Skip to content

A new pilot study: how to grow from 25 to 100 employees and get yourself on the road to becoming a champion!

Making the jump!

Making the jump!

Montreal, 16 September 2016

The growth phase from 25 to 100 employees is filled with leadership and operational challenges, recurring errors and hidden traps. Young CEOs may find the journey surprisingly testing. Many fail for mistakes that could be avoided or prevented. And there is not always a second chance for CEOs. This groundbreaking study will aim to highlight the best moves, the best practices and practical roadmaps to ease the path. At a level of 100+ employees, companies can take bigger bites, aim at larger projects and conquer new markets. They have an option to become  champions.  At 25, you have to make smart moves and your margin of error is slim.

With the support of the Centre Laurent Beaudoin, the executive center from the University of Sherbrooke, and Leaders & Cie, a reputed executive headhunter and specialist in leadership, we are conducting interviews with young CEOs (20-30), experienced CEOs (100+)and a dearth of experts on SMEs. We have talked to more than 40 people so far and collected great observations and insights. Our last interviewee was Daniel Lamarre, CEO of Cirque du Soleil.

If you would like to share your views and nuggets of wisdom, we would love to hear from you. Get in touch, shoot your your remarks or call us.  In any event, you will hear from us.

André Du Sault, MBA (LBS), MPA (Harvard)




Posted in Governance, Innovation & organisation, Management ideas, Strategy & globalisation.

There will be other Trumps

bla bla bla









Owen Sound, 14 April 2016


The slippery road from inequities to stagnation, from demagogy to decline

According to the WSJ, real wages in the USA peaked in 1973, before the oil shocks. Sadly for the middle class, they have been on a downhill trend ever since. Past the oil bumps, the decline remained relatively subdued until the 1990s. Economic growth was up, employment felt robust and it was still possible for most workers to do better than the previous generation. But behind the jolly scene however, new forces were building up that would come to change the economic landscape in a dramatic fashion and few people were paying proper attention. These ominous forces of the 1990s were being plastered over by a strong resurgence of consumption in the West, fueled by ever lower prices from China (the Walmart effect) and cheap credit.

For a good while the consumer felt in a sweet spot: decent wages with falling prices for most household goods. But the triple forces of globalisation, technology and financial crises would soon start to whack at the middle class like a tornado set loose in the mid-western plains of America. Skies darkened from 2001 onwards, when China joined the WTO. It took just a few years for the West to realize the fundamental rules of the economic game were being changed for good by both the formidable rise of China and the transformative nature of Internet technology. By 2005 the severity of the shock treatment across most western nations was in plain sight for all to see and sorely feel. Failure to respond to the twin challenges proved systemic across the Western liberal world and was exacerbated by the 2008 financial crisis of our own making. The 1990-2000 years have to be singled out as the true lost decade of the Occidental nations (see previous blog ‘What happened between 1991-201?’ A systemic failure is an indication that the whole model needs some rethinking, as opposed to fixing a few mere parts.

I recently took on the wheel to revisit Southern Ontario after a similar road trip in 2002: a modest ride of over 2000 km from Windsor to Ottawa. I could not help but observe that most downtown areas of mid-size cities are feeling the brunt of the multiple factory closures: abundant ‘for rent signs’ peppering the Main streets, old paint peeling off, and scores of unemployed and prematurely retired workers nervously sipping their Tim Horton coffee at 10:30 am. It is not just a question of malls built in the outskirts of towns. No, one can feel and hear the pain when talking to shop owners, librarians and other local witnesses of the past 15 years. As a matter of fact the whole Windsor – Gaspé corridor policed by Via Rail, now looks pretty much the same: Rust is spreading where manufacturing was standing.  The stakes are now pushed higher: the health of the country.

For Ontario, the future of their auto industry is now at play as new car plant investments are more often than not directed at Mexico. This could essentially leave the famed southern peninsula a mere giant farm plot. In Quebec, the advantage of cheap hydro energy has run its course and cannot protect any more heavy industries such as aluminium. Farming in Quebec is at a disadvantage in terms of colder climate and smaller farm lands. In both provinces, forestry has suffered its own intense clear cuts as newspapers are vanishing. To survive, industries either have to move up in value and quality, or else wages must decline. This is the nature of globalisation: free trade pacts work for the cheapest or the best, not those stuck in the middle. In light of union resistance to lower wages, it is often the plant that ends up closing down.   As for innovation as an alternative, it seldom thrives under union terms or bureaucratic guidance. The trickle of jobs flowing down to the Southern states, Mexico or Asia has slowed down, but has not abated. Closures are still part and parcel of media news every single month! After 15 years of shut downs, politicians have run out of easy rhetoric and quick fixes. Fool me once, shame on you, fool me twice, shame on me, angry voters are now thinking.

Thankfully, there are pockets of excellence along the way, mostly hanging around universities, some tech centers such as Waterloo, and cultural icons such as Stratford. But there is a general sense of community values dissolving in this post-industrial age. The young aim for bigger cities in search of opportunities and Toronto, Montreal and Quebec City become the magnets.  Urban economies are gradually taking over but our cities are not in best shape. Can services truly prosper without a minimal manufacturing core in the economy?

Precarity is now a word that we often hear in discussion with young university graduates. One morning I kept wandering on the engineering campus of renowned Waterloo University, and I came to estimate the % of students of foreign origin manifestly well above 50%, with a strong representation from China and India. Where were the Canadian engineers? The aftermath of the triple-force tornado has left citizens with a nagging feeling that opportunities that could reliably be counted on 20 years ago, are slipping away for good and that the best days are perhaps gone. All this translates into unexpected political outcomes, with distressed voices finding new trumpets.

We are seeing a greater dispersal of the popular votes covering the full range of the political spectrum, from the far right to the far left, from the Tea Party to the Working Families Party in the USA, from Podemos to the PP in Spain. A whole variety of parties and factions are now playing each other on the fears, emotions and resentment of the shrinking middle class. Language is changing, more radical, more personal and more outrageous.   Jeremy Corbin, well anchored in the far left, was unexpectedly elected Labour party leader in the UK, while Marine Le Pen is increasingly brandishing the flag of rightist virtues in France. In Spain the last general election of 2015 has produced no new government despite four months of negotiation. In the American primaries, we are witnessing shifting voting interests, where several center-based mainstream candidates have literally been cast out.

This spreading of votes comes at a cost: it makes it more difficult to build lasting center-based coalitions, good enough to win elections and rule. Instead it has become easier to arrange for micro coalitions to block out new initiatives or reforms proposed by governments. As a result political gridlock has now become a default position. In times of needed changes, meaningful reforms grind to a halt. This is not lost on agile populists and talkers who see openings in these situations and exploit them. They are not shy to pander a ragbag of half-truths, false promises, and disinformation to middle class voters. It just becomes easier to do so to muster a coalition to challenge discredited politicians. While this phenomenon is relatively new in North America, and to some extent in Western Europe, it has been the staple of life in Latin American for a couple of centuries. And there are some reasons to fear the trend at home.

