NOVEMBER 2, 1978
Trade with China
AN ADDRESS BY C. Calvert Knudsen, PRESIDENT AND CHIEF EXECUTIVE OFFICER, MACMILLAN BLOEDEL LIMITED
CHAIRMAN The President, Reginald W. Lewis
BRIG. GEN. LEWIS:
Members and friends of The Empire Club of Canada: MacMillan Bloedel is one of the forest products industry's largest firms and that industry is easily the country's most important in terms of numbers employed, total production and export earnings.
But it is not an easy industry. In its chief market, the United States, it is the first to get the axe when times are bad. It is an industry that is suffering from increased competition from the developing forests of South America and the southern states--forests where it is said that trees grow faster and the workers are more docile.
Our speaker today, Mr. C. Calvert Knudsen, joined MacMillan Bloedel as President and Chief Executive Officer just two years ago. The year before he joined the company it lost nearly $19 million Readers of The Globe and Mail this week will have read that in the first nine months of this year, MacMillan Bloedel made a profit of nearly $73 million. No wonder Executive Magazine described MacMillan Bloedel's acquisition of our guest speaker as "a stroke of genius."
Mr. Knudsen is a lawyer by training. A native of Tacoma, Washington, he was educated in the law at the University of Washington and Columbia University. He practised law in Seattle, specializing in handling stocks and bond issues. Our speaker then became associated with the forest products industry and prior to joining MacMillan Bloedel he spent fifteen years in the top echelons of the business.
Since joining his present company, Mr. Knudsen has studied company priorities, and as a result he has effected management re-organization, he has reduced overhead costs, and he has taken all actions necessary to achieve his goals of improved overall efficiency and productivity. He aims to spend $600 million over the next five years in upgrading production facilities. Early last month specific details of $163 million newsprint expansion expenditure were announced by his company.
With such big achievements in such a short time, it might be expected that this would be our speaker's theme today, but this is not so. Mr. Knudsen has recently returned from a trade mission to China where he explored the possibilities of increasing trade with that country. Following from that visit, the subject of his address to us today is "Trade with China."
Ladies and gentlemen, I am delighted to introduce to you Mr. C. Calvert Knudsen.
Ladies and gentlemen: Thirteen years ago, in 1965, China quietly embarked upon an economic development program aimed at modernization, prosperity and military strength. To accomplish this, it was accepted by most of China's leaders that economic development would undoubtedly result in the growth of elite groups--a management elite, a military elite, a bureaucratic elite, and an intellectual elite. It would also tend to emphasize urban values over rural or agricultural values. Chairman Mao, however, refused to accept these possibilities. Instead he precipitated the cultural revolution that started in 1966 and did not really end until 1976, after his death.
During and after the cultural revolution, elitists--intellectuals, bureaucrats, students--were force-marched into the countryside to work side by side with peasant farmers as a means of re-emphasizing the merits of simple agricultural labour compared to more intellectual or urban pursuits. Students were selected on the basis of their proletarian background and political enthusiasm rather than scholastic aptitude.
For more than a decade, China focused itself inward to the near total exclusion of the rest of the world insofar as economic development and foreign trade were concerned. What little trade relations China had with the West, at least, were carried on through the twice-a-year Canton Trade Fair. There it purchased only those items it couldn't produce for itself and couldn't do without, and sold enough export goods to pay for its meagre purchases.
Now, however, only two years after the present regime came to power by deposing the so-called "Gang of Four" that ruled briefly after Mao's death, it is suddenly apparent that China has returned to its original course and is now firmly resolved upon the most comprehensive, ambitious economic development program ever proposed in the history of the world.
The objective of the program is to transform China from an agricultural nation to a modern industrial nation by the year 2000, only twenty years from now. The program is called the Four Modernizations, which are the modernization of agriculture, of industry, of national defence, and of science and technology. The first phase of the program--to 1985--as initially disclosed was estimated to cost about $350 billion. Subsequent additions and extensions have raised that figure to $650 billion or more in the period to 1990.
To put these numbers in perspective, let me remind you that China has a land mass slightly smaller than Canada, supporting a population of more than 900 million people compared to our 23 million. It has a per capita G.N.P. of about $500 per person compared to our $8,400, or a total G.N.P. of about $450 billion compared to our $200 billion. According to the World Bank, in recent years real growth in China, off a relatively small base, has been averaging about seven per cent per year, compared to our five per cent off a much higher per capita base.
