Before “there was no competition or competitors, so there was no competitive spirit,” says Takao Nishiyama, the company’s executive director of overseas affairs. The company now moves an astounding 17 million passengers per day through Tokyo’s spotless subway network and aboard the Shinkansen bullet trains—although they travel at 320 kilometres per hour, not one has recorded an accident since operations began more than four decades ago.

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186 mph

Italy ETR 500

photograph (left) kai t. dragland (ntnu); sources new York city transit, fastesttrains.org, the telegraph, discovery news

0

—Joe Starkman, president of condo developer Knightsbridge Homes, is proposing to build a pair of condo buildings in Calgary with no resident parking. This would be the first such development in Alberta and is politically sensitive enough that city council would have to approve it this spring. Opponents are calling the plan unrealistic, but Starkman counters that he’s tapping into a worldwide trend—and he’s able to offer a cheaper product since underground parking stalls in downtown Calgary cost about $60,000 to build.

Fastest trains in the world

m en n s e ot any or s,” t n ”

2

“We’re looking at the Y generation—the first in decades where a car is not their first priority. It doesn’t even rank in the top five.”

190 mph

Eurostar

Spain AVE Taglo 250

Taiwan THSR 700T

South Korea KTX

France TGV RÉseau

Shanghai maglev

japan Shinkansen

Germany Transrapid TR-09

China CRH380A

199 mph 205 mph 208 mph 219 mph 236 mph 270 mph 275 mph 279 mph 302 mph

Let the data guide you Jean-François Barsoum Senior managing consultant, Smarter Cities, Water and Transportation at IBM Jean-François Barsoum helps cities co-ordinate the flow of information from traff ic cameras, road sensors and public transit networks. Lyon and some other French cities are adopting the system that helps crunch the data and beam real-time information to users on their smartphones.

You could take the subway to the end of the line and then you could take a cab. Or you could take a bike to the train station and then you could take the train. And because of the access to all the information—including how many parking spots there are for electric vehicles, if the trains are

running late and if there is a road blockage—people can actually take all of this into account. If there’s a delay, the system will alert you and say the mode you thought you were going to take to the airport won’t work for you any more. It will also do predictions. There’s historical data which says that at 4

o’clock it usually looks like this, but it will also take in existing conditions and say, based on what it looks like now, here’s what we think it is going to look like. It will actually think ahead: Every time there is an incident or a change in what’s happening on the highways, the system will let you know. april 2015 / REPORT ON BUSINESS 31

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HOW TO TRANSFORM A C IT Y: PART 2

Even on a bitterly cold winter evening in Seoul, South Korea, couples are strolling leisurely along the Cheonggyecheon, laughing and holding hands as they follow one of the paths that flank the stream. The waterway burbles along, in a sunken concrete thoroughfare, for nearly 11 kilometres, in the heart of this megacity of 10 million people. It’s hard to imagine that, a decade ago, roughly 168,000 cars a day travelled over an enormous raised highway that towered over the Cheonggyecheon. Then, in 2000, urban planner Kee Yeon Hwang and his team convinced then-mayoral candidate Lee Myungbak of the merits of replacing the freeway with a recreational corridor. Together, they calmed a skeptical (and furious) public, and got the elongated park built in about 2 1/2 years. At the same time, the city added two roads and a 14.5-kilometre bus-only line beside the previous route of the freeway. It also built dozens of bridges to connect the two sides of the stream. The project is credited with increasing bus ridership by 15%, and subway ridership by 3.3% between 2003 and 2008; downtown traffic has also decreased by 2.3%. As for Lee, he became Korea’s 10th president.

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photograph seil sung

Seoul | $367 million (U.S.)

15-03-09 11:52 AM

photograph seil sung


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t r a n s p o rtat i o n

No free parking

3

sma rt i d e a

Donald Shoup Urban planner and economist

BUILD A TEST CITY

How do you claim the title of selfdriving-car capital of the world? Build a $6.5-million (U.S.), 32-acre facility for autonomous vehicles. The University of Michigan in Ann Arbor’s M City will simulate driving in a real urban centre, including a four-lane highway, streetlights, roundabouts and a variety of road surfaces. The project is backed by the major automakers, along with tech companies like Verizon and Qualcomm.

Tell me about your study of the Los Angeles neighbourhood of Westwood, where you found an astronomical amount of cruising for parking.

It’s a 15-block area and, over a year, we estimated that it amounted to about 915,000 vehicle miles travelled. That’s equivalent to four trips to the moon, or 36 trips around the Earth. It was 50 cents an hour at the meters, but the cheapest off-street parking was about $2—and often you get a similar ratio in other cities. If you look at the garage, it might be $10 for the first hour, $2 on the street. So the city is telling you to cruise. They did the

same study in New York and found similar results. In San Francisco, they’ve tried out variable pricing in a big way over the last three years—the cost changes depending on location, time of day and day of the week—and it cut the time of cruising in half. This makes me think of the Seinfeld episode where George wants a free spot. Why does parking make us crazy?

Just what George said: “I never pay for parking. Paying for parking is like going to a prostitute. Why should I pay, if when I apply myself, maybe I can get it for free?” Well, of course that’s what people are doing.

18.3

million

Number of bicycles in the Netherlands

vs.

16.5

million

the country’s total population

Republic of San Marino

1,139 cars

per

1,000

people



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An (P

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photograph (left) naomi harris; Sources world health organization

Donald Shoup is a rock star—probably the only rock star—in the world of parking policy. The radically commonsensical ideas in his 2005 book The High Cost of Free Parking have inspired a cadre of self-declared Shoupistas in cities around the world who want to apply the laws of supply and demand to on-street parking.

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“There are health studies that show around 4,000 people die prematurely every year from poor air quality in London. And if that’s the case in London, I can tell you now that in Beijing and Moscow, it’s going to be a lot higher than that. If you are only going to punish the big dirty wagons initially and disincentivize those, then politically you are not going to upset too many people. Then, year on year, you can tighten up the standard, bit by bit. ” —Martin Powell is a former environmental adviser to London Mayor Boris Johnson and is now head of urban development at Siemens AG, whose technology is used to ding drivers £11.50 ($22) for motoring into the city centre. A new proposal would see central London become an ultralow-emissions zone by 2020. Large older trucks would face a £100 ($190) daily charge, and cars more than 13 years old would be fined £12.50 ($24) daily.

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top 10 pollution producing cities

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Delhi gwalior

Canada 4 Vancouver

8 Toronto

11 Montreal

12 Sarnia

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14 Red Deer

5 Sydney

14 New York

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Other cities

photograph (left) naomi harris; Sources world health organization

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Health authorities say 25 is the safe level for PM2.5

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Annual mean PM2.5, µg/m3 (PM = particulate matter)

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16 London

17 Paris

20 Los Angeles

36 Shanghai

56 Beijing

Just do it Jonas Eliasson Professor, Stockholm’s Centre for Transport Studies On Jan. 2, 2006—the morning before Stockholm introduced a €2 congestion charge—the bridges leading into the city centre were jammed with cars. On Jan. 3, however, traffic flowed freely, thanks to the 20% of drivers who kept their cars off the road. Eliasson helped launch the program. Why was the charge so successful? First, we already knew that economic policies affect behaviour, and that the effect is bigger if the prices are really visible. One of the things we did in Stockholm was that we had a big electronic sign over the road reminding people that they really were paying a charge, even though they didn’t get a bill until the end of the month. And people had more

alternatives than we appreciated—not only public transportation, but also in terms of departure times, other destinations, carpooling. Each of these effects were relatively small—the number of drivers going to public transportation was less than 10%, but when you added up 5% going to other departure times, 3% going to carpooling and so on, you reach this almost magical figure of more than 20%.