Persistent inequalities in Latin American have a long history of opening doors to Caudillos, the reputed strong men adept at winning the votes at the stump, and then keeping power at all costs with hands of steel covered in velvet. Once in power, they actively work to ring controls around the institutions that count: courts, money systems, homeland security, transport hubs, universities, etc. They usually do this by vetting budgets and nominations by party faithful installed in the targeted institutions. Infiltration is swift, radical and ruthless. Corruption is often the currency that wheels and clinches the changes. Manipulations are just a means to an end. Soon the population is divided between the ‘protected’ by the system, and the ‘unprotected’. The ‘protected’ are usually much adept at accessing benefits, lining their pocket book and even dare pushing for lower taxes.

After a term or two in power, caudillos feel strong enough to move to the more difficult task: Changing the constitution to remove barriers for re-election. They believe they have ‘conquered’ power for good. Witness Peru, Bolivia, and Venezuela in recent years. Even Brazil’s constitution will be hard tested in the current impeachment process of President Dilma. On a recent trip to Nicaragua, there were plenty of warning signs in the media that the Ortega regime was following the standard Chavez playbook in Venezuela: from revolutionist to near dictatorial power. The end result down the road could be predictably frightening in a region known for instability. The traditional safe guards of national constitutions are steadily weakened, removed and replaced. Weak institutions and repeated constitutional changes are the fundamental reasons of the recurring cycles from left to right and from boom to bust in Latin America. That is not about to change. They are somehow caught in a rut.

Although such scenarios look far-fetched in North America, it is the Rob Fords, the Trumps and the Sanders of the current political world who are the first canny operators to tap into the pool of resentment boiling in the middle and lower classes. They are not only gathering support, but they are also showing the way for others to come, and argue. We will therefore see more pandering and more gridlocks from politicians just as the middle class is just as likely to slide further down in the pecking order. There is an existential risk of a nasty cycle of gridlock-decline-gridlock and so on. This has been the fate of past nations. North American middle class people are unused to losing ground. But in the early 1990s I just happened to live in Sao Paulo and estimated the loss of real wages at a whopping 40% in the span of just two years! In the face of repeated financial crises, I saw co-workers selling their cars to buy older ones, selling their houses to buy ones 60 minutes further in the outskirts. Cold hard economic reality always ends up washing out magic and wishful thinking.

It remains today quite unrealistic to envision an opportunistic coalition trying to ram in constitutential changes in the USA or Canada. But we have to remind ourselves that even mayor Bloomberg himself campaigned to change the New York city’s term limit law, and was elected to a third mandate in 2009. Only to be replaced by Bill De Blasio, from the far left. A precedent was set and temptation could not be resisted. Municipal politics in North America are often reminiscent of some practices in Latin America.

In today’s context, the real risk lies rather with extended stretches of bad government, with political parties jockeying for short term tactics and advantages, but never achieving the necessary breakthroughs. Every batch of 10 years of ineffective government will carry a hefty price tag in terms of lost opportunities, weaker institutions, lags in technology, climate burden and drop in competitiveness. In a nutshell, we run the risk of economic stagnation, greater inequities and a resurgence of protectionism. We already are into our 2nd decade of searching for an answer through the mist, and running into circles. This, unfortunately, is how we get on the slippery slope of relative decline. And it is mighty hard to reverse.

André Du Sault, MBA, MPA (Harvard)

Ref: Brookings Institute, WSJ, La Prensa Nicaragua





Posted in Country visits, Management ideas, Strategy & globalisation, World economy.

Tagged with , , , , .

Has our innovation future changed color in the last election?

Again the writing is on the wall:  we are facing another wave of disruption and we are not ready.


Montreal, 28 November 2015

After a blue wave, an orange crush and a red tide, are we getting readier in Canada to face a digital economy driven by technology, digital infrastructures and new business models?   As with the case of manufacturing in 2001, we are at risk of underestimating the next competitive wave as the digital economy should take hold from 2020 onwards. We can draw lessons from the Japanese challenge in the 80s-90s and the rising capabilities of China.

Around the mid 1970s, Japan overtook the USA in patent applications.   At the time much was said of the poor quality of Japanese patents, their inability to properly invent new technologies, and their positioning in the low and middle tech segments of the period. ‘Made in Japan’ labels were often seen as derisory statements. True high tech, it was believed, resided within the realms of the American and European labs. Yet by 1978 Japan was already making 50% of television sets (then classified as middle tech) in the world as opposed to 25% for America. The TV industry, with all its technology and processes, was slipping away from the Americans, proper inventors of the television. American TV producers were late to improve quality, to automate production and to develop advanced designs. And more competitive pressure was to come.

The Japanese assault began in the early 1980s, a bare 5 years after the patent signal. Various industries in computers, chips, electronics and cars saw fierce rivals and competitors emerge and capture whole swaths of markets and technologies.   In many industries, Western leaders fell off to a sizzling bundle of performance, quality and lower costs from Japanese competitors. The intensity of the ‘Catch up with the West’ was remarkable within the Japanese Kaishas, as the emerging champions were then called. Japan shook the Western economies until their self inflicted financial crisis of 1990 literally stopped them in their tracks, to the great relief of Western nations.

1990 thus proved a great year for the West: The fall of the Berlin wall ended the cold war on the political side, and the stock market crash in Tokyo put an end to the Japanese economic threat. The ensuing 1990s can be described as a rather loose decade in the West, fueled by galloping consumption and deregulation in a wide range of industries such as airlines, telecoms and financial services. With the economy running at 4%, the Clinton administration even managed to register an unprecedented string of budget surpluses from 1997-2000. There appeared to be few visible clouds on the horizon.

Up North, the Canadian economy recovered with the help of a weaker C$ and Nafta. During the 1990 decade, the gains of Nafta were essentially recycled to cut down federal deficits and pull down the national debt. This was well necessary and looked prescient enough at the time. But little of the gains from Nafta were recycled into making domestic industries more competitive. When China muscled into world trade from 2001 onwards, we started bleeding a steady loss of 500,000 manufacturing jobs in Canada (5M in the USA) during the next decade. We somehow comforted ourselves that we at least held the high pitch of the high tech mound, compensating for losses in low and middle tech. The lesson of the previous Japanese challenge were quickly forgotten: That it is difficult for companies to move up market in value added, relocate factories, improve on design, service and client experience all the while your margins are under attack. It takes 5-10 years to make and build these adjustments with plenty of sustained efforts. As such technology innovation becomes a critical part of the answer. We had 10 years to prepare for China but preciously little was accomplished. With hindsight, it looks like the West vastly wasted its peace dividend and is now paying the price.

Forty years after the Japanese did so, the Chinese have now ominously overtaken the USA in patent applications, in 2014. We can also read the same headlines:   poor quality in patent applications, the Chinese are not really innovators but imitators, they pluck tech secrets by cyber hacking unguarded treasure troves, local Chinese engineers do not match westerners, and so forth. Yet the picture is also becoming clearer. China announced last May their 10-year plan ‘Made in China 2025’ calling for a national drive on 10 key high tech sectors. China is directly and openly challenging the 3 major incumbents in technology: USA, Japan, Germany.   If for a second you think this is wishful thinking on the part of China, consider the latest McKinsey Global Institute report on ‘The China effect on global innovation’ (136 pp). Any lingering doubt will evaporate or else you will be standing at the end of wishful thinking.