Planning for this ambitious program was initiated under the aegis of Chou En-lai before his death. The first major step towards implementation, however, came in February of this year when China signed a $20 billion eight-year trade agreement with Japan. Then in March, at the Fifth National People's Congress, China announced a ten-year economic development program (1976 through 1985) of 120 major industrial projects, including ten iron and steel complexes, nine non-ferrous metal complexes, eight coal mines, ten oil and gas fields, thirty power stations, six trunk rail lines and five harbour projects.
Recognizing that outside technology and expertise will be essential if this ambitious program is to be achieved, foreign firms are being invited in to support the development effort. In addition, China seems ready to abandon its former cash-and-carry policy in favour of various term-financing devices, including product payments, barter deals, possibly even joint-venture arrangements, and finally, as disclosed only in recent weeks, term loans from institutional leaders. China's credit is excellent at this point and its initial approaches to lenders are being greeted with glad cries. Given the awesome proportions of these plans--and the potential market for and source of goods and services that is represented by China's 900 million people--it is not surprising that the developed world is quickly responding.
Bids are being invited from all developed nations except the Soviet bloc. Japan, of course, has so far been the principal beneficiary, which is certainly logical given its technical proficiency, its geographic proximity, and its language similarity. Nippon Steel Corporation already has a contract to build a $3 billion steel complex near Shanghai. Japan National Oil Company has an oil exploration agreement. Hitachi Shipbuilding and Engineering Company and Mitsubishi Heavy Industries each have contracts to modernize Chinese shipyards, and so on.
However, China is shopping world-wide for expertise and technology. Germans, Frenchmen, Englishmen, Americans, Danes, Canadians, and firms of almost every nationality outside the Soviet bloc are being invited for proposals.
Where does Canada stand at this point? Well, in recent years, as you probably know, Canadian trade with China has been mainly wheat--from $150 to $300 million annually. China produced about 285 million tons of grain in 1977, but most of this was rice (China is a major exporter of rice to other Asian nations) and China imports wheat to supplement its own production. In addition, starting in 1975, we have supplied about $20 to $30 million a year of pulp and paper--mostly pulp--in addition to miscellaneous items, including aluminum ingot, by the way.
Our imports from China have been small, about $80 million per year mostly in consumer goods, resulting in a large imbalance of trade in our favour. This is a problem--not an insuperable problem, but one that should be dealt with by a conscious effort on our part to increase our imports from China as we increase our exports to China. It is not insuperable because the grain sector is a special case--China must import wheat and the available suppliers are limited mainly to North America.
As a potential supplier, Canada has a marginal but unquantifiable advantage over other western nations because of its early recognition of the People's Republic in preference to Taiwan. I would describe this advantage mainly as a desire to do business with Canada so long as quality, price and terms are at least equal.
As far as products are concerned, it seems clear that in the short term wheat will continue to be a major item. However, subject to normal lead times, I suggest that technology and expertise will become increasingly important. Project design and management, process equipment, and for a transition period perhaps even raw materials, in the fields of mining, metallurgy (both ferrous and non-ferrous) and hydro-electricity are fertile fields for our Canadian engineers and equipment manufacturers to plough. And speaking of ploughing, agricultural equipment, and new factories to produce such equipment, are also potential areas for Canadian involvement.
Oil and gas technology is another area. Only yesterday it was announced that Petrocan and Ranger Oil have been invited to submit a proposal for offshore oil development--in the case of Ranger, utilizing technology developed in its North Sea drilling operations.
Another area of promise to Canada is the tourist trade. CP Air expects to start direct flights from Canada to China sometime in 1979, and is interested in providing hotel management services as well to help care for the expected surge of both business and pleasure travellers. China only gave out 10,000 visas in 1978, but wants to move that up to 100,000 by 1980.
In my own industry--forest products--the opportunities have not been as clearly delineated as those mentioned above. Nonetheless, a careful examination of the situation indicates a growing long-term potential, especially in the pulp and paper field. Consider these facts: because of the high fibre strength derived from long fibre softwood trees, the softwood timber resource is the most important source of raw materials for most pulp and paper products. About fifty per cent of the world's standing inventory of softwood timber is located in Russia, about thirty-three per cent in North America, and the balance is distributed mainly in Europe, Asia and Latin America.
Russia, of course, is not a potential supplier to China for political reasons. Entirely apart from the political problem, however, Russia has had to run hard just to keep up with its own internal demand growth, and shows no sign of any serious intention to become a major supplier to nations outside the Soviet bloc. Europe and Japan are net importers of pulp and paper products, and their future growth in consumption will have to be supplied from other areas, mainly North America. Although Latin America has future potential, the main potential is in hardwoods, and, longer range, in the development of softwood plantations that will not be market-ready for a number of years.
