“This dumps you down. You feel like you’re falling,” Guy Nelson says, pointing to a five-storey-high roller-coaster switch under construction in one of the cavernous sheds at Dynamic Structures’ dusty six-acre yard in Port Coquitlam, B.C. “We stop you, and then we reverse you. You go backwards and roll off down another track. There are 300 features we put you through.”
Once finished, the coaster parts will be disassembled, packed into containers like a set of Ikea drawers and sent to China. The one being assembled in the next building, Nelson says, is bound for Ferrari World in Abu Dhabi. In both cases, the actual track—which is less knowledge-intensive to construct—will be made by Dynamic’s joint venture in China.
“It’s high labour content per tonne,” explains Nelson. He’s tall and still brawny at 60, with a deep, gravelly voice. “The switches, all the controls, all the design—that’s what we do in Vancouver.”
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It takes imagination to conjure up how these towers of naked steel will become some of the world’s leading-edge immersive rides, the kind you find in Orlando theme parks. Dynamic has worked on rides for those market leaders too—in 2014, it built new track for Walt Disney World’s Big Thunder Mountain Railroad, while in 2010, it engineered an immersive experience for the Harry Potter and the Forbidden Journey ride at Universal Studios’ Wizarding World of Harry Potter theme park—and honed its expertise in the process. But now it’s on the cusp of cracking a larger global market, using its own technology developed in Canada. Over the past 12 months, Dynamic has landed about $100 million in ride contracts, most of them in Asia.
And it’s not just coasters. Last spring, Dynamic announced its involvement in the construction of the Thirty Meter Telescope, a $1.5-billion joint venture that includes partners from the U.S., China, Japan and India, to be built on Mauna Kea in Hawaii. When completed in 2018, the telescope will reside in an 18-storey-tall observatory and give astronomers a glimpse of galaxies forming at the edge of the observable universe, near the very beginning of time. Prime Minister Stephen Harper announced Canada’s $243.5-million contribution to the project in April; Dynamic is expected to complete a $70 million portion of the work.
It all adds up to a breakthrough year for the nearly 90-year-old company. The windfall is especially timely for Dynamic’s parent firm, Winnipeg-based Empire Industries Ltd., whose other business activity, supplying steel pipe and machinery for the oilsands, has fallen off a cliff. Truth be told, Nelson had no intention of becoming an exporter of precision engineered products when he bought Dynamic eight years ago. But a combination of circumstance and business sense caused him, like one of Dynamic’s coasters, to stop, drop and head off in another direction. He has one word to describe what Empire’s state would have been had he not done so: “Dire.”
The well-travelled Toronto entrepreneur had already owned a 30% stake in Winnipeg’s Empire Iron Works for a decade when, in 2006, he took the company public and became CEO. The idea was to buy up firms across Western Canada and corner the market in steel fabrication for the oil and gas industry, which at the time appeared to be caught up in a long-term commodity supercycle. Nelson figured the severe shortage of skilled trades gave the advantage to the largest operators, so for two years Empire Industries, as it is now called, set about acquiring fabricators from Ontario to B.C.
Nelson first crossed paths with Dynamic Structures while bidding for the steel contract for the 2010 Olympics’ speedskating oval in Richmond, B.C. They were the only other bidder, which forced Empire to come in low to secure the contract. The same thing happened with the ski jump near Whistler, except Dynamic came out the victor.
“They’ve cost me money in two scenarios,” Nelson was thinking when, unexpectedly, he was approached by Dynamic’s local management three months later. At the time Dynamic was owned by AMEC, but new leadership at the Britain-based engineering giant had decided to sell the company. AMEC, which itself ended up with Dynamic as the result of a series of larger mergers and acquisitions, was in the business of consulting and project management, and Dynamic’s more capital-intensive manufacturing operation didn’t fit. Empire was obviously in that business; would it be interested in Dynamic?
“I bought it because they were pissing me off,” Nelson recalls. But Dynamic also had a contract to build the Harry Potter ride for Universal Studios. The multi-year project was backed by performance bonds that would be transferred from AMEC to Empire. In other words, Nelson had to follow through.
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Dynamic had already built and refurbished rides for Disney theme parks, the undisputed leader in the amusement park business. These had been straightforward contracts, using Disney’s designs for the kind of media-enhanced indoor rides that make its venues unique. But Universal had an audacious plan to expand its own $500-million park in Orlando, the heart of Disney country. As a result, Dynamic was developing expertise in designing roller-coasters that do things like stop, drop and switch tracks, and theatres in which the floor drops away, leaving the audience suspended on robotic arms in front of 3D projection screens. This was unfamiliar territory for Nelson, and he had no choice but to go along for the ride.
The purchase of Dynamic dropped another piece of unfinished business in Nelson’s lap. He found himself representing industrial interests, alongside people from universities and the astronomical community, in a lobby group pressing for Canada’s participation in the Thirty Meter Telescope project. In this, he played along, perhaps not realizing this particular sales job would take eight years and countless meetings with bureaucrats and politicians to bear fruit. His wife, Leslie, burst out laughing upon hearing he had been named co-chairman of the Coalition for Canadian Astronomy. He awoke the next morning to find a copy of Astronomy for Dummies on his side of the bed.