Prepare for a renewed assault from China. The country has already built a formidable trade and tech platform:

  • 15 free trade zones
  • 32 special economic development zones
  • 53 high tech parks
  • over 1250 multinational R&D labs
  • 1300 private universities and growing
  • 30,000 PhDs graduating every year
  • an estimated 0.6-1.0 M engineers graduating every year
  • top engineers and scientists cost about 50% less than in the West
  • 820,000 patent applications processed last year

In the meantime, our own scorecard on tech innovation has remained thin since 2001. The OECD, Conference Board, World Economic Forum, and our own government have adamantly produced reports showing our gradual and steady slide in the innovation rankings. We are not doing bad, but as the tech game picks up speed, we are at risk of missing an important turn. Politicians happily promote free trade agreements, infrastructure programs and the urgent need to export. This is all in reaction to the last 10 years and the beatings we have taken in manufacturing and the recent drop in commodity prices. However there is little thought about the forthcoming tech wave and what should be done to prepare for impact on business models, and the organization and culture of work. Yet consider the following stats reflecting a lower tech intensity in our economy:

  • R&D as % of GDP has gone from 2.0% in 2001 to 1.7% in 2012 in the nation
  • the R&D budgets of the top 10 Canadian companies dropped by 10% from $7.2 B to $6.5B, from 2013 to 2014; in general, R&D as % of sales is dropping in our larger companies
  • in telecoms, the fall of Nortel and RIM have weakened our tech position in a critical industry
  • in pharmaceuticals, a significant bundle of R&D centers of multinationals were reallocated to the BRIC nations following the financial crisis of 2007-08; pharmaceutical R&D dropped from US$ 620 M to $320M from 2000 to 2013 in Canada
  • our position in aerospace technology now looks wobblier with the Bombardier crisis
  • our SMEs consistently under invest in new equipment, IT and other technologies
  • R&D budgets have been dropping in the Canadian government labs as an estimated 30/40,000 scientists were removed from the Federal payroll during the Harper administration.
  • we have a resurgence in tech start-ups, but often they fall prey to acquisitions from outsiders thereby foregoing the upside potential of future champions.

We used to be second best under the American umbrella, surfing upon their global expansion and their fundamental research for 60 years after World War II. During this period, Canadian scientists were considered world class and the country could capture a decent piece of the pie of multinational R&D. By extension we somehow lived under the public impression (and in good part a policy) that science labs were the lynchpin to produce innovations. Alas, we have a track record in Canada of too many great home-based inventions whose commercial realizations were ultimately captured South of the border. But the hard reality is that it is first and foremost companies that produce and drive innovations. Innovators are connected to their markets and customer needs. They use and package technology to create new products.   Today this growth competence still remains mostly underdeveloped within Canadian corporations, despite the fact that some 60% of the total R&D spending in Canada is done in private and business hands. We are not getting the innovation bang for the R&D buck that we spend. This is why the loss of Nortel is leaving a deep scar in our innovation landscape. They were champions in creating new generations of products.

Government policies and trade associations have so far failed to produce the strategic visions to make the breakthroughs in a world where trade and technology is tilting towards Asia. Dropping out the top 20 in the innovation rankings will be the next alarm bell. The painting is on the wall.


André Du Sault, MPA Harvard

References: WEF, Cirano, Globe and Mail, McKinsey, interviews


Posted in Innovation & organisation, Management ideas, Strategy & globalisation.

The C$ ride: Here we go again. A 30-year check.

Montréal, 19 August 2015

The current rate of about 1.30 C$/US$ looks a bit stretched compared to recent years. It hovered around parity for a couple of years following the financial crisis and it delightfully sounded as a new normal. As a proper matter of fact the parity has been only a rarity for the past 40 years. For those wondering where the C$ is now heading, remember that the C$ touched a low of 1.62 last 2003. It may seem far in time, but it provides a reality check on poor speculation. If you look at chart 1 displaying the C$/US$ chart over 30 years, you will see that we have roughly completed a 20-year cycle. From 1992 to 2003 the C$ steadily devalued to the point that foreign media were tagging the C$ as the northern Peso. It then steadily strengthened from 2003 to 2009, and remained relatively stable until 2013. In 2013 the C$ turned around anew along with the drop in commodity prices, losing ground and parity, thereby marking the end of a cycle. So here we go again! Once more we need a weakening C$ to get out of a hole. It pays a good deal to examine the last 20 years to see how well we managed our economy and how we should tackle the new growth challenges.

Chart 1 C$/US$ from 1985-2015

C$ 30 year charat











Under the Liberals

When Paul Martin, the first architect of the economic recovery achieved under the Liberals, became finance minister in 1994, the situation did not look altogether bleak, but it did look precarious. The country had just come through the 1991 recession and debt had reached C$ 578 billion, or 55% of GDP.  To add to the turmoil, the PQ soon got elected in 1994, and jumped straight into crafting their 1995 referendum strategy.

Luckily for the Liberals the NAFTA treaty had just been signed in 1993. The table was set for manoeuvring a steady devaluation of the currency which in turn boosted our export performance to the US for about a decade. With the economy turning around and the Liberals applying austerity in the national books, the country finances finally turned around as well. This extraordinary performance was then overshadowed by the sponsorship scandal amidst an acrimonious leadership transition between Jean Chretien and Paul Martin. It just turned out that this vicious worm had long been digging and furrowing into the Liberal apple. The period of 2002-2005 was thus clouded by an awkward change of political power to the Conservatives. With the politicial focus entangled in national politics, the country somehow misjudged both the rise of China as a manufacturing power and the momentum that would give birth to the super commodity cycle. Canadian manufacturers, drunk on the elixir of a weak C$, woke up to a monstrous challenge: a rising C$ and a tsunami of Chinese competition.

Under the Conservatives

When the Conservatives from Alberta regained power in 2006, they delighted to a dream come through: The odds-on to become an oil super power with no interference from the East, meaning Ottawa. Eventually the commodity boom and the oil sands came to bankroll the economies of Eastern Canada, notably those of Ontario and Quebec, severely hit by China and the financial crisis of 2008. Luckily in turn for the Conservatives the banking system and the country finances had been put to good shape by the Liberals. When the financial crisis hit, the banking system stood firm and the federal government threw in a stimulus package to keep the economy afloat. The C$ devaluation in 2009 turned out to be just a blip on the chart, albeit a significant one, mirroring the oil price movements. So from 2008 to 2013 the C$ held up on the whole rather well, within a comfortable range of C$/US$ 1.00-1.10. The Canadian economy plodded along, with the help of a consumption debt pushing new highs nearly every quarter.