China, then, must either look internally for wood fibre to serve its future growth in consumption, or else look to North America. Although China has a modest softwood resource, the development programs announced so far do not include pulp and paper as a high-priority item. Yet the growth in economic activity being programmed will of necessity bring--indeed, has already brought--a sharp increase in the use and consumption of pulp and paper products. Pulp will be required for printing and writing papers. Newsprint will be required for improved mass communications. Packaging will be required for export products as well as domestic.
The sum and substance of all this, in our estimation, is that China will be a growing importer of pulp and paper products--principally bleached kraft pulp, newsprint and linerboard. Actually, China's import volumes of these products have grown considerably in the past three years. However, the Chinese have been opportunistic buyers, both because of the previous policy of self-reliance, that is, to minimize imports, and because major volumes of pulp have been available at discount prices during the recent world recession. Our belief is that China recognizes the reality of the world distribution of softwood timber inventories and is now open to proposals for long-term supply arrangements with North American producers to assure itself of a continuing reliable supply at reasonable, competitive prices. For logistical reasons, West Coast suppliers, both American and Canadian, will be the principal trade partners, but others will also be competing for the volume from time to time--even Japan and Scandinavia.
What about lumber and plywood? China has not imported softwood lumber or plywood, which are ideal building materials, for many years. There are, of course, many small sawmills and a number of plywood mills in China, which produce mainly hardwoods and some softwood lumber from logs imported from Russia. Although there is no indication at this time that softwood lumber or plywood will be added to the import list, one must speculate whether an aggressive construction program such as this, incorporating western design and management, might not develop a requirement for engineered wood products that would most logically be supplied from British Columbia and the Pacific Northwest.
In total, the picture looks good for Canada, despite the difficulty of curing the present imbalance in Canada's favour. As many of you know, only a month ago I participated in an informal trade mission to China headed by Paul Desmarais. Included in this group were senior executives representing a broad cross-section of Canada's capabilities both to export to and import from China. We calculated that, with only reasonable success, Canada should be able to develop a cumulative two-way trade flow of at least $10 billion between now and 1985.
Obviously there are many risks and uncertainties inherent in these projections. They range from political uncertainty to the possibility of management failure, to a renewal of the class struggle, to concern over financial feasibility.
The most difficult risk to assess is the political uncertainty, which would, of course, be aggravated by any or all of the other uncertainties. The driving force behind China's economic development program is Vice-Premier Teng, a 73-year-old veteran of the infighting at the top, who has been removed from power twice in the past, but each time has come back more powerful than ever. By any standard, Teng is a tough, dynamic leader, with more vitality than most 20-year-olds. He and his adherents are called the pragmatists for they value the achievement of their goals more than the ideological purity of the means employed, and are thus more open to imported technology and expertise with the attendant dangers of exposure to the values of the western world.
The Chief of State, on the other hand, is Chairman Hua, an equally vital 57-year-old, who has shouldered Mao's ideological mantle to a greater degree than has Teng. How these two men and their peers negotiate the trade-offs between rapid modernization, on the one hand, and the ideological purity of Chinese socialism, on the other hand, will determine the economic future of China as well as the future of trade with China.
Consider, for instance, the internal strains that will now be imposed on higher education in China, where after the "lost decade" students will be selected on the basis of scholastic aptitude rather than political enthusiasm; where faculties will be expected to catch up instantly on the "lost decade" of progress in their fields in order to teach today's technology to their students; where during the "lost decade" many of the best and the brightest were sent to rusticate in the communes and now must face the possibility that life has passed them by in favour of today's student generation.
Consider, for instance, the impact on China of sending thousands and thousands of students to universities all over the world to catch up on the "lost decade" of language ability and technological proficiency. What attitudes will they bring back to China when they return?
Consider, for instance, the impact of widespread tourism in China and the cultural relaxation and openness that will be necessary in order for tourism to succeed and expand.
Will these forces and others bring about the emergence of new groups of elite? Will Chinese society again polarize in a renewal of the class struggle? When Teng and the other veterans retire. will the younger group headed by Hua precipitate another cultural revolution and turn their backs on economic development?
China watchers the world over are asking these questions and watching events carefully to divine the answers. All that can be said at this point is that both Hua and Teng support the long-range plans that are now being implemented. Long-range programs tend to take on a life of their own almost independent of political change, and perhaps that is the objective. If so, we should be able to count on at least a ten-to-fifteen-year run of economic development and foreign trade growth for China.
Beyond that, no man can see with clarity of vision. And beyond that, I expect, the problems and opportunities will belong to our children and theirs, not to us.
The appreciation of the audience was expressed by William M. Karn, a Past President of The Empire Club of Canada.