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Canada Headquarters: Facing Off [Global Business magazine]

by Hope Katz Gibbs
Contributing Editor
Global Business magazine
April 2000

FIFTEEN YEARS AGO, THE SWEDISH telecommunications company Ericsson was presented with a tempting opportunity to move to Canada to be closer to one of its biggest customers, Cantel (now Rogers AT&T). Ericsson jumped at the chance, and came smack up against the challenge of deciding where to set up its regional headquarters.

“It came down to Montreal, Toronto or Ottawa,” says Lionel Hurtubise, chairman of the board of Ericsson Canada. “After considering all the pros and cons, we chose Montreal because of the large number of software engineers based here.”

The move certainly panned out for Ericsson. After starting off with 10 engineers in its research and development center, the company today is the sixth largest investor in R&D in Canada and is outfitted with a staff of more than 1,600 engineers.

Hurtubise says Ericsson remains very bullish on Montreal. Labor is very stable, with turnover of 4% per year compared to nearly 25% in its Dallas facility. The total cost of taxes and office space, meanwhile, seems minimal when compared to Ericsson’s home base in Sweden, Hurtubise says. “The Canadian government provides a tax credit for 40% of our employees’ salaries and we get a direct refund from the Province of Quebec.”

Not that all investors in Canada regard Quebec as the perfect site for a regional headquarters. Hurtubise would get an argument from Tom Loberto, for instance. Loberto is president of TeleTech, a Denver-based e-commerce solutions company that located its Canadian operation in Toronto in 1998.

The company’s initial goal was simply to tap the Canadian market, Loberto says, “We already had operations in the U.S., Latin America and Asia, and we wanted to reach customers in Canada.” Eventually, TeleTech decided to do this through an acquisition of Electronic Direct Marketing, of Toronto. Though EDM’s location helped TeleTech make its decision, it was not decisive in and of itself, Loberto says.

“Just look at the merits of Toronto, he says. “ It is the fourth largest city in North America, has ethnic diversity, the labor pool is highly educated, and it is close to New York. What more can a company ask for?” Montreal, to Loberto, might as well lay a continent away.

ACROSS CANADA

There are a number of rivalries in North America. New York versus Chicago, or Los Angeles, or Washington. Florida versus California. Texas versus just about everyone else. But none of these has proven as energetic as that between Quebec and the rest of Canada, especially Ontario.

The cross-Canada competition goes back more than two centuries, to when a large migration of loyalists left the United States after the American Revolution. Toronto, which had been little more than a settlement, grew into a hub for Canada’s English-speaking community. And it quickly grew into a cultural competitor to Quebec, which had been settled mainly by French emigrants.

Yet Toronto didn’t match Montreal as a business center until well into the 20th Century. Quebec long remained Canada’s main hub for banks, transport companies, insurance companies and Canadian corporations, a large portion of which were owned by the city’s robust English-speaking population.

In the 1970s, however, everything changed. The main factor was the rise of Quebec nationalism, says Howard Silverman, president of Corporate Affairs International, a site selection-consulting firm based in Montreal with offices in New York, Toronto and Ottawa.

Quebec nationalist sentiment peaked in the mid 1970s and again in the mid 1990s, both times resulting in referendums that proved harrowing experiences for much of Canada’s business population.

The resulting perception of instability led to a major exodus of companies from Quebec, Silverman says. “Toronto took advantage of the opportunity, and convinced companies to expand in their jurisdiction. They still do it today.”

The shift was indeed dramatic. In 1999, the Toronto area generated more than 40% of Canada’s gross domestic product. The region is now home to manufacturing and head quarter’s operations of about 1,500 foreign companies, including Ford and GM, American Express, Exxon and Nestle.

“Toronto has definitely become the business capital of Canada,” Silverman says.
And although Grahame Richards, assistant deputy minister of the investment division of the Ontario Ministry of Economic Development and Trade, insists that his province does not compete with Quebec for investment, in the last decade Ontario was very aggressive in pointing out its qualities to any foreign company that will listen.

Quebec responded in kind, however, and with increasingly successful results. A turning point came in 1996, when the governments of Canada, Quebec, Montreal and 130 private sector businesses joined to create Montreal International, an organization dedicated to scouting the world for investors.

In the last four years, 25 major foreign firms have ventured into the city, says Jacques Girard, president and CEO of Montreal International. Now that Quebec’s nationalist movement has been losing steam. Montreal may well be proving more attractive than it has in decades to new investors.

“Montreal has a European flair, and it is a little more affordable, so that is also attractive to Europeans as well as U.S. investors,” Silverman says. “Although Toronto is currently in the lead when it comes to attracting foreign business, in the coming years I believe Montreal will give it a run for its money.”

SUBTLE DISTINCTIONS

The competition may be more artificial than would first seem, given its occasionally contentious nature.

“The truth is there are more similarities than differences when you compare Toronto and Montreal,” says Gene DePrez, national director for global location strategies of PwC. “In my experience, tax incentives and basic tax differences don’t play a big role in an executive’s decision.”