How did drivers feel about it? The benefits were so large that people started to like it—which I don’t think many people had counted on. Before, just 20% or 25% of voters were in favour. After a year, 70% or 75% of voters were in favour. So, why are politicians so afraid of these kinds of charges? I think many politicians underestimate that people will get used to almost any kind of

India

change rather quickly. Once the charge was in place, we asked people in Stockholm if they had changed their behaviour—and it turned out most of them weren’t even aware they had changed. How do you translate Stockholm’s experience into advice for others? It depends on what your particular congestion problems look like. When I ask that question, the response I get most often is, “We have congestion everywhere and all the time.” But most cities have worse congestion around the city centre and on a couple of highways, and typically during rush hours. And so what you do is to put a price on the most severe bottlenecks— the junctions or ramps that cause these queues, which build up and lock other junctions. Just putting a price on these places can help quite a lot. april 2015 / REPORT ON BUSINESS 35

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photograph robby whitfield/crossrail.co.uk


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HOW TO TRANSFORM A C ITY: PART 3

London | $25 billion

photograph robby whitfield/crossrail.co.uk

In a 2007 episode of the enormously popular U.K. motoring program Top Gear, the show’s four hosts race one another across London, each using a different mode of transportation: car, bicycle, public transit or motorboat. In the end, the bike wins, a result that prompts host Jeremy Clarkson to disavow the entire segment for fear of alienating his car-mad fans. The real point was not to prove that two wheels are better than four, but to highlight the absolute madness of navigating one’s way across the congested city. For Clarkson, relief is on the way in the form of Europe’s largest construction project. Upon completion in 2018, the $25-billion Crossrail will span 118 kilometres from Heathrow Airport to Shenfield in Essex, about 50 kilometres away from the city’s centre, and will move 200 million people a year. The new line, which will run both above and underground, will increase London’s rail capacity by a whopping 10%. (The tunnelling is expected to be completed this spring. In the photo, Elizabeth, a tunnel machine named after the Queen, breaks through to Liverpool station in January, 2015.) At times, the project has seemed more like a massive archeological dig. In boring 42 kilometres of new tunnels, workers have discovered mammoth bones, Roman horseshoes and 3,000 skeletons dating back to the 16th century.

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the great central bank freak-out of 2015

By Kevin Carmichael

photograph (left) danish siddiqui/reuters; (right) ruben sprich/reuters

aghuram Rajan got it started. On Jan. 15, the governor of the Reserve Bank of India jolted traders on Mumbai’s Dalal Street by cutting interest rates. The surprise was the timing of the announcement: Rajan wasn’t supposed to deliver a policy statement for another 19 days. The weirdness continued that same day—in Switzerland, of all places. For three years, the Swiss National Bank had steadily bought euros on currency markets to keep the country’s franc from surging in value relative to the euro, and thereby choking off growth. Unorthodox, yes; but global financial markets had grown accustomed to the regular renewal of the bank’s stance. Without warning, however, the Swiss cut the franc’s tether. Swiss National Bank chairman Thomas Jordan also set the benchmark Swiss lending rate at negative 0.75%. In theory, a lower rate should put downward pressure on the franc; not enough in this case, as the franc’s value shot up by 18% in the days that followed. Many hedge funds bled red. And on it went. The Danes cut interest rates four times in the span of a few weeks. As this issue of the magazine neared deadline, China’s central bank cut rates by a quarter of a percentage point and Poland slashed them by a half point. In the first 60 days of 2015, some 20 central banks had executed stimulus measures. Let’s call it


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15-03-13 12:24 PM

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India’s Raghuram Rajan (opposite) kicked off a global deluge of interest rate cuts in January. Thomas Jordan of Switzerland (below) set his benchmark rate at less than zero

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photograph (left) danish siddiqui/reuters; (right) ruben sprich/reuters

al ve ser. In ue

The scale and breadth of intervention is reminiscent of the central bankers’ manoeuvres during the 2008-09 financial crisis, with one big difference: There is no obvious emergency this time. The central bankers who acted so boldly in the Great Recession say they are now responding to the startling collapse in oil prices. But since when was cheaper gasoline such a bad thing? The central bankers reply that, when you combine the plunging cost of energy with stagnant growth in major economies such as Europe and Japan, deflation has emerged as the clear and present danger. Into this frenzy stepped Stephen Poloz. The Bank of Canada governor had the decency, at least, to wait until his regularly scheduled interest rate policy announce-

ment on Jan. 21. The bank’s benchmark rate had been set at 1% for more than four years, put in place by Poloz’s predecessor, Mark Carney. Everyone assumed it would stay there. But Poloz shocked Canadian markets with a quarter-point cut. He called it “insurance” against the economic blowback from the fall in oil prices. The deterioration of wealth, he said, would be “unambiguously negative for the Canadian economy.” Poloz’s counterparts all have similar explanations: Central banks are hardwired to fight inflation or deflation, so what else are they supposed to do? But what if the world’s central banks have developed a hero complex? Cheaper money works by tickling our greed. It tempts us to borrow, spend and invest. Th at i s wh at m a ke s e co n o m i e s go around. The thing is, there is an emotion that trumps greed: fear.

The Bank of Canada was by no means enthusiastic about the Canadian economy’s prospects at the end of 2014. Poloz made a point of underlining his dissatisfaction with the high number of Canadians who were either looking for work or in need of more hours. Still, things seemed to be crawling in the right direction. A weaker loonie and stronger economic growth in the United States looked likely to give exporters a lift. Statistics Canada confirmed in March that real gross domestic product grew at an annual rate of 2.4% in the last quarter of 2014, faster than the central bank reckons the economy can grow without eventually stoking inflation. The bet on Bay Street at the end of last year was that Poloz would leave the benchmark rate unchanged for most of 2015 before starting a gradual trek back to higher rates. Growth conditions aside, the Bank of Canada was also clearly worried that Canadians were borrowing their way to a new financial crisis. In its policy announcement last Dec. 3, the bank noted that “household imbalances”— which is how it describes the country’s record debt load—“present a significant risk to financial stability.” The implication: Higher interest rates eventually would be needed to wean Canadians off their credit habit. Seven weeks later, Poloz decided there was a more significant risk facing the Canadian economy than mass foreclosures. At a news conference on Jan. 21, Poloz explained that the sharp drop in APRIL 2015 / REPORT ON BUSINESS 39

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15-03-13 12:24 PM

I

dence of entrepreneurs like Mark Hanna, a partner at Montreal-based Leeza Surfaces Inc., which supplies stylish, highend countertops. The company is headquartered just north of Pierre Elliott Trudeau International Airport, and has warehouses in Toronto, Vancouver and Connecticut. I first met Hanna at a forum for entrepreneurs in Ottawa in August, 2009, near the end of the Great Recession. He was weathering the crisis well, and he was optimistic. But when I contacted Hanna this past February, after Poloz’s surprise rate reduction, he was spooked. “The cut in rates, to me, suggests desperation,” he said. “This does not instill confidence when I think about our economy.” The trouble for central bankers is that there are lots of Mark Hannas out there—in every industrialized country. He is an honest-to-goodness economic actor: a hirer of people, a customer for loans. He is the kind of person the central banks are trying to help, yet they’ve shaken his desire to expand his business. So why the Great Freak-Out? In the old days, central bankers tried to avoid volatility—or creating excitement of any kind, really. They were the stoic guardians of our economies, detached from the fickle political calculations of governments and immune from the base profit motives that drive corporate leaders. Alan Greenspan, who was chairman of the U.S. Federal Reserve from 1987 to 2006, was the archetype of the abstruse central banker. His long, elliptical responses to questions from U.S. legislators, delivered in a monotone, were