Unusually low interest rates have breathed oxygen to the world economy since 2008, but 7 years later there is a nagging feeling this strategy has run its course. Few countries have taken the breather to properly reform their economic and social structures: On the whole Europe is still wobbling in the ruts of their own ‘lost decade’, whereas BRIC nations have lost their shining attraction. As a result, world economic growth is now slumping to 2.8% for 2015 (below the critical benchmark of 3%, and much dependant on just 3 nations: USA, India and China). This is a fragile context for the rest of the world and the oil market has reacted violently (chart 2). Oil prices took a drop of 50% in less than 6 months! Manufacturing and exporting nations are mildly rejoicing, but commodity nations are licking their wounds. Not surprisingly the C$ has tumbled as rapidly as the oil price.

Chart 2. Oil prices 2005-2015











Now what’s the outlook for the C$?

This will essentially depend on 3 things regarding our economy and how it will grow:

– whether the manufacturing part of our economy can pick up steam

– how long the commodity slump will last

– whether we can take our share of the future high tech and digital economy.

There is a general sense that the Canadian economy has eroded in the last 20 years. Traditional sectors such as fisheries and forestry have taken a beating. Aluminium is now being upended by the same global forces and the outlook remains cloudy from extraction to transformation. Low tech manufacturing such as textiles and apparels have long departed. The car industry in Ontario was weakened by the last financial crisis and finds itself in a declining trend as Mexico is increasingly capturing new automobile factory investments. In telecoms, the rise and fall of two giants, Nortel and RIM, has hit the sector and we lost two very capable R&D franchises. In Montreal, the pharmaceutical industry shrunk by 40% and shifted significant R&D facilities to emerging nations. The last commodity boom has thus conveniently plastered over a loss of competitiveness in several key industrial sectors. Without the oil contribution, the health of many industries would be looking visibly shaky.

Canadian manufacturing did not prepare well during the boom years (1994-2004) to take on the competitive challenge from China. Dutch disease or not, manufacturing lost an estimated 500 000 jobs during the years of a strong C$. And just as manufacturing was coming to see eye-to-eye with China, the financial crisis hit in 2008. No wonder manufacturing cannot rebound today as formidably as politicians would now hope so, despite a lower C$. After 10 years of manufacturing struggles, and given at last a respite in the currency field, where can/should we expect economic growth to come from in the next 10 years?

  • Not really from the consumer. Household debt and high real estate prices have now reached levels that could reasonably pose a fair threat to financial stability. The Canadian consumer has not deleveraged since the financial crisis of 2008. He has rather stacked up debt.
  • From new government packages? Unlikely. The federal government has kept control of the national debt and has now topped it at 52% of GDP and is aiming at balancing the budget within the next 2 years.  Rather, it is provincial governments that are struggling to put a lid on their deficits as they face fierce opposition to austerity measures. Still there is little consensus to lift debt to higher levels.
  • Can exports take up the slack? Just possibly. Manufacturing will eventually respond positively to the falling C$ but with a lag and probably less verve: fixed investments have been flat for the last 5 years. We still hear more about closing factories than new investments. Southern American states, Mexico and Asia provide very tough competitive fields to Canada in attracting FDI. Successful high value manufacturing products increasingly require a combination of competitive cost structure, tech performance, design quality and service.   This is a combination that Canada has not easily achieved in the past.
  • The trade balance has averaged – C$ 6.8 B in the last 5 years and we are on track for much of the same this year. This will be a critical indicator to watch. The US economy should pull us along, but we have lost ground to China and other nations in the US market.
  • Will the commodity slump be short lived? Don’t bet on it. It is hard to predict how long will the slump in commodities last. Oil might move faster if OPEP countries change their revenue strategies, but most commodities will depend on the Chinese economy. We do know that China is transiting to a more sustainable growth rate of 4-6%. Yet the Chinese government takes all the possible measures to hit their official growth target of 7%. We can suspect there has been a fair amount of negative distortions built-in the Chinese economy to prop up that 7% target, notably in debt levels. Eventually we should expect some hard adjustments. When, where and to what extent these will take place remains mighty hard to predict. But they eventually will.   For the time being the economic slowdown in China looms large in the field of oil and commodities, and hence the C$. Sitting out the slum might easily take a couple of years, 3 to 5 if we listen to forecasts from investments banks.
  • The profound shift to the digital economy is probably our next biggest challenge to engineer sustainable growth. The shift from a ‘traditional economy with software’ to a ‘digital economy with traditional logistics’ is well under way. But we currently stand in the middle of the pack of followers: not terrible laggards, but neither amongst the drivers of the revolution. This somehow reflects our poor score card on productivity and innovation, an item that has been the subject of countless studies but few deeds in the past 20 years.

So on the whole it does look a little wobbly for the Canadian economy. Then where is the C$ going? Probably down in the short term.  You should keep an eye on the 1.50 marker. The C$ will essentially remain much more vulnerable to external factors than domestic ones. Two stand out: The US economy and the China economy. It is the Chinese economy that will remain for us the biggest source of stress .  We are happy to see high growth rates in China to sustain commodity prices. But high growth rates also mean that China is moving upmarket fast, from low tech to middle tech to high tech goods. In the mid 1970s Japan overtook the USA in patent applications and it took a mere 5-10 years for Japan Inc to challenge Europe and America in high tech. China is now overtaking the USA in patent applications. Yes we hear that Chinese patent applications are inferior and that China lacks innovation capabilities, but all that was said of the Japanese challenge as well. There is inherently nothing that could prevent China from moving up on the high tech curve. We can be certain high tech challenges are coming up: the writing is now on the wall.

Can we keep up the international pace in high tech and R&D innovation policies? Our track record is lukewarm at best and we are mostly losing ground as a nation in various rankings. As a federal election is now looming, it does not look like that any of 3 main parties has a convincing plan for the economy other than protecting the middle class, and hoping for higher prices for steel, copper and oil.

Brace yourself for a difficult 4-year term in the country.

Andre Du Sault, MPAHarvard


Posted in CFO & treasury, Strategy & globalisation, World economy.

Tagged with , , .

Field trip to Silicon Valley: The Valley fires volleys

Palo Alto, 29.03.15

Visiting the campuses of Google, Facebook and Apple in Silicon Valley is a bit like the army scout who gets a peek behind the walls of the foreign army, witnessing the overwhelming forces in action. Silicon Valley is pushing disruption to new levels.

Today’s situation within the tech world is a far cry from the dot com boom of 2000, when scores of small dotcom start-ups were carpeting the landscape, hitching on the telecoms bubble. If it all went down in crash, it evidently demonstrated the potent energy it could rally with the young and bright. This was not lost to Silicon Valley’s movers and shakers.  Silicon Valley remains a magnet for people on a mission and vision. As Robert Noyce, microchip man and one of Silicon Valley builders, once said: ‘Here everyone works much harder and cooperates more’. The spirit of Silicon Valley has fed an appetite that knows no boundary!