Although this may be true for most potential investors, city and provincial officials insist that cultural and political distinctions can prove key factors in getting a big multinational firm to move to town.

Yet their comparisons also quickly move to the realm of figures, and the differences seem not all that grand.

Toronto officials certainly tell an impressive tale. The Windsor-Detroit gateway is considered the largest corridor of international trade in the world, with goods valued at $81 billion a year moving back and forth to the United States.

The stats also illustrate how Toronto is home to a deep pool of educated workers; 68% of the city’s workforce has attended a university or college. Overall, Ontario’s 17 universities graduated more than 6,000 students in engineering, mathematics and technical sciences in 1998, and two of those schools, McMaster and Toronto, are often ranked among the top 10 universities in North America. Job loyalty is also high in Ontario. In 1997, job tenure averaged nine years for managers and eight years for all workers.

Let Quebec officials speak, however, and you will hear much the same story. Montreal, they say, graduates 8,000 students per year with science and tech degrees, and 7,500 more with business administration skills. Plus, the city’s four universities include McGill—considered the best in Canada by Gallop polls since 1991.

Indeed, Montreal has been especially effective at attracting high- tech companies. Besides Ericsson, large telecom companies that have based their Canada operations in the city include Nortel Networks, the Videotron Group, Bell Mobility, Clearnet Communications and Microcell Telecommunications.
Montreal officials were especially thrilled by the Feb. 8, 2000, unveiling of a new wireless technology called “EDGE.” At a press event, executives from Rogers AT&T of Eastern Canada and Ericsson Canada took part in a “third generation” phone call. The EDGE technology enabled the executives to simultaneously chat, buy stocks, check film previews and purchase theater tickets over the same line.

The reason the EDGE event ended up taking place in Montreal rather than Toronto—or New York or Los Angeles—was that the city’s high-tech industrial base helped create a synergy between the two companies, says Jean Rochon, Quebec’s Minister of Research.
Boosting the Bottom Line.

Ultimately, the figures that investors most care about are more mundane—the combination of tax rates, incentives, and business and labor costs that add up to the bottom-line.

In much of Canada, lucrative tax incentives have come to play a much bigger role in this equation than almost anywhere else in North America. In Quebec, incentives can cover two-thirds of the cost of some R&D investments, and subsidies for creating an infotech job can total as much as $10,200 a year.

Investors are certainly not complaining. And the officials say that the benefits far outweigh the expenditure. Motorola, for instance, recently opted for Quebec in large part due to the tax benefits offered there.

Marie Carrier, a spokesperson for Ericsson, says “Quebec is a better place for tax incentives than anywhere else in Canada and the U.S.”

Ontario, of course, would beg to differ, and officials there say the province’s total tax structure is at least as generous as anywhere else in Canada. R&D tax incentives in Ontario can include a 100% deduction of both current and capital expenditures for R&D, and a 20% investment tax credit on those expenditures. Unused tax deductions can then be carried back three years or forward for as much as 10 years.

“In Ontario, if you spend $100 on R&D, the combination of tax credits is $48.80,” says Richards of the Ontario Ministry of Economic Development and Trade. “That is the most generous tax credit in the
OECD countries.”

Ontario goes on to provide an additional deduction in computing Ontario taxable income. This “super-allowance” varies from 25% to 52.5%, depending on the type of corporation.

SOUTHWARD BOUND

In many ways, the real competition for both Quebec and Ontario is with various sites in the States. These days most Canadian governments and business leaders are more concerned about losing investment and employees to the sunny lands to the south, rather than to points to the east or west.
Here, the draw is much more than a matter of R&D incentives. Cost, says Stuart McKay of KPMG Vancouver, is the biggest factor. McKay points to a Quebec-sponsored KPMG study published in Sept. 1999, comparing business costs in major North American cities.

Overall, KPMG found that Montreal ranked first among the 13 major cities examined.
Total costs in Montreal were 9.2% below the U.S. average, based on total operating costs and taxes. Calgary came in a close second, with a 7.6% advantage. Toronto and Vancouver ranked third and fourth, respectively, with costs some 5.5% below the U.S. average.

“In recent years, the cost competitiveness of Quebec, and Montreal especially, has been improving,” McKay says. “Our study found Montreal was the lowest cost of the cities we looked at. This was the first time that we have done a study when Quebec came out on top.”

A few “fundamental cost issues are working in Quebec’s favor now,” McKay says. These include “affordable industrial land and a good labor supply.”

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"I get by with a little help from my friends," says Hope, who gives special thanks to:

• MICHAEL GIBBS, website illustration and design: www.michaelgibbs.com
• MAX KUKOY, website development: www.maxwebworks.com
• STEVE BARRETT, portrait of Hope on Bio page: www.stevebarrettphotography.com

Contact HOPE KATZ GIBBS by phone [703-346-6975] or email.

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