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photograph adrian wyld/cp; chart source thomson reuters datastream

oil prices at the end of 2014 was proving to be far worse than expected. By convention, the bank bases its forecasts on the current price of oil. In October, the cost of Western Canada Select was about $70 (U.S.) a barrel. When policy makers gathered to rethink policy in January, WCS had been stuck below $40 (U.S.) a barrel for weeks, which is nowhere near enough to cover the cost of extracting oil from sand in Northern Alberta. The bank has seen oil shocks before. Their statistical models gave them a good idea of where things were headed. Thousands of Canadians were facing certain unemployment. Oil companies already were scrapping plans to expand production, triggering a broader decline that would rob factories of orders and consultants of service contracts. There would be pain. The bank focuses on something called the “output gap” to tell it how close or far it is from hitting its inflation target. The gap is the difference between actual GDP and the level of production the bank thinks the economy can manage before inflation accelerates too quickly. The goal is to get as close to the red line as possible. Last fall, the gap was narrowing. In January, it was getting wider. Hence the rate cut, according to Carolyn Wilkins, senior deputy governor of the Bank of Canada. “That’s why we decided to take out the insurance that we did, by cutting the rate, so that we could increase the chances that our projection, which is that we’ll close the output gap by the end of 2016, will actually occur,” Wilkins told me in late February, just before she and the other members of the bank’s Governing Council went into a customary week-long blackout period ahead of the March 4 policy announcement. (In that announcement, Poloz left the overnight target unchanged. More on that later.) “Certainly from our point of view, doing the right thing with respect to monetary policy is the best way to maintain our credibility, because we’ll be more likely to achieve our inflation target, but also that credibility should be something that underpins confidence.” Plenty of other experts disagree. Paul Masson, an adjunct professor at the University of Toronto’s Rotman School of Management and a former adviser at Canada’s central bank, says Poloz’s notion of insurance was akin to unloading the cannons at the first sight of the enemy’s flag. “ ‘Taking out insurance’ can take many forms, such as keeping your powder dry until it is needed,” he says. The chief executive of a Canadian company, who requested anonymity in order to speak freely, says he thought Canada’s economic leaders were asleep at the switch. “My impression was that the Bank of Canada and the government were totally unprepared for a major correction in oil prices,” the executive says. “They have been fixated on Canada as a petro-country and nothing more. Their reaction didn’t seem to appreciate how volatile the Canadian dollar was and the violent correction will also have negative ripple effects.” The little-talked-about problem inherent in this rush to the barricades by central bankers is that it sent a massive signal that we have reason to be fearful. “Who then would be bold enough to make a long-term commitment in such an environment?” wonders Stephen Lewis, an economist with ADM Investor Services International Ltd. in London. Central bankers don’t necessarily care about what the Lewises of the world have to say. The City of London and Wall Street types have been hurling those sorts of barbs for years. But what if the people who run millions of businesses—large and small, global and local—are rattled? The bank needs to keep the confi-

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The Group of 20 got out the fire hose when the world was on fire, but they didn’t stick around for the rebuild Bank of Canada Governor Stephen Poloz said he was just taking out a little “insurance” with his quarter-point cut. To traders, it looked like panic, and they pounded the loonie

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photograph adrian wyld/cp; chart source thomson reuters datastream

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quite deliberately opaque. “I should warn you,” he once joked, “if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.” Yet Greenspan, oddly, was easy to read when it came to what the markets cared about most. He liked to adjust interest rates in predictable, quarter-point increments, so when he started down a path, investors and traders knew where they were headed. The Greenspan years came to be known as the Great Moderation. There was nothing moderate about monetary policy during the financial crisis and its aftermath. Ben Bernanke, Greenspan’s successor, and the heads of the rest of the world’s major central banks, acted boldly and massively. They slashed interest rates—to 1% in the euro zone, and near 0% in the United States and Japan. The Fed, the Bank of England and the Bank of Japan also launched huge quantitative easing programs that lasted for years—essentially creating hundreds of billions of dollars worth of currency to buy government bonds and other debt securities, thereby injecting cash into banks that could be loaned to businesses and consumers. The politicians did their part, too—at first. They ran massive budget deficits to stave off another Great Depression. Even Canada’s resolutely tight-fisted Conservatives cranked up infrastructure spending and racked up a $56-billion deficit in the 2009-2010 fiscal year, and a $33-billion shortfall in 2010-2011. But since then, to varying degrees, governments have shifted back to austerity. The Group of 20 got out the fire hose when the world was on fire, but they didn’t stick around for the rebuild.

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That austerity is now an anchor on growth. The U.S. recovery has picked up momentum over the past year—in part because state and local governments are spending again—but the American economy is the exception. Even growth in China is slowing. Japan remains mired in a slump that, in many respects, has lasted since the 1990s. Much of Europe is flirting with deflation and a triple-dip recession. In contrast to governments, the central bankers have kept stimulating since the financial crisis. Denmark pioneered the use of negative interest rates in July, 2012, when its central bank lowered the deposit rate on funds it holds for commercial banks to -0.2%, to encourage those banks to loan the money instead of hanging onto it. All along, of course, many analysts have questioned how effective the low, low rates and all that E-Z money have been. Some argue that the central bankers have done little more than fuel asset price bubbles, lining the pockets of the well-to-do, but few others. The U.S. stock market has almost tripled since the bottom in 2009. Apartments in New York have cracked the $100-million barrier, and in London, they’ve soared beyond $200 million—asking prices, at least. Closer to home, average prices for a detached house in Vancouver or Toronto have soared above $1 million. The University of Toronto’s Masson wrote a paper in 2013 that pleaded with Carney to raise interest rates. He says that Canada’s lacklustre economic growth since then hasn’t caused him to change his mind. A massive run-up of debt caused the financial crisis. History could be repeating itself. Central banks understand the risks. They simply are unwilling to put theoretical

easing by printing money Total central bank assets (in trillions of U.S. dollars) 4.0

Euro Zone 3.0

United States

2.0

1.0

2008

Japan

2009

2010

2011

2012

2013

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After Europe’s Mario Draghi (below) dropped the big one—¤1.1 trillion of quantitative easing— U.S. Fed Chair Janet Yellen wouldn’t tip her hand

concerns ahead of a threat that is staring them in the face. Deflationary pressures last fall pulled the big central banks in various directions. After injecting more than $3.5 trillion (U.S.) into the U.S. economy following the financial crisis, the Fed ended its regular monthly purchases of bonds and mortgage-based securities in October. That was the Fed’s nod to those who accuse it of sowing the seeds of the next crisis. But Janet Yellen, who replaced Bernanke in February, refused to signal when she might raise the official rate from zero. In September, Mario Draghi, president of the European Central Bank, lowered the ECB’s benchmark rate by 10 basis points to 0.05%, and its deposit rate to -0.2%. He also promised that the ECB would soon unveil a massive QE program of its own. Then, another wild card began creating more headaches for central bankers.

A week before Poloz’s dramatic interest rate announcement, Timothy Lane, one

In some ways, Poloz’s job is much trickier than Carney’s was during the financial crisis. Carney had the aid of Jim Flaherty’s expansionary fiscal policy, but now the Harper government is determined to balance the books before the election this fall. On the day that Poloz cut interest rates, Finance Minister Joe Oliver said there was no need for a matching response from him. “We think it’s wrong to burden our children, our grandchildren with expenditures that we’re incurring today, so we think a balanced budget is important and we’re going to achieve it,” he said in a broadcast interview with CNBC at the World Economic Forum in Davos. Oliver would be correct if it still was the 1990s, when Canada was facing a debt crisis. Now, Canada is one of the few countries with a triple-A credit rating. The federal deficit is so narrow— less than 0.5% of GDP—that it hardly matters whether the government balances it or not. The provincial premiers aren’t helping Poloz much, either. Bank of Canada economists estimate that the total portion of GDP growth this year attributable

to ce 0. if ha m Sh po photograph (left) kevin lamarque /reuters; (right) kostas tsironis/ap