In fact, Dynamic’s sideline in telescopes predates its coaster business. In 1975, when it landed the contract to build the enclosure for the Canada-France-Hawaii Telescope, the Thirty Meter Telescope of its day, the bridge and building-steel maker hoped such projects might help it maintain its heightened staffing levels after completing a spurt of work on bridges for the new Coquihalla Highway—the most technically challenging stretch of roadwork in Canada. Little did anyone know that the advanced engineering experience Dynamic would gain would ultimately propel the company in a new direction altogether.
“David Halliday was the mastermind behind all this,” says Dynamic president Ye Zhou, referring to his predecessor, who saw Dynamic through half a dozen astronomical projects in the 1980s and 1990s. For most recent undertaking, the Keck Telescope, it built not only the enclosure but also the telescope itself. After Empire acquired the company in 2007, “we encouraged Guy to be more interested in this part of our business,” Zhou says. He admits there was some trepidation among Dynamic’s staff at the time. “He [Guy] assured us he would continue supporting this part of the business, but back then nobody was expecting it to transition into a major part of Empire’s business.”
In fact, Nelson didn’t need much convincing. The more he got to know Dynamic, the more he liked what he saw. “Guy had always wanted to move Empire into more modern, higher-margin businesses,” says Steven Judge, a friend and associate who serves as president and CEO of International Breweries.
Meanwhile, the 2008 recession was casting the vulnerability of Nelson’s old business plan into stark relief. As oil prices plunged and companies shelved or cancelled oilsands projects, he was forced to shut two-thirds of Empire’s steel fabrication capacity. He got rid of sites in Winnipeg, Ontario and elsewhere in B.C. “I was in survival mode for four years,” Nelson remembers. Empire was in covenant with four banks, with $50 million in debt and a “bad mix of business,” he says. “It wasn’t a pretty picture.” Against that backdrop, Dynamic’s export business in engineered products offered a ray of hope.
Much of what happened to Empire and to countless other Canadian companies over the past decade can be traced to China. Expected to unseat the U.S. as the world’s largest economy within the next five years, the country’s double-digit GDP growth, exploding manufacturing capacity and need for modern infrastructure in the early years of this century drove a torrent of investment into the oilsands and other natural resources around the world. Today, though, the pace of growth has slowed, as China makes the tricky transition from an export-focused economy to the consumer-driven model of a more affluent, developed country. That’s bad news for resource companies and their suppliers in Canada, which expected China’s growth trajectory to continue. But it’s an opportunity for exporters with hard-to-copy products to serve a new generation of consumers, who demand the same kind of amenities North Americans already enjoy—state-of-the-art amusement rides, for example.
Like the telescope business, demand for amusement rides comes in cycles. When Disney and Universal aren’t building new parks, there’s little work to be had. So in 2011, Nelson created Dynamic Attractions, a subsidiary that would market turnkey ride systems to the other three-quarters of the world’s park operators that did not have their own technology—especially those on a building spree in Asia and the Middle East.
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Selling sophisticated machinery in China is not as simple as selling formed steel. One obstacle Dynamic faced was a 30% tax on manufactured imports. Nelson reasoned that if Dynamic could set up a joint venture with a Chinese partner, it could build the low-cost roller-coaster track there.
Through a personal connection—Zhou’s father had a contact in China—Dynamic went into business with Bill Qiu and his QiGuang Group, a commodity-scale metalworks in Zhoushan, China, in 2013. QiGuang owns 55% of the joint venture, QiGuang Dynamic Steel Structure Co., in addition to a 10% stake in Empire. This way, Dynamic manufactures the formed metal parts in China and largely avoids a tariff that might erase its margin or render its amusement rides uncompetitive. And it keeps the higher-margin design and development work in Canada.
In the fullness of time, Nelson proved to be the kind of boss the engineers at Dynamic were looking for. Where AMEC was cautious, he was decisive. “Guy is a brave man,” Zhou says. “He’s the one who made the decision to enter the general entertainment market. He’s the one who’s been tirelessly promoting the Thirty Meter Telescope. He’s the one who opened up our manufacturing facility in China. I don’t see all of this happening with AMEC.”
Judge credits Nelson’s leadership and “positive energy” with getting Empire through its darkest hour. “He managed to rally the management team to reduce costs, compete for all business available and look for new opportunities around the world,” he says.
“Guy is very creative,” says Terry Quinn, a mergers and acquisitions consultant who met Nelson 15 years ago and today sits on Empire’s board as an independent director. “He likes leveraged risks, but with the risk he takes the vendor along with him.” Each deal to expand the company has involved the owner either taking shares in Empire, offering up working capital to finance the transaction or “an earn-out that worked in our favour,” Quinn says, adding that some deals didn’t happen because the partner just wanted 100% cash.
There were multiple voices in the discussion around Empire’s pivot from its old-economy focus to the new one, Quinn says. “We had a few people drop off the board because they didn’t like the strategy.” Today, that change in strategy looks inspired.