All three campuses are expanding at a frightening speed. The fortress of Facebook is opening this month a parking facility for 3000 cars! A new building under construction will see capacity for employees grow from 3k to 9k in the space of a few years. While Googleplex is the most fun to visit, all three sites are overwhelming with buzzing activity, concentration and a youthful energy bent on changing orders.  The Tools of disruption are firmly in the hands of Silicon Valley and the players have today the critical size and scale to match their visions.  Google has over $60 B in cash reserves, Facebook, $11 B and Qualcomm $18 B. These digital giants are now firing volleys at a score of industries: medias, cars, health care, satellite, and even groceries, etc.

The convergence of IT and telecoms in the last decade gave us the smart phone and the apps model.   Smart phones now account for 75% of the phone market in the USA, up from 65% last year.   Within the population of top users, a majority of them state they use it ‘nearly all the times’, while 21% affirm that ‘they could not maintain a relationship with a partner without the apps! Talk about a new generation growing up!

All the while the traditional medias are still reeling from the attacks of Apple and Google. TV is next in the line of attack. For the first time, TV ads ominously dropped last year in absolute $ term, as ads on mobile and digital platforms are pumping up. Apple is about to launch a TV streaming service, in a bid to unravel the bundle of pay TV.

In the car industry, some 10-25% of the average construction costs of a car now goes into software and electronics. This will go up as technology has become the No 1 purchasing criteria in the luxury segment.   As cars increasingly take the look of a computer on wheels, digital champions are now challenging Detroit in the design of the car of the future. Car makers have responded by recently opening about 16 R&D labs in Silicon Valley, notwithstanding a pricey real estate and a stretching cost of living!

Digital health is on the screen as well. Google and Johnson & Johnson have struck a deal to advance robotic surgery. Apple is working on a ResearchKit to link up with its Apple watch. Novartis CEO, Joe Jimenez, a Bay area native, looks to be on a tech mission.   It is working with Google to put tech sensors on contact lenses, with Microsoft on motion-sensing technology for patients with multiple sclerosis, and on pills and inhalers with sensors for dose monitoring. Furthermore Novartis teamed up with Qualcomm to create a start-up fund for medical device monitoring health remotely. The push towards digital medicine has begun.

Silicon Valley has also entered the space race with low-earth-orbit devices.  Facebook has solar-powered drones. Qualcomm and Virgin are betting on One-Web, a network of low-orbit and low cost satellites. Google has invested in SpaceX and a fleet of balloons. Finally VCs have poured over a $ 1B in new food and grocery technology, hoping to disrupt traditional supermarkets. In a nutshell, few industries remain outside the reach of Silicon Valley.

The Silicon Valley innovation ecosystem has achieved critical mass across the whole spectrum of the value chain: from multiple R&D labs to emerging start-ups, to growing tech companies battering down the sales barriers, and to full scale overseas operations. Young inventors and entrepreneurs try their luck in the Valley while Venture Capitalists prowl for the next big idea.

A review of the cutting edge R&D being carried out at Stanford University, who sits right at the heart of Silicon Valley, tells you to watch the next wave of the Internet of Things and mobility. Another revolution in the making.

A trek to Silicon Valley has become as important as a visit to China was critical during the great manufacturing shift.  For mid-size tech clusters, this is bad news, as best talent is drifting out.

André Du Sault, MBA, MPA (Harvard)

Sources: San Francisco Chronicle, WSJ, FT


Posted in Country visits, Innovation & organisation, Management ideas, Strategy & globalisation.

Tagged with .


Montréal, 26.02.15

Envisioning Quebec in 10 years:  Joint conferences Harvard club of Quebec and Cirano.

‘Are we boiling in our own water?’, Henry Mintzberg.







We were ill prepared to face the first challenges of this century. The costs of lost opportunities have proven steep enough. The next 10 years might just be critical in terms of making the right choices for our society. How should we respond to new forces and what needs to be done by 2025 to remain a prosperous society?


On 01.01.2000, the end of millennial was wildly celebrated. The last decade had seen communism retreating, democracy spreading and an unprecedented consumption boom erupting. Neo conservatives had succeeded in pulling back vast swaths of regulation, notably and ominously, in financial services. Telecom and dot-com companies were flourishing and peaking. In Quebec, the Bouchard government had managed the rare feat of a 0-deficit in 1999, taking advantage of favorable economic winds. All in all there was much optimism to be seen on the horizon as few urgent issues loomed and king consumer felt good.

Yet, this view would prove to be an astonishing misreading of the challenges that would come to mark the first decade of the new century.   We engineered not one but two financial crises in a single decade (2001, 2008), unleashing the dark forces of greed and speculation, the seeds of which were sowed in the 90’s. Two crises is a telltale sign that things have somehow, somewhere, gone astray, throwing us out of balance. The rise of China, confirmed by their entry into the WTO in 2001, was sending plenty of warning signs of incoming competitive shocks in manufacturing. Indeed a very hungry tiger was let loose. Distracted or blinded by turbulence in financial markets, governments and companies misread the economic impact of China on local investments, labor and growth rates. But just as we finally came to figure out the scale and true nature of the China challenge, the 2008 financial crisis hit us hard. Debt skyrocketed and growth plummeted, opening troubling financial gaps for a string of countries, states and provinces around the globe. In a mere decade we managed to paint ourselves in a corner. We suddenly discovered we had outsourced our best growth options to China at a critical moment.

So, how have we collectively fared in these past 15 years, in Quebec? In a nutshell, the economy roughly grew by 45% between 1999 and 2014, while government expenses grew by 110%. Our best industrial clusters have dimmed under global competition and new waves of innovation, often for lack of vision.   Manufacturing took a hit of about 300,000 jobs. The Plan Nord was essentially played as a political card at the top of the commodity cycle. Montreal sputtered under poor leadership. We have lately taken to ride the new digital economy, but we are at the tail end of it, 10 years behind the leading nations. We have thus missed yet another key opportunity to leap forward.

A new reality is now painfully sinking in: high debt, diminishing growth prospects, and declining resources for the essential mission of government, namely the 4 pillars of education, health, infrastructure and the economy. Rather unfortunately, a long history (20 years) of rationing budgets in these four areas has had the perverse effect of dampening any instinct of excellence and new visions. Still, the government has proved the most effective pick pocket with a flurry of taxes under crafty guises. We moreover lack unanimity of purpose in the province, split by fiercely opposing constitutional views, just like a persistent family feud in the middle of a storm. We have not been good at anticipating and preparing for new waves of changes. Actors of change have not played their roles and leaders have disappointed. As of 2015, we are still searching for a new deficit 0. We are back to 1999, but in a far less comfortable situation.

In his last book, ‘Rebalancing Society’, Dr. Mintzberg was cannily asking ‘Are we boiling in our own water?’.  The environment has been moving faster than what our institutions have shown able to adapt. We resist and accommodate ourselves to the rising temperature. Are we set in for a quiet and persistent decline for the next 10 years? Or will we find the inner resources to reverse the trend of the past 15 years?


We are now standing a mere ten years before the close of the first quarter of century, 2025.   How might we expect to end it and under what possible shape will our society be left with? Can we collectively craft the outline of the possible journey ahead and our destination?   Challenges will abound. More business as usual is unlikely to comfort the next generation. For the first time ever, the active population from 15-64 actually declined in Quebec last year. The ageing of the population has thus officially begun, quietly. Climate changes will surely bring further surprises ahead. The forces of globalization and the digital economy will continue to blow as hard as ever. There will be new opportunities and threats to remain a prosperous society, but nothing is written in stone.   Nations and cities rise and fall on their capacities to renew themselves when a new era comes in.