of four deputy governors of the Bank of Canada who sit with Poloz and Wilkins on its Governing Council, gave a speech at the University of Wisconsin in Madison. The title was clear enough: “Drilling Down—Understanding Oil Prices and Their Economic Impact.” The text was released online and, toward the end, Lane declared that lower oil prices would be “bad for Canada.” If that was meant as a warning, most analysts and commentators missed it. The bank rarely sent messages via its deputies, so few—if any—market participants would have been giving Lane their full attention. Besides, there were no other reasons to expect any surprises. After Poloz succeeded Mark Carney in June, 2013, he made a point of easing his way into his new role at the centre of the Canadian economy. He kept the bank’s benchmark rate at the 1% set in September, 2010, allowing the memory of Carney’s dramatic moves during the financial crisis to fade away. No more adventures in monetary policy—Poloz was fond of telling audiences that the time had come to let “Mother Nature” do her work. No wonder Poloz sounded almost apologetic when he met with reporters after his rate cut. “We generally prefer that markets not be surprised by what we do,” he said. “We took comfort from the observation that the consequences of the drop in oil prices appear to be well understood, and that the possibility of a rate cut had begun to enter markets in the last couple of weeks.” Or maybe it didn’t. The Canadian dollar plunged by more than 1.5 cents (U.S.) that day, closing at 81.07 cents, its lowest level since April, 2009. The Bank of Canada’s leaders are clearly sensitive to the possibility that monetary policy could actually undermine confidence, rather than bolster it. But in January, they decided to risk it. Wilkins insists that they knew what they were doing. A quarter-point interest rate adjustment is the type of fine-tuning that the bank used to do all the time. “It’s a bit of a stretch to say that a 25-basis-point cut in a policy rate is a panic reaction to a 57% decline in oil prices since last June,” she said. That oil price collapse is more of a problem for Poloz than it is for central bankers in Europe and Asia. All of the bankers are worried about the deflationary impact on consumer prices. Poloz also has to contend with the impact on output and employment in the Alberta oil patch, and on the companies that supply and finance it. 42 APRIL 2015 / REPORT ON BUSINESS

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to all levels of government will be 0.2 percentage points. In 2006, that figure was 0.8 percentage points. I asked Wilkins if the January interest-rate cut would have been necessary if current government spending was at pre-crisis levels. She dodged the question. “We take fiscal policy as a given,” Wilkins said. photograph (left) kevin lamarque /reuters; (right) kostas tsironis/ap

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Compared to what the ECB’s Draghi

announced on Jan. 22, Poloz’s rate cut looked like a blip. Draghi unveiled a ¤1.1-trillion quantitative easing plan that would have the ECB co-ordinate purchases of ¤60-billion worth of securities a month until September, 2016. Investors were ready for QE, but not on that scale. Britain’s Guardian newspaper described

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it as “shock and awe.” The plan kicked the Great Freak-Out into the stratosphere. In many countries, official interest rates are now lower than they were during the financial crisis. The Danes, the Swiss, the ECB and the Swedes all are experimenting with negative interest rates. In effect, they are challenging hedge funds and banks to find more productive uses for their money than financial speculation. At least some investors are encouraged. U.S. and Indian equity markets have scaled new heights this winter. “The accommodation should result in a positive wealth effect via higher equities and bonds,” Ankur Patel, chief investment officer at R-Squared Macro, an investment firm based in Birmingham, Alabama, told me. “These co-ordinated global rate cuts, zero-interest-rate policy, and QE may be what ultimately provides a net positive boost to confidence.” Yet the usual doomsayers and conspiracy theorists—and the Internet is full of them—are predicting disaster: We are headed for a devastating global currency war, reminiscent of the 1930s, when central banks slashed exchange rates in an attempt to ignite their countries’ exports. But when those competitive devaluations were combined with beggar-thy-neighbour trade restrictions, they only aggravated the Great Depression by reducing global demand for goods and services. The suggestion that central banks are trying to beggar one another like they did in the Great Depression is highly debatable. Yes, the exchange rate is one of the channels through which a central bank influences inflation. And when interest rates shift, capital diverts to countries that offer the highest return. With so little demand in many countries to offset the upward pressure on exchange rates, they have little choice but to keep lowering rates in order to hit their inflation targets. The adjustment is more mechanical than predatory. “It is not so much a currency war, or anything malicious, but the mere fact of lack of co-ordination,” says Vivek Dehejia, an economics professor at Carleton University who currently is working on a research project in Mumbai. Dehejia has a point. The world’s central bankers this winter looked like soldiers awakened in the middle of the night to fight an unknown enemy. If there was no grave emergency, then surely someone should have said so. But who? That was part of the problem. There is no one. The most powerful central banker in the world is Janet Yellen. She has a reputation as a communicator. Yet the Fed’s messages have been anything but clear. This past February, Yellen tried to cool speculation that the Fed’s policy committee would raise the target range of its benchmark rate—now between zero and 0.25%—any time soon, or even hint that it would. “If economic conditions continue to improve, as the committee anticipates, the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-bymeeting basis,” she said. “Before then, the committee will change its forward guidance. However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings.” She sounded like Alan Greenspan. In theory, negative interest rates and years and years of ultralow interest rates should work just fine. Unless, of course, executives and investors look at a negative interest rate and decide nothing good can come of a policy that appears to defy reason. Ben Bernanke always warned that monetary policy wasn’t a panacea. We finally may be witnessing what he meant. After the scramble of January and February, the weeks and months ahead will determine whether monetary policy still has any pop. Which brings us to the Bank of Canada’s most recent interest rate announcement. On March 4, Poloz performed another stunner—this time by doing nothing. Financial markets had priced in another rate reduction. There was grumbling about Poloz sending mixed signals. There is a real risk that central bankers could be losing the public trust. And if that is true, they just made things worse. APRIL 2015 / REPORT ON BUSINESS 43

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for can’t see th the forest

With the heyday of B.C. resources over, it’s a good thing Vancouver has universities that could seed a tech sector—and the scenery that can keep it here by Richard Littlemore photographs by Kamil Bialous


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Winter scenes from Canada’s new tech town, from far left: the new Telus Garden building; a nearby art installation and, below it, a typical Yaletown block of offices, condos and restaurants; chilling on the seawall; chilling again, this time at SAP; condos on the park—and the water; an Aquabus ferry below the Cambie Bridge

When the guides of the future plan the itinerary for the walking tour dubbed “Vancouver: Tech City,” they’ll start in Railtown. After all, this is where the social media company Hootsuite emerged in 2008, amid the cheap, converted warehouses between the Downtown Eastside and the docks on Burrard Inlet. Back then, you called the neighbourhood “sketchy,” but that got you the stink eye from Bill Tam, president and CEO of the BC Technology Industry Association: “It’s edgy!” The next stop on the tour will be Gastown, another old neighbourhood of small-footprint buildings full of walk-up offices, but one that was more gentrified in the early days—not “edgy” but “funky.” In 2015, this was the home of entrepreneurial hothouses like Launch Academy, where hopeful youngsters learned how to innovate—or how to fail quickly and start again before they dragged their friends and family members into an expensive mistake. Following a semi-circle, the tour will run through downtown, where the high-tech industry suddenly became so dominant around 2015 that it outbid law firms and government ministries for the city’s most prestigious office space. And then it’s on to Yaletown, another converted warehouse district that, in the dawning era, bristled with clubs, cafés, spas and fitness emporiums—and high-tech offices brimming with thousands of hipster techies who could afford that kind of thing. APRIL 2015 / REPORT ON BUSINESS 45