Across the street from the metalworking sheds and the patch of ground where the dome of the Thirty Meter Telescope will rise—at 18 storeys high, it has to be built outdoors—an open-plan office building houses Dynamic’s engineering division. This is the company’s real competitive advantage, Nelson says. He introduces Amir Hadi Hosseinabadi, dressed in coveralls and standing in front of a large robotic arm. Hadi explains how he is developing an automated system for the zero-force optical polishing of the mirrors used in telescopes. The machine employs a laser to map the microscopic topography of the glass and determine whether it needs polishing. It can shift itself around any size of mirror array; existing machines for polishing can do only one segment at a time.
For Dynamic, this is pure R&D, with no guarantee of a payoff. But the potential is significant. Polishing mirrors and lenses is a major cost of maintaining telescopes, and using an intelligent robot could cut expenses dramatically. “The cost of this machine is $200,000,” Hadi says. Existing contraptions sell for anywhere from $600,000 to $1.5 million. If the project is successful—and it’s hit all its milestones so far—every major observatory in the world will want one of these machines. There might also be applications maintaining military hardware.
On top of Empire’s overall shift to precision manufacturing, Mark Senn, western vice-president for Export Development Canada, identifies two smaller things the company has done right in cracking global markets. First, it chose its niches. “When you’re the size of most Canadian companies, you really have to be focused,” he says. Senn points to the example of another B.C. company, MacDonald Dettwiler & Associates, which built a commanding presence in the small market for satellite ground stations before expanding into satellite hardware and software. There are only so many customers for such things, but if you can establish a reputation as a reliable supplier, you can bank on that for years.
Second, Senn applauds Empire’s decision to establish a joint venture in China rather than just a supplier relationship. “Most of the business Empire is going to do is lumpy and contractual in nature,” he notes. So when the order for, say, a big coaster comes in, the company has to know it can get track made in volume and on time. “The strategy of having a deeper business relationship adds certainty,” he says.
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By shifting the repetitive, labour-intensive welding and fabrication work offshore, Empire is doing more than simply keeping its costs down, says Zhou. “We also manage to elevate the skill set of our Canadian employees, which has turned out to be a very successful configuration.”
Nelson is the first to admit he’s no Steve Jobs. He did not have a vision of this future. But he did have the situational awareness to see which way the economic winds were blowing and to what his own employees and cash flow statements were telling him. What’s more, on the basis of that information, Nelson had the intestinal fortitude to ditch his old, ultimately doomed business strategy and adopt a new, unfamiliar one.
As Nelson sees it, he had no choice. Canadian manufacturers will continue to struggle if they try to serve the small domestic market or rely on a low dollar to stoke exports. What Canada has to offer the world is its engineering and research smarts. Those qualities may not be obvious from looking at the assorted roller-coaster pieces on view today in Port Coquitlam, but they will be once they begin thrilling parkgoers in China and the Middle East with their death-defying twists and 3D projections of approaching monsters—all made possible by a little Canadian know-how.
Canada’s trade deficit has been a cause for hand-wringing since the collapse of oil prices a year ago. But some experts argue that the export numbers don’t tell the whole story. Empire Industries’ move into China, in which it partnered with a Chinese firm to manufacture parts of its amusement park rides, is an example of what Daniel Koldyk, a senior researcher with Export Development Canada, calls “integrative trade.” In a recent paper, titled “Chasing the Chain,” Koldyk and his colleagues argue that headline trade figures are premised on an obsolete model of trade—that is, companies create products using entirely domestic inputs and then export them. But as trade barriers have diminished and global supply chains evolved, a car rolling off an assembly line in Canada and shipped to a U.S. customer may, in its constituent parts, have already crossed the border several times. What matters more than direct trade figures is the value added in each cross-border transaction. That’s harder to get a handle on.
Today, says Koldyk, the go-to strategy for Canadian manufacturers is to create, acquire or joint-venture on foreign operations. Indeed, sales by foreign affiliates of Canadian companies now exceed the level of direct exports from Canada. Whereas Canadian exports to the U.S. have grown 18% in the past decade, sales by foreign affiliates have grown 187%. Within those foreign affiliate relationships lies a revenue stream that doesn’t show up in conventional trade figures. “When you look at value-added activity, we see we’re less dependent on the U.S. market than we previously thought. We see a lot more going to Asia and emerging markets,” Koldyk says. And while they may not create blue-collar jobs in Canada, those foreign affiliates are creating higher-value research, professional and management jobs here, not to mention repatriating taxable profits. “One of the misperceptions about foreign affiliate activity is that it’s a net loss to Canada,” Koldyk says. On the contrary: It enables Canadian firms to achieve the necessary scale to become globally competitive and to access emerging markets that will continue to grow faster than North America. “Twenty years ago it was about offshoring. Now it’s about tapping into South-South trade,” Koldyk says, meaning the burgeoning trade relationships between, for example, China and Brazil. “How do you tap these fast-growing trade networks? You get inside them.”