In 2015, the Harvard Club of Quebec and the Cirano Institute will be presenting 4 conferences to address some of the major issues and priorities affecting the future of Quebec within a time frame of 10 years. What do we want to secure and what needs to be accomplished? Where will leadership come from? We aim to create a forum for discussions and new ideas, reaching out to outstanding researchers and field practitioners. We will bring external voices, notably from Harvard University, and expert opinions to address 4 critical topics: the management of our economy, the revival of Montreal, the modern challenges to governments, and the dilemmas of health & demography.

Our website:

Please join the debate!


André Du Sault, MPA Harvard.


Posted in CFO & treasury, Governance, Strategy & globalisation, World economy.

Tagged with .

Field trip to Detroit: A breach in the American tissue

Detroit, 20 December 2014









‘Obsolescence is the hallmark of progress‘, Henry Ford II, 1955.

Detroit is now unlike any other city in the world. As the heart of the American car industry, Detroit images American capitalism in its best and worst forms: inventiveness and dreadful labor relations. And Detroit is not standing under the best shape at all. As a matter of fact it is in real danger of becoming obsolete. Can both the city and the car industry turn around in the coming years?

Detroit is not alone in its dire conditions. Most of the Great Lakes cities have suffered steep industrial decline and vanishing populations. Whereas Cleveland and Buffalo have sort of stabilized and managed a mini rebound,

Populations           1960                     2008                 % change

Detroit                  1.67 M                  0.91 M                  -46%

Cleveland            0.87 M                  0.43 M                  -50%

Buffalo                 0.53 M                  0.27 M                  -49%

Milwaukee          0.74 M                  0.60 M                  -19%

Detroit has seen its population further erode to 0.68 M in 2013, a roughly 60% drop from the peak of 1.67 M people in 1960. What has happened in a matter of 50 years to cripple the 4th largest city in the USA?

Detroit literally invented the American urban doughnut: rich suburbs and downtown decay. It was first to build expressways and first to build suburban shopping malls. All the while the unemployed and the blacks started to populate the downtown area in the 1950s. To increase production quota in world war II, Detroit not only imported black labor from the South, but took white managers from the South too. In effect it imported the whole segregation conflict, lock, stock and barrel. The rot expanded and sure enough serious riots exploded in Detroit in 1967, imprinting deep scars in the urban tissue. Oblivious to these mounting tensions, Detroit had even applied to be the host city for the 1968 Olympics (they were held in Mexico city). Gradually blacks moved into municipal employment and came to control and dominate city unions. The ever conflict continues to fester and pester. My uncle was working in the car factories of Detroit in the 1960s and 70s and was always carrying a gun or two in his car. Such was life and insecurity then.

Detroit had gone through difficult times before. In 1932, at the peak of depression, Ford commissioned Diego RIvera to paint a monumental fresco at the Detroit Institute of Arts (DIA). Then, Detroit had a population of 1.56 M people, but 311,000 auto workers had just recently been laid off. Diego duly spent a month at the notorious Ford Rouge factory, observing and understanding.   Not so astonishingly, Diego’s interpretation of the car industry included the Aztec god Tlaloc inside the painting, a god requiring human sacrifices.   Today the mural ‘Detroit industry’ stands as the noted masterpiece of the museum, as if the godly curse had come to devour the city. The Ford Rouge plant eventually recovered and came to employ 60,000 workers in the 1950s but subsequently declined to 6,000 workers in 1999.








After the riots, the oil shocks of the 1970s proved to be the second shock to Detroit. The big 3 auto makers steadfastly relied on the larger car models to make money because of their higher margins. The Japanese saw their advantage in the low end of segments: high quality small cars with low gas consumption. For 2 decades the Japanese kept chipping away market share from the big 3 auto manufacturers as they moved up market. In fact, when Toyota launched the Lexus in 1989, the big three readily acknowledged that they could not themselves build such a luxury car.   The relentless Japanese competition on quality was the 3rd shock to an industry built upon mass production with average quality.   When Japanese car makers in turn built factories in America, they kept far from Detroit and its poisonous labor relations.

Wall Streeters are much despised in Detroit. The financial crisis of 2008 was a serious blow to the city and car companies. GM declared bankruptcy and Chrysler fell into the hands of Fiat. Ford managed to escape. Last 17 December, the Chrysler Group LLC name was ominously dropped for good, and was officially renamed FCA US LLC (Fiat Chrysler Automobiles).

The competitive landscape has in the meantime become more complex and more competitive as the Koreans have joined the big leagues. Can the GM towers, anchored by the river, regain clout in the markets? The future of the car industry essentially depends on a range of quality and design that bundles into a package of emotion and passion for car buyers.   When you wander in the GM Renaissance towers, you cannot help but observe the grayness of the office floors all modeled on the same cubicle patterns, floor after floor after floor. In a nutshell, we are strolling into the kingdom of Dilbert. My guide was enthusiastically describing the towers as the last pristine site in Detroit. I thought they looked like vertical straight jackets.






As for the city, some green shoots of recovery have lately popped up here and there. Youth seems to be tentatively back in town to the great relief of long time residents. Tech incubators, cooperatives, social entrepreneurs and real estate speculators have taken delicate roots in the city. Detroit is endowed with great buildings in the downtown area and the DIA is an outstanding proof of the mighty peak of industrial Detroit. Professional sports provide some of the central glue that is still keeping this sprawling city into one piece. Soon, the Joe Louis hockey arena will be moved next to the baseball and basketball stadiums in the downtown area. But can the younger generation battle back a dysfunctional city, massive corruption at town hall and powerful unions acting as nests of self interests?   Detroit is ulcered with a backlog of 110,000 vacant buildings, creating scores of pockets of war-like zones in a city that is large enough to absorb San Francisco, Boston and Manhattan within its boundaries. Thus about 30% of 140 square miles are vacant. Neighborhood initiatives aiming at reviving the creative spirits are facing the recurrent onslaughts of vandalism fueled by the nation’s 3rd largest population of homeless, drug violence and hordes of scavengers.








Will the city work better after bankruptcy? Will the car industry be prepared to face the next electric shock?   Clearly the old traditional American capitalism has been failing in Detroit.  In any event the country has moved on. Other cities such as Houston, San Antonio, San Diego and Denver have all seen population growth in excess 120% during the same period.  As we are moving towards intelligent cities driving economic growth, Detroit is a reminder that cities rise and fall in the great melting pot of the USA. Few industries and governments were prepared for the rise of industrial China in 2000 and fewer properly drilled their companies to the competitive tsunami. It was then thought that the competitive response from the pool of SMEs of each country or region would come to redefine the new economic order over the forthcoming decades.   And so it has been.