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Then, down past the Telus World of Science, tourists on this outing will come to Mount Pleasant, where Hootsuite took over a snazzy space in a move facilitated by the always-accommodating Vancouver Economic Commission. Finally, saving the best for last, it will be on to the SkyTrain for a quick trip to Burnaby and the 10-minute walk to The Company That Saved the World. Every great tech scene has an origin story, complete with a ground zero, like the Palo Alto garage where Bill Hewlett and Dave Packard, late of Stanford, seeded Silicon Valley. In British Columbia, the point of genesis is in the Vancouver suburb of Richmond, in an old shed long since lost in the fog along the Fraser River delta. That’s where Professor John MacDonald and physics grad Vern Dettwiler headed on Feb. 3, 1969, after they walked out of the University of British Columbia to set up a little remote-sensing company. They thought that they had an interesting technology, and they were disappointed that the brilliant young scientists and engineers they’d seen go through UBC all seemed to be leaving town. The two men hoped they might be able to keep some of the more promising students employed. Now, 46 years later, MacDonald Dettwiler and Associates Ltd.—better known as MDA— is a communications and information company with more than 4,800 employees arrayed in plants and offices around the world, including 600 in its head office and still-leading research-and-development centre in Richmond. They build everything from black-box military communications systems to radar satellites. And in their benign shadow, the high-technology sector in B.C. now employs 84,000 people, more than the forestry, mining and oil and gas industries combined. According to a recent KPMG report commissioned by the BC Technology Industry Association, B.C. boasts 9,000 hightech companies that together generate more than $15 billion in direct economic impact—that’s 7.6% of provincial GDP. That sudden growth, in a province that still can’t shake the resource-industry self-image, has produced a buzz, and the buzz has turned to giddiness with the arrival and/or expansion in Vancouver of some major international players. Microsoft and Sony Pictures Imageworks have staked out huge footprints in what is arguably the highest-profile commercial space in downtown Vancouver—the redeveloped former Eaton’s (later Sears) department store that anchors Pacific Centre at 725 Granville St. Barely a block away, Amazon is installing 1,000 high-tech employees in the Telus Garden, a new head office for a telco that is, itself, a tech giant, with 7,000 employees in Metro Vancouver, including 1,200 in the downtown core; 700 of them will work at this new location. The attendant pressure has changed the face of commercial real estate in Vancouver’s suddenly crowded downtown. Norm Taylor of commercial real estate firm CBRE says the market is set to absorb more than two million square feet of new office space in the next two years, the largest growth

spurt in Vancouver’s history. As of late February, that space was more than 60% pre-leased. And in a central business district once reserved for head offices (or what small share Vancouver has of them), high-end law and accounting firms and government, high tech—growing at twice the speed of the rest of the B.C. economy—is generating more than 40% of the demand for office space. It’s true, of course, that B.C.’s $15 billion in tech salaries, services, sales and exports pales next to California’s $275 billion. But it’s early days. “B.C. is in that adolescent growth stage when parts of you grow faster than others. It’s an awkward passage,” says Bill Tam. The gawky phase has demonstrated three things, each of which bodes well for the future. First, tech is all about people, and every person interviewed for this story made some reference to B.C.’s research universities as a source of both tech geniuses and bold entrepreneurs. (Full disclosure: I have written for the presidents of UBC, Simon Fraser University and the University of Victoria.) Second, tech is sticky. Sure, it’s not physically stuck to a resource like mining or forestry. But it’s surprisingly difficult to pick up and move an established tech company—especially the creative part. Third, tech is all about critical mass. Once you have the above-mentioned talent pool, you get networking and creative cross-pollination. And you get spinoffs minted by people with serious industry experience. While no one is bold enough to say Vancouver has reached critical mass, the success of homegrown heavyweights like Hootsuite, and the arrival or expanding presence of international anchors, indicates a sector heading toward maturity.

Hootsuite employees work at communal tables. The office boasts tent-style meeting rooms, local art and beer on Fridays. At right, Hamilton Street as work gets out


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Actually, “sector” isn’t the right word to describe this phenomenon any more. In a time and place where a surprising number of people subscribe to both Greenpeace and Harvard Business Review, we talk about the tech “ecosystem” and its “biodiversity.” Tech is no longer as sterile as a lab. It’s a forest of interaction where little things feed big things and big things, in turn, seed new little things. The best illustration of this is the BC Techmap, an interactive visual history compiled by PricewaterhouseCoopers over the last 18 years. The map shows thick bundles of connections emanating from the research universities. In a 2013 report on some 220 UBC spinoffs and affiliated companies, Colliers International calculated total market capitalization of $2.5 billion and total annual revenue of $400 million. SFU says that it has “spun out, mentored, incubated and assisted over 200 companies, adding more than 2,400 jobs to our economy and contributing an estimated $186 million in annual tax revenues.” That’s just direct economic activity driven from university labs—everything from biotech contenders like QLT Inc. to cleaner-energy industries like Westport Innovations. The universities, with help from institutions such as the British Columbia Institute of Technology and Emily Carr University of Art + Design, also spawn the engineers, scientists and technicians in clean tech, the health professionals and researchers in biotech, the computer and electrical engineers in web tech, and the designers, artists and storyboard writers in gaming and computer animation. Oh yes, and the business people. Once in the tech sector, few of those people sit still. One of the next biggest tentacle bundles on the Techmap runs from MDA to the many dozens of other companies that have benefited over the years from lessons learned at the knee of MDA’s masters. Another bundle emanates from Ballard Power Systems, the once-ballyhooed fuel-cell innovator whose biggest actual output to date may be counted in talent that it has trained and sent on to other enterprises. Consider Mossadiq Umedaly, who was Ballard’s chief financial officer in its mid-’90s heyday when Ballard, Daimler-Benz and Ford together looked like they might seize the

whole burgeoning market for no-emission vehicles (said market imploded when regulatory leader California decided that hybrids were a more practical alternative). Umedaly says that Ballard’s chairman at the time, the late Fraser Mustard, used to divide the tech world into “doers” and “thinkers,” and then, à la Rumsfeld, into “doers who think” and “thinkers who do.” Umedaly, a doer who thinks, left Ballard before its slide and, in 1999, assumed the presidency (and later the chair) of Xantrex, a power electronics company that had been working on unsexy but practical power inverters since 1983. Umedaly saw the potential to scale up the Xantrex operation, especially in an age when inverters were becoming essential to managing intermittent power from renewable sources like wind and solar. He found a first round of financing and then floated an IPO in 2004, and by the time he sold the company in two pieces to Ametek and Schneider Electric, Xantrex was “the biggest clean-tech company in B.C.,” with annual revenues of $250 million. Schneider is huge; “it’s the French Siemens,” says Schneider’s VP operations and CFO for solar, Jill Tipping. With 150,000 employees around the world and 3,000 in Canada, the company had the capacity to relocate its 200 new Burnaby employees, specialists in solar power, pretty much anywhere—a thought that Tipping says never came up. Instead, the company’s global solar business unit is headquartered in Burnaby. Although Xantrex had no manufacturing here, almost no sales and—given the low cost of B.C.’s hydroelectric power— no market, “this is the brain trust; it’s the gold mine. The risk of moving it and disrupting it accidentally is too high,” Tipping says. In the tech world, “you do the things that are smart to do in the places that are smart to do them,” she adds, pointing to Apple, which designs in California and manufactures in China. Tipping’s only reservation about Metro Vancouver is that question of critical mass. There is great local talent, but Schneider still has to recruit mid-career managers and senior engineers from elsewhere. So, Tipping says, Schneider is delighted to see companies like Microsoft upping their Vancouver presence. “Even if they’re not directly in our space, it still creates a cluster effect that’s good for us.” The story is similar at the Vancouver operations of what is now SAP, the world leader in enterprise software and software-related services, with 130 offices around the world and 74,000 employees. The 1,200-person Vancouver operation began in the 1980s as a local start-up called Crystal Services. Owing to a succession of takeovers, it was later known as Seagate Software, Crystal Decisions and Business Objects before being acquired by SAP in 2008. Again, SAP has the global capacity to shift or absorb smaller operations, but in Vancouver, it chose to consolidate and expand. Kirsten Sutton, managing director for SAP Labs Canada, says this location is now the SAP Canadian Centre of Excellence for Analytics— the largest software development employer in B.C., it’s SAP’s locus for innovation in some of its most important product lines. As with Schneider and Xantrex, Sutton says, moving was never an option. “The DNA is what SAP needed,” and that DNA is peculiar to Vancouver. “It’s the culture, the worklife balance. People who work here love it here and it comes through in their work.” APRIL 2015 / REPORT ON BUSINESS 47

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Michel Laberge’s In any story of Vancouver, it company, General is, of course, inevitable that Fusion, foresees a new the work-life thing would form of clean energy. “The sphere,” centre, is come up. The city is so often filled with molten leaddismissed as being full of peolithium that is pumped ple who spend too much time to form a vortex hiking and skiing and standing in the path of pipelines. Sitting in the spectacular downtown wedged between False Creek and Burrard Inlet in the lee of the North Shore Mountains, it’s easy to understand how people in the rest of the country would find Vancouverites smug (even if self-deluding about whether it’s worth the cost of living). But nearly everyone interviewed for this story had recently travelled to Eastern Canada, and they all felt compelled to give a weather report. In a February phone conversation, Don Osborne, president of the MDA Information Systems Group, mentioned that he was looking out across a busy, balmy Richmond golf course—and that, in Ottawa and Montreal, which he had visited the previous week, the temperature had been minus 35. SAP’s Kirsten Sutton phoned from the airport in Toronto. Minus 25. Dennis Lopes, head of legal and corporate affairs for Microsoft Canada, called from the Vancouver airport, taking his last whiff of air redolent of early cherry blossoms. He was flying home to Microsoft’s Canadian head office, also in the Toronto area, and he was dreading the change. Microsoft is busily recruiting for its newest international development centre in the spanking new Pacific Centre space. (It has similar centres around the world from China to Finland, but no others in Canada or the U.S.) To this end, Lopes says, “We’re recruiting from around the world and, from a candidate perspective, Vancouver is very desirable, despite the high cost of living.” He went on to deliver an analysis straight out of Richard Florida. In addition to being warm and beautiful and conducive to an outdoor lifestyle, Vancouver is richly multicultural and highly diverse, all aspects that are attractive to people from the creative sector. It’s also close to Microsoft’s international headquarters in Seattle, although what really matters, for people collaborating on projects, is that it’s in the same time zone. Asked, though, if this is a recruiting centre whose real purpose is to consolidate staff, the best of whom would then be cherry-picked to go south of the border, Lopes dismisses the suggestion out of hand. Microsoft already had a Vancouver development staff of about 300. Rather than sending those folks south, it’s more than doubling their numbers. The staff in the new 143,000-square-foot Pacific Centre office will number 700, and there is a rumour (which Lopes declined to confirm) that Microsoft has told its broker that it may hang on to 75,000 square feet in an existing office in tony Yaletown. Microsoft is digging in—and in a way that contributes to a growing Canadian myth: head office, sales and marketing types go to Toronto; techies, creative and other hipsters to the Left Coast. Mind you, it’s not all about the mountains, the oceans and the choice of three cappuccino purveyors on every block. Randy Lake, executive vice-president and general manager of

the animation and visual-effects leader Sony Pictures Imageworks, brings a hard, cold, cashbased reality back into play when he says, “I love Vancouver.” Having moved the Imageworks head office from Culver City, California, to Pacific Centre as of April 1, “I would not want to pick up and leave. But if the [tax] incentives were gone tomorrow—well, that’s my nightmare scenario.” The sweetest of those incentives, for Sony, is the DAVE—the Digital Animation or Visual Effects— tax credit, which lately means that a credit of “17.5% can be applied against any qualified B.C. labour expenditures that are incurred while performing eligible post-production activities in B.C.” Lake says this break, more than any other factor, drove the relocation from Culver City. Still, even Lake returns to the metaphor of the high-tech ecosystem. His 750 animators and visual-effects specialists will be in the same building as Microsoft’s development staff, and they all will be mere blocks away from colleagues in Gastown and Yaletown, where Sony had maintained a smaller production studio for the last five years. Lake said the firm was originally attracted by the talent in homegrown firms like Distinctive Software (now part of Electronic Arts) and Image Engine. Here again, there is strength in numbers. The visualeffects community is highly nomadic, jumping from one film production to another and—when necessary—from one production company to another. So, again, it’s easier to recruit if prospective employees know that a subsequent shift would take them to, say, the sizable Industrial Light & Magic facility down the street and not all the way down the I5 to California.


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There are two other broad aspects to the B.C. tech story— and two other places in the ecosystem. At one extreme is the bold entrepreneurial start-up—the 5,000 one-person operations that don’t even get included in the count of 9,000 existing high-tech companies. At the other are the Hail Mary candidates, like General Fusion. This is The Company That Saved the World (or at least Would Save): a $50-million gamble to produce an energy source that founder Michel Laberge insists would render fossil fuels redundant for everyone on Earth. Laberge personifies the surprisingly short distance between those extremes. First, he is, himself, an indirect product of MDA. Following the BC Techmap, MDA begat Creo, the laser-imaging company that was acquired by Kodak in 2005. Laberge worked at Creo for nine years after receiving a PhD in physics from UBC. At Creo, he says, he learned there was more to business than “solving a triple integral equation.” But he got bored with Creo’s lasers, took his savings and set to work, in an abandoned gas station on Bowen Island, on a simple fusion power plant. In other words, a decade ago, he was one of those start-up companies with no employees. But, by his efforts, he generated both heat and light. In fact, he generated enough energy to convince Mike Volker, director of SFU’s Innovation Office and co-founder of the Vancouver Angel Technology Network, to raise a total of $420,000 from 60 investors. Then Laberge

recruited Creo colleague Doug Richardson (“for no salary!”) as CEO, and, between them, they made enough progress to attract another $50 million in financing, including contributions from everyone from Chrysalix Global Network and the oil sands company Cenovus to Jeff Bezos. They’re now working on the components of a fusion-energy reactor that will have no long-lived radioactive waste and a nearly inexhaustible fuel supply from sources such as heavy hydrogen atoms from seawater. “We’re trying to convince ourselves that it will work,” Laberge says. “Then we will need a big pile of cash.” He thinks their design could result in a plant that costs only $200 million, compared to the nearly $20-billion (U.S.) bill for the latest experimental fusion reactor in France. This gets to one of the last, limiting factors affecting Vancouver’s reach for tech greatness: big piles of cash. While these seem to be available in the trunk of every Silicon Valley Jaguar, everyone complains that they are in short supply north of the border. Haig Farris, the famed West Coast angel investor who cofounded and ran Ventures West, and who helped raise the $200 million that put the Burnaby quantum computing company D-Wave on the map, sniffs at the suggestion. “I’ve been in this business since 1973 and it hasn’t changed one little bit: I go to Silicon Valley and all I hear is, ‘It’s so hard to raise money.’” But then he acknowledges that, in some ways, things have changed. “Now physics and math are driving everything and people in the venture capital community don’t get it. Neither the media nor the investors understand. So, there’s lots of angel money. But it’s hard to get people to commit for longterm, complicated things: for artificial intelligence, learning computers and materials science. The best deals are still the hardest to sell.” And yet, Mossadiq Umedaly, who has also spent much of the past decade managing or facilitating tech investments, says: “For a good idea, there’s always money.” Which bit of optimism leads to a last word from Laberge, who is Québécois, funny and self-deprecating in a completely unconvincing way, and who, if he succeeds, could generate a dividend that will make the combined job-creating tech fortunes of Jeff Bezos, Mark Zuckerberg and Elon Musk seem modest. Laberge offers both a complaint, and a solution: “It’s as hard to find the money as it is to find the fusion. I walked a lot to find the money. So, I’d say, you need a good idea and long legs.” APRIL 2015 / REPORT ON BUSINESS 49

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Christiane Germain surveys downtown Winnipeg from her soon-to-be-opened Alt Hotel in the city’s downtown

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Nearly every major chain— Marriott, Westin, Sheraton—has launched a line of smaller, hipper hotels. So how can the Germain family, who first brought the concept to Canada in the 1980s, compete?