As the next phase of the digital revolution makes its assault on our lives, it will now be the health of city-regions that will make the difference in economic prosperity. It will be about how cities attract and mobilize resources, such as creative talent, new investments and cutting edge R&D within the new digital frontier. Can cities develop new forward looking policies and redefine their municipal landscape? Can cities go beyond mere cluster building and actually make them work? Unfortunately, the municipal record in North America is riven with some of the worst examples.

Good luck Detroit.

André Du Sault, MBA, MPA


Posted in Country visits, Governance, Management ideas, Strategy & globalisation, World economy.

FOR WHOM THE BELL TOLLS – Bombardier Transport







Montréal, 10 November 2014

When Huawei first beat Nortel on a bid, in Siberia, few noticed the warning signs of the paradigm shift. While Nortel was embroiled in accounting scandals, a residual of the telecom and dot com bubble fueled by greed, Huawei grew astonishingly fast in the early 2000s. Huawei’s chairman liked to describe his group’s spirit as a pack of wolves, basically ready to kill. And down went Nortel, distracted and unable to catch up strategically to Huawei. The combination of low production costs, technology, and service levels beyond the reach of Western competitors has propelled Huawei into the top 3 three telecoms manufacturers in the world. Huawei just announced early this Fall that its ambition would now take on the giants of the IT field, namely IBM, HP, etc.

Last 22 October 2014, the bell tolled again. CNR MA Corp, an affiliate of the world’s largest railcar manufacturer (CNR), a Chinese state-owned enterprise, won a bid for the metro of Boston.   The Chinese bid amounted to $570 M, as against a bid of $1080 from Bombardier. The difference is stagerring. However much the details might reconfigure the final costs, the bottom line is that Chinese engineers will do the job, and Chinese workers will build the cars. Assembly will be done in the Boston area. Now Bombardier has done a good business in China for the last 10 years, notably with the Shanghai metro and others. The hidden price was the technology transfer to its local joint-venture partner. The boomerang is coming back a lot faster than expected, now haunting Bombardier. The rail puppy has now grown into a full blown carnivore.

The Massachusetts Bay Transit Authority chose to pocket at least $400M in savings thereby cracking the door open to Chinese competition in public markets. Much will be written about fairness, or not, and for whom. But the writing is on the wall. For equal product technology, the Chinese can scoop up contracts with much lower bids. A few questions however inevitably pop up: How were the Bombardier profits in China recycled, and into what? Has the C-Series gobbled up every scrap of cash flow? What is the state of Bombardier Transport’s competitiveness ahead?

The next battle round will likely take place in Mexico. President Pena has just ordered to reopen the bidding process for a $3.7 B contract for a train linking Mexico city to Queretaro. China Railway Construction led a consortium that initially won the bid. All bets are now open.

The wolves are knocking at the gates. To be continued.

André Du Sault, MBA, MPA










Posted in CFO & treasury.

DEFICIT 0, TAKE 2, BY THE LIBERALS. Where will they take us?










Montréal, 03 October 2014

In the late 1990s, the Lucien Bouchard administration took aim at reaching deficit 0, which was achieved in 1999 with Bernard Landry as Finance Minister. We thought the monster deficit was put into cage for good, or at least for a long while.   We are now back at it, 15 years later, in 2014. Fifteen years may seem long enough, but the taxpayer finds it rather way too short. What have we done and what have we learned in the meantime? And where are we going this time?

Interestingly in this 15-year stretch, GDP grew by 42%, while government expenses grew by 116%. This neatly summarizes why we are facing yet again this monster and why governments have cunningly pick pocketed citizens by all possible means of taxation. Are we better off today than in 1999? Clearly, it seems not. We have serious problems on both sides of the equation: on economic growth and government expenses.

The initial deficit 0 drive, carried out with the zeal of a mission at all costs, brought a number of side effects, worth a revision:

  1. It institutionalized government by rationing for the top 3 ministries: Health, Education, and Infrastructure. Rationing established budget cuts and caps for services that are limitless in their nature, thereby hoping that better efficiency would make up for the cuts. It did not quite work out this way. As a matter of fact the verdict is rather harsh: Performance in these top 3 areas central to the government mission has been questionable at best, abysmal at worst.  For instance, It is nothing short but troubling that not all citizens are covered by a medical doctor when the health budget takes a whopping 43% of the total provincial budget pie. In education, we are playing the ostrich in the sand, tolerating dropout rates and analphabetic that have reached scandalous levels.   And our suspicions have lately been confirmed that infrastructures were the playground of corruption at the municipal level for the last 30 years, or ever since the fiasco of the Olympic stadium. Those 30 years of corruption have deprived Montreal of a significant architecture and design signature.   Shame on us, shame on them.
  2. The management of the economy by both politicians and bureaucrats has equally been dismal. Deficit 0 take 1 happened just as China was about to upset the established liberal order and shake out globalisation in 2001. Even if the writing was on the wall for all to see, we practically abandoned manufacturing with rather poorly designed and mostly reactive industrial policies. Most decision takers in government and professional associations proved incapable of outlining a vision in the face of this new industrial challenge. Consider that manufacturing as % of GDP has come down to 12% in Quebec, way below what the Germans consider the minimum critical mass of 20% for a healthy sector. The loss of jobs, R&D centers and head offices have been terrible. We got caught and distracted by the technology bubble of 2001 and the financial bubble of 2008. Still today, it looks like we are still chasing our tail in policy circles. We were saved by ores and mines, but this will come short in the future to keep our prosperity level at par. Oil alone will not save the Canadian economy and cheap electricity will not prop up anymore Quebec’s industries. Growth options will require astute direction, hard work and a measure of sacrifice.
  3. The baby boomers will likely get a harsh judgment in about 10 years’ time, just as the younger generation will finally take over and realize what was left to them. They will remind us the crumbling of values displayed by this generation. A generation initially raised by meritocracy as an offspring of the quiet revolution, but who, upon reaching decision making levels in their late 50s and 60s, turned to looking after themselves before the good of the community. ‘Doing the right thing’ just seems to have vanished as a reliable and guiding value! Scores of bad examples in hospitals, schools, political parties, unions and government offices have punctured our confidence in those entrusted to public leadership. Like mildew spreading into a house behind walls, rot seems to have infiltrated the governing middle class behind the cloth of democracy. We have tired of witnessing politicians ceaselessly tendering to special interests (often including their own), promoting partisan gridlock and being devoid of any vision.

And here again we stand at the junction of a new round of axing government budgets, all the while the economy is wobbling: our manufacturing sector is still reeling from unending closures, our technology strategy is falling behind swifter nations, and our unions are stubbornly dedicating themselves to protecting a declining pool of jobs at the cost of foregoing future employment. The challenges are immense.

We can only hope that the Liberal party will spare a moment of thought about the world we will be living in 10 years’ time and the position we would wish the province of Quebec to be in, to maintain prosperity and progress.   There is whiff of change in the air but considerable unease down the ground. Are we facing a depressing moment of largely unarticulated cuts without a drop of vision and hope for a better future? Will deficit 0 take 2 merely put an end to the fading dreams of the affluent society that marked the 20st century? Will it be one more signpost in a slow and irremediable decline?