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By Grant Robertson Photographs by Carey Shaw

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I N beneath Montreal’s new Alt Hotel sits a gleaming Tesla, the super-sleek electric car that starts at $70,000. The vehicle belongs to a guest, but the specialized wall charger through which the car gets its juice was installed by Alt to attract clients—particularly the hip and monied. Alt’s parent company, Group Germain Hospitalité, is the first Canadian hotelier to cut a deal with Elon Musk’s automaker, and the fact that Tesla drivers—who are about as niche as any market can be—have sought out the hotel is a good sign. But there’s a much larger strategy at work for Germain. In the cutthroat hotel market, anything Alt can do to stand out as a distinct brand is worth pursuing. The Germain family opened Canada’s first boutique hotel in Quebec City in 1988, back when the term “boutique” had barely entered the traveller’s lexicon. With just 126 rooms— about one-fifth as many as the nearby Château Frontenac— Hôtel Le Germain-des-Prés was wildly different from the larger chains it competed against. Its focus was on style and design, rather than scale, from the stand-up showers and modern furniture to the soft lighting, unique artwork and bowls of fruit in the lobby. It was luxury without the price tag, and the concept was a hit. In fact, Le Germain did so well that it wasn’t long before other hoteliers began to mimic it. Today, industry giants like Westin, Sheraton and Marriott all have boutique subsidiaries of their own, while independents have popped up across the country to capitalize on travellers looking for an alternative to the impersonal, cookie-cutter chains. All of which raises the question: Has the hotel market hit Peak Boutique? “It’s overused,” admits co-president Christiane Germain—who runs Germain with her younger brother, JeanYves—of the boutique moniker. But there’s good reason for that. Christiane says simply: “It sells.” Christiane and Jean-Yves still remember the

first time they walked into a boutique hotel: the Morgans, New York City, 1985. The two had grown up in Quebec City, where their parents, Victor and Huguette, had bought a convenience store in 1957, which they parlayed into a lunch counter and, eventually, a successful steakhouse. By the time Christiane and Jean-Yves were old enough to join the family business, it included a property management company and a

portfolio of residential and commercial buildings. On a business trip to Manhattan, they checked into the recently renovated Morgans Hotel on Madison Avenue, which was getting a lot of buzz. Christiane instantly understood why—walking into the place was like witnessing a new invention. Gone was the beige-and-white motif that characterized most hotels at the time. Instead, the decor was rich with colour, and the bathroom walls were adorned with bold black-and-white checkerboard tiles. In most of the rooms, bathtubs were scrapped in favour of stand-up showers with glass doors stretching from the poured-concrete floors to the ceilings. That in itself was revolutionary for a North American hotel. Shiny steel airplane-style sinks replaced the traditional vanity, and the lobby looked like a living room, with furniture sourced from Parisian flea markets. “The design was really exceptional,” says Christiane, sitting with her brother 30 years later in a brightly lit, coloursplashed meeting room at the Alt Montreal. Both are fashionably dressed in that seemingly effortless French mode. They look far younger than they are (she is 59, he is 58). “You remember, Jean-Yves? The rooms were not large, they were small. But the use of the space was really quite—it was new.” “Showers,” says Jean-Yves. “Yeah, showers.” Morgans is credited with starting the boutique phenomenon. Opened in 1984, it was the brainchild of Ian Schrager and Steve Rubell, the promoters behind New York’s legendary Studio 54, the mecca of ’70s disco culture—until the Internal Revenue Service ended the party by sending them both to prison for tax evasion.


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the fluorescent-lit parkade

At left, Christiane Germain chooses between local artists at Winnipeg’s Gurevich Fine Art and tests out newly installed energyefficient lighting. Below, a worker lays carpeting in a room with Alt’s signature concrete wall

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Upon their release in 1981, Schrager and Rubell turned their attention to the hotel business. Their idea was to create a spot so hot, people wouldn’t just want to stay there—they’d want to be seen there. Schrager and Rubell bought a stuffy old place called the Executive and hired French interior designer Andrée Putman, who devised the bold colour and decor scheme. In an interview soon after it opened, Rubell tried to describe what set Morgans apart. “Well, if a Holiday Inn is like Macy’s or Bloomingdale’s, we are like a boutique on Madison Avenue,” he said, according to Alan Philips, chief marketing officer of the Morgans Hotel Group, which now owns 13 boutique hotels around the world. “And that’s where it came from.” So what is a boutique hotel, anyway? That, says Philips, is “one to be argued for the ages.” Originally, it meant a hotel that was smaller than 150 rooms (though that has been stretched in recent years to 200-plus). However, Philips says the term has more to do with qualitative measures than quantitative. “If you really want to hit it in the best way possible, you want the hotel guest to call their friends and say, Where are we going tonight? And they’ll say: Your hotel—it’s the coolest place in town.” The Germain siblings decided they wanted to create their own “it” spot in Quebec City. Le Germain-des-Prés opened—sans bathtubs—three years after that stay at Morgans. The Canadian boutique was born, entering an industry dominated by huge chains like Sheraton in the mid-market, and by Canada’s own Four Seasons brand in the luxury segment. Le Germain settled somewhere in between. Christiane and Jean-Yves (she handles operations, he oversees the finance side) honed their model for 10 years before opening a second hotel in Quebec City in 1997. Two years later, they expanded to Montreal and, in 2003, to Toronto. Today, there are five Le Germains and six Alts. The higherend Germain locations (in Quebec City, Montreal, Calgary, and two in Toronto) are aimed at travellers who want luxury, but in a more laid-back atmosphere. Walk into a Le Germain and the first thing you notice is the darker tones and soft lighting. Christiane can’t find the right word in English to describe the vibe, so she settles on enveloppante, a word that implies a comforting, cocooned feeling. Alt is the younger, funkier brand, aimed at a crowd the company describes as “trendy but unpretentious” or “inspired and creative.” Think app developers on vacation. There are two Alt locations in Quebec City (including the original Le Germain-des-Prés, which was converted seven years ago), two in Montreal, and one each at the airports in Toronto and Halifax. Now Groupe Germain is in expansion mode. This past December, it raised $80 million from a consortium of Quebec heavyweights, including the Caisse de dépôt et placement du Québec, La Capitale Financial Group, Industrial Alliance, Fonds de solidarité and investment bank DNA Capital. The eventual plan is to bring the total number of Alts to 15, creating a nationwide chain of cheap-chic boutiques. An Alt is set to open in Winnipeg in April, followed by another in Ottawa next year. A Le Germain will also open in Ottawa in 2017. But the Germains no longer have the boutique market to themselves. Jean-Yves figures there are 30 such hotels in Montreal alone, and the industry giants are aggres-

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sively growing out their own boutique brands—Marriott is adding 60 of its AC hotels in the U.S. and Latin America over the next three years, and has teamed up with Ian Schrager on another boutique offshoot called Edition Hotels. And that presents a problem for Groupe Germain: They want to get bigger, but they can only hang on to their customers if they don’t deviate from the original, intimate concept. “Our challenge,” says Christiane, “is to grow and be able to remain small.” a lot since the Germains came on the scene. Stand-alone hotels in the downtown core are unusual now, replaced by mixed-use developments. The new 550-room Delta is the first dedicated hotel to be built in Toronto in two decades. Groupe Germain first partnered with a developer five years ago to gain access to precious downtown land it otherwise never could have afforded. Its Calgary Le Germain location, which opened in 2010, is across the street from the Calgary Tower, and includes office space (owned by the Germains) and condos. “It’s a prime piece of real estate, and just doing a hotel on it would not have worked at all,” says Hugo Germain, Jean-Yves’s son and the company’s director of development. Christiane estimates they would have needed to open 400 to 500 rooms to justify the price of the land. Since Calgary, all the company’s new hotels have been housed in mixed-use buildings. The $27-million Alt in Montreal’s Griffintown shares space with condos. The soonto-be-opened Winnipeg location houses office space. The