In 10 years’ time, China will likely be in command of the largest economy in the world, on its way to complete its transition to a high value technology economy. It will be in a strong bid position to become the domineering power in commerce for a large share of the century. The digital economy will have leapfrogged and shaken traditional industries, professions and public services.   Cities and regions will have become the defining economic drivers for national economies.  In a nutshell, the rules of the game will have changed again, but not necessarily in our favour. Once more the writing is on the wall, with pressing issues calling for attention.

How do we reform our government structures and programs, and our guiding institutions to address the new challenges as we get closer to the end of the first quarter of the 21st century?   What knowledge and skills do we want to instill in our future leaders through our education system? How do we tame the health system that threatens bankruptcy to the province? How do we build new business champions, from start-up to international niche players? What infrastructures and institutions will revive Montreal as a beacon of entrepreneurship, creativity and scientific innovation within the north American landscape? How do we make our governments more transparent and accountable? These are questions that should be in front of our minds in this period of forthcoming austerity.

Keeping the status quo on a lower budget will not take us far. For all purposes, not far enough.

We are facing a defining moment, with the Liberals in command.

Where will they take us?

André Du Sault, MPA Harvard




Posted in Governance, Management ideas, Strategy & globalisation, World economy.

Tagged with , , .


football fan










Sao Paulo, 08 July 2014

Brazil is shattered by the end of 2 illusions: the ‘futebol arte’ is definitely gone and the ‘Plano Real’ will not carry the country ahead anymore.


Brazilian football has been infused by the samba touch to produce the world acclaimed ‘jogo bonito’ or the ‘football art’. A visit to the football museum in Sao Paulo reveals a treasure of some of the best Brazilian goals of the past 50 years. They are truly inspiring and artistic. The 1970 team was especially remarkable.

This World cup had dried out the art of Brazilian football. When the host team beat Chile by penalties in the first round, all the frailties were revealed. The team play and nerves were just not up to par with the dreams of a nation and the best competitors in the field. Brazil won the game but at the cost of losing the cup altogether.   The implacable 7-1 result in the semi-finals will resonate for generations. The tragedy was somewhat predictable, the collapse was unprecedented.

National tears will now roll the ball onto the political arena, where presidential elections are scheduled for this October. President Dilma is hoping to survive the football upset. Once the Cup got going, the festive mood edged her up to 38% in the polls, against 26% for the runner-up, Aecio Neves. Now the expensive price tag of $11 B and the whiff of corruption are likely to resurface. Mrs. Havelange, daughter of former FIFA boss, acknowledged in El Pais some 2 months before the Cup opening that ‘all that could be robbed had already been so’. An astounding revelation. During the cup, a newly constructed overpass collapsed, killing and injuring several. From a recent survey measuring the confidence Brazilians display over their national institutions, political parties scored only 7%, right down at the bottom, while national congress barely passed with 15% of the population.


The PT (Partido dos Trabalhadores) is seeking a 4th term this Fall. It is still riding on the Plano Real put in place by past president Fernando Henrique Cardoso (FHC) 20 years ago, in 1994. The Plano Real ended a decade of hyper inflation and economic retrenchment. Past president Lula, who succeeded FHC in 2003, had a great first term, cleverly combining liberal economic policies and new social programs. The commodity boom permitted this experiment. It won swaps of voters on the left, and sufficient voters from the center to win a majority. Lula completed 2 terms before anointing Dilma Rousseff. She easily won the presidency in 2011.

The first term of current president Dilma is not ending as well as predicted (see previous blog in 2011 – The economy is slipping into a troubling pattern of low growth and high inflation. Recurrent corruption scandals are grating the new middle class. Short of new ideas and effective reforms, the PT is increasingly embracing a more leftish agenda bent on keeping power at any cost.: Higher spending, opaque government programs, administrative price controls, high import tariffs, troubles and delays in infrastructure programs, and a sense of prolonged improvisation.


With the fun now officially over, the next government will have a hard time to fix the economy. Like other emerging nations, GDP growth is tapering to 1.3% this year and the outlook remains rather bleak. The heart of the matter is that residual inflation remains stubbornly too high, mining productivity and competitiveness.

Inflation rates averaged in the last 10 years about 5.3% and is expected to hit 7% this year. Not terribly high, but high enough to attract short term financial funds and to strengthen the Real. Over a 10-year inflation period, real price differentials with the USA have now come to exceed 30%! This hurts industry and exports. The duty-free shops at the international Guarulhos airport look decisively ‘duty-added’. Some popular cereal boxes in Sao Paulo are down to 180 gr at $C 3.50 each! This combination of high prices, high interest rates and a strong exchange rate are taking their toll on the economy.   Awkwardly the government is now resolved to use a strong Real to put a brake on inflation.

Manufacturing is suffering from a combination of sluggish productivity, high international prices and from the ever encroaching Chinese competition. Car production in Brazil is dropping by 10% this year, and for the first time ever below Mexican production. Capital investments are thus down by 5% this year compared to 2013. Ominously, Chinese business men are organizing and transposing THEIR own trade shows inside Brazil. Chinese exports to Brazil have gone from $16 B in 2009 to $$37B in 2013. The trade balance is thus taking a beating.

Brazil keeps the highest import tariffs in the world and not surprisingly ranks only 43rd in the McKinsey Global Index.   Still, behind the barriers, the trade account has moved last year from a surplus to a deficit for the first time in 10 years. It is expected to remain negative in the near future. As a result, the current account deficit is hovering around -4% of GDP this year, still within a comfort zone, but just about it.

The only sector performing well is agriculture, registering strong investments and trade surpluses. As for the consumer, he is putting on the brakes as well in light of rising unemployment. The consumer confidence index has lately been dropping like a stone, in spite of the Cup.

The Plano Real celebrated 20 years last 01 July 14 with good reason. The middle class at last rebounded and found a new voice. Yet, for all the thanks bestowed to FHC, the Plano Real has reached the end of its useful life. The Brazilian economy is now caught in a trap and requires a new Plano and fresh initiatives.   Can the PT be up to the task? It controls the purse, benefits from some election momentum, and can count on the votes from the left.   At this stage the election is theirs to lose. But policy wise, doubts are creeping up the ranks of the middle class.


The 2016 Olympic games in Brazil will present an opportunity to stimulate the economy. But the costs and the benefits of the World Cup will surely generate a string of local debates and quite possibly generate additional delays in infrastructures. The world cup is likely to leave a sour taste in the mouth of Brazilians. Furthermore experience in emerging economies tells us that corruption shoots up when a party stays in power for a third term, and spills over in a 4th term. Lousy politics and a stumbling economy will breed bad news ahead.

Odds are that the Brazilian ‘jeitinho’ (improvising, finding a way ahead) will pull the country through for the next 2 years, until the staging of the Olympic games. It is just that the hangover will then hit harder.

André Du Sault, MBA, MPA (Harvard)

References : Folha de Sao Paulo, Estado de Sao Paulo.



Posted in Country visits, World economy.

Tagged with , , , , .