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future Le Germain in Ottawa will be part of the city’s new art gallery and will also have residential floors. “It’s a barrier to entry to be stand-alone,” says Jean-Yves. The company is also targeting cities that are starved for beds. Ottawa and Montreal, in particular, have lost several older hotels, which have either shut down altogether or converted to residential units, rather than embarking on a costly revamp. In the last year and a half, according to Monique Rosszell, managing director at industry consultancy HVS Canada, Montreal has lost roughly 1,500 rooms (including a 700-room Delta and a 488-room Holiday Inn). Ottawa has lost about 1,000—among them, the 328-room National Hotel. Together, that’s the rough equivalent of 12 or 15 boutique hotels. To compound the squeeze, new rooms haven’t kept pace with the closures—room numbers across Canada grew by just 0.5% in 2014 and 1.5% in each of the two previous years, says industry analysis firm STR—one of the lowest increases in years. Average growth has historically been about 2.3% a year, adds Rosszell, but the 2009 debt crisis put many hotel projects on hold, and some were never revived. Some of that demand has been eaten up by Airbnb and other sites that allow travellers to rent rooms in other people’s homes. But the overall market, driven by the core business traveller, remains strong enough that many cities are ripe for expansion, or so believes Groupe Germain. But the boutique model depends more on filling rooms than a big hotel does. In a smaller building, every dollar must be wrung out of the facility because there are fewer economies of scale. “The boutique concept is not easy in terms of managing it well, because you don’t have a large capacity,” says Gabor Forgacs, an associate professor at Ryerson’s Ted Rogers School of Hospitality and Tourism Management. “It’s important when you look at a boutique hotel that you try to sell each room each night for good dollars, because you don’t have 1,500 rooms.” For most hotels—big or small—that means pricing rooms based on supply and demand. Want to stay on a Saturday night? Be prepared to pay far more than on a sleepy Monday. But the Germains are bucking that industry norm at their Alt hotels, with fixed pricing—$154 a night at both their Montreal locations, for example, regardless of whether it’s high season or low, a weekend or weeknight. Forgacs, who was a manager at Four Seasons before joining Ryerson, is a fan of the idea. “That was bold,” he says. “That was against everything that everybody was doing. And so far, it’s holding up.” But as Hugo readily admits, a lot more goes into a hotel than just the price tag. Success and failure is often determined by other factors, especially in the boutique market. If you want to know how old your hotel is,

take a look at the electrical sockets. If they’re conveniently located above or beside the nightstand, you’re in a newer hotel, or at least one that’s undergone a significant renovation. Times change, as does technology, and the job of a hotel is to stay on top of those trends. Before everyone started using their phones as alarm clocks (not to mention checking their e-mails and Twitter before turning out the light), electrical outlets were hidden behind furniture to keep unsightly cords out of the way. Today, that’s an inconvenience.

“We need to think where the technology is going,” says Hugo Germain. “We always question how much wiring to put in a room. Is it still relevant? Where is it going to go, with WiFi and Bluetooth, with TVs?” Since Groupe Germain is mostly building hotels from scratch, it can incorporate new design details into each room. It began installing iPod docks in its rooms back in 2003—but even those are out of date now as people increasingly use Bluetooth to sync their devices. “We need to think where the technology is going,” says Hugo. “It might sound obvious, but we’re always questioning how much wiring to put in a room. Is wiring still relevant? Where is it going to go, with WiFi and Bluetooth, with TVs?” When it comes to furniture, however, the key is not to chase trends. A typical hotel will go five to seven years before updating its rooms. So even the boldest, hippest hotels must be conservative. Alt rooms have partially exposed cement walls, giving them a slightly artistic look. Bonus: They also cost less, which allows designers to put more money into statement furniture like a trendy chair that can be easily swapped out to update the look, without a major overhaul. Rooms are smaller, too (though with lots of height, since the ventilation equipment is built into the walls, not the ceiling). In a bigger hotel, says Hugo, “you might have 350 square feet of space, but there is a corner you never use. Well, in our case, that corner will be basically removed. Or we’re going to be enlarging the window and putting in higher ceilings.” “Sometimes we have to, I will say, to fight with each other,” Jean-Yves says of the battle between design and cost. Those debates invariably include Christiane’s 33-yearold daughter, Marie Pier Germain, who has a degree in mechanical engineering from Queen’s and serves as the chain’s director of professional construction services. She and Hugo, 35—who has a Queen’s MBA—represent the next generation of Groupe Germain and are carving out roles for themselves in the operation as it grows. It’s not clear how big the Germains want to get. “In the last five years, we’ve grown more than we did in the 20 years before that,” says Christiane. And though they’re committed to remaining a purely Canadian play for now, that’s not set in stone. “Once we achieve our objectives here in Canada,” she says, “then our model may change.” That’s likely a few years off yet. For now, the focus is on cities like Winnipeg, Ottawa and, eventually, Vancouver, with its sky-high real estate costs. Clearly, the Germains believe we haven’t hit Peak Boutique—not yet. But with the Marriotts of the world flooding the market, they’ll need to balance their own ambitions with the reality of competing against rivals a hundred times their size. “We’re a small player,” says Christiane. “A very small player,” agrees Jean-Yves. “And when we do our market research, it brings us down to earth. We’re making progress, no question, but we’re fighting against the big guys—the big guys.” APRIL 2015 / REPORT ON BUSINESS 55

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Do you regret that you couldn’t win over animal rights people who decry the Stampede’s treatment of horses and cattle?

We love animals. We agree with the humane societies that we all have the same care and concern for animals. And there is a big distinction between animal activists and people who care about animals. We have four studies going on with the University of Calgary, researching animal behaviours and physiology, to ensure we have best practices, and we share these best practices with other associations. Will the Stampede be affected by the energy price collapse?

The long ride As a preacher’s kid growing up in Ontario, Vern Kimball loved his father’s records of Canadian country singer Wilf Carter, and he dreamed of heading west to see the Calgary Stampede. Little did he know that he would eventually run “the greatest outdoor show on Earth” for 11 years. In March, Kimball, 59, who holds an MBA from the University of Calgary, stepped down as Stampede CEO, still loving his job, but hoping to do more to promote the city. And like the rootin’, tootin’ cowboys celebrated by Carter, he went out with his boots on. You once said you would only go when the fire in your belly was gone. Is the fire out?

The fire is still there, but I’d like to go when the fire is still burning bright. What will you do?

Given my skill set, contacts and experience, I’m thinking about how best I can contribute to make Calgary a better place. Some folks are interested in me, but I’m taking a couple of months to think about my next chapter. What was your darkest moment as Stampede CEO?

The worst and best moments came close together. The worst was standing on top of Scotsman Hill in June, 2013, overlooking the Elbow River rising, and seeing the neighbourhoods and much of the Stampede grounds flooding. That was a horrible thing for this community. Two weeks later, we opened the gates and I saw those kids rushing in with big smiles on their faces. I thought, “Wow.” It was a symbol: If we could get the Stampede up and running, the community

would be able to get up and running. How long did it take for the Stampede’s infrastructure to recover?

When we put Stampede 2013 together, it was like a visit from a mother-in-law—the stuff everyone sees looks pretty good, but you put a lot of things in another room and shut the door. It took us to the end of 2014 to completely recover and get back to preflood status. There was a great effort by our employees and volunteers.

But won’t visitors spend less?

The people will still attend, but they will be more careful this year. I think the oil patch will bounce back—many of my friends think it is a great time to buy distressed assets. Are you going to miss all this? What other CEO gets to wear a cowboy hat to work?

It will be bittersweet, no question. I love my cowboy hat. I’m going to keep wearing it. And I love my boots, but I probably won’t wear them 16 hours a day, like I did during Stampede. I’m going to be able to read things not related to business and play my piano more. But this year my vacation is going to be the Stampede. It’s time for me to be a tourist again. /Gordon Pitts This interview has been condensed and edited.

photograph roth and ramberg

Exit Interview

I have seen this before, and we will be prudent in what we are doing with expenses. Right now all our indicators are pretty much even. [As of early March] our reserve ticket sales—those that are sold in advance—are actually higher than at the same time last year. History shows that fairs and exhibitions are considered good value.



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