Technology and Tomorrow

BRIG. GEN. LEWIS:

Members and friends of The Empire Club of Canada: In its 1938 annual report, Trans Canada Airlines grandly reported that in addition to one Stearman aircraft, stationed at Vancouver as a stand-by for the Vancouver-Seattle mail service, the initial equipment roster comprised five Lockheed 10A Electra aircraft. These were powered by two 420 horsepower engines and were capable of carrying ten passengers and eight hundred pounds of freight at an altitude of 10,000 feet, that is, five and a half times the height of the CN Tower. They could do this at speeds up to 175 miles an hour. Subsequent Trans Canada reports tell us that the equipment roster was increased by the addition of nine Lockheed 14H aircraft in 1939 and in 1940 six Lockheed Lodestars were purchased, each of which could carry fourteen passengers. It wasn't until about 1946 that we encountered another aircraft manufacturer's name in the equipment roster. Heady stuff in those early days and the beginning of what we know today as Air Canada.

At about this same time a young Stanford University business administration graduate was serving his country as an officer in the United States Navy, and would do so again during the Korean conflict. Putting those two seemingly remote pieces of information together is perhaps a roundabout way of introducing our guest speaker today, Mr. Roy A. Anderson, Chairman of the Board and Chief Executive Officer of the Lockheed Corporation of Burbank, California.

Mr. Anderson received his Bachelor's degree in economics and his Master's degree in business administration from Stanford University. Before joining Lockheed, he served in executive positions with other high technology companies.

Joining Lockheed in 1956 as a staff accountant, he advanced through several financial operations and management offices to that of Assistant Treasurer of the corporation in 1968, Vice-President and Controller in 1969, and Senior Vice-President and member of the Board of Directors in 1971. In 1975 he became Vice-Chairman of the Board and Chief Financial and Administrative Officer, and was elected to his present position of Chairman and Chief Executive Officer in September 1977.

As I have noted, there is quite a strong connection between Lockheed and Canada and I was delighted to find yet another, albeit a tenuous connection, in the fact that Mr. Anderson resides in a place called La Canada, California.

I commenced this introduction with comments showing how interwoven our national airline was with the Lockheed Aircraft Corporation in its formative years. That association continues to this day, with Lockheed providing not only Air Canada with the most sophisticated of aircraft and equipment, but also providing the same support to our Defence Department. Indeed, Canada, with the longest coastline of any country in the world, will be relying on the Aurora aircraft of Lockheed to provide coast surveillance as protection of our sovereignty.

We are delighted that the Chairman of Lockheed is able to be with us today, and I know that you will agree with me that his background and accomplishments in the business world permit him to speak authoritatively on the topic "Technology and Tomorrow."

Ladies and gentlemen, I am honoured at this time to present to you the Chairman of the Board and Chief Executive Officer of the Lockheed Corporation, Mr. Roy A. Anderson.

M R. ANDERSON:

Let me say that I am honoured to appear before your distinguished organization.

The Lockheed Corporation is proud of its association with your country. This association has several facets: First, we're a supplier of high technology products to Canada. Second, we buy--and are committed to buy--a considerable amount of goods and services from you. Third, one of our divisions, Lockheed Petroleum Services, has its headquarters in Vancouver.

We were very pleased when, several years back, Air Canada selected our L-1011 TriStar for its aircraft fleet. Today ten TriStars are in that fleet. We sincerely hope more will be added.

In 1976 the Canadian government placed an order with us for eighteen Aurora anti-submarine warfare and patrol aircraft. One week from today, the first Aurora will be rolled out at our Burbank, California plant. It's a beautiful plane, certainly enhanced by your national colours. The program is on schedule. To us, the rollout will be an historic occasion--a fitting testimonial to the smooth and effective partnership we have developed.

And it is a partnership. Under the Aurora contract Lockheed agreed to place $415 million in new business in Canada by 1993, with financial penalties assessed for non-performance. Toward that commitment, Lockheed and its suppliers had placed orders in Canada totalling $184.5 million up through the third quarter of 1978. After negotiations with the Department of Industry, Trade and Commerce, including the application of stringent rules on Canadian work content, this amount has been reduced somewhat, and actual credit for $132 million has been achieved. The terms of the contract required that a total of $88.2 million be achieved through that time period. So our efforts thus far represent an over-achievement of about $44 million. We also have offset commitments on P-3 Orion structural work totalling about $168 million. On potential future aircraft programs to be developed at Lockheed, commitments have also been made to involve Canadian industry to the extent of about $350 million. Our total commitment then, is about $938 million under the Aurora program. Toward that total objective of $938 million, Lockheed and its suppliers have placed new or additional business in Canada totalling about $242 million, through the third quarter of 1978.

As a part of the L-1011 TriStar program, Lockheed has placed $70 million of work in Canada thus far. There is a potential for an additional $85 million, giving a total of $155 million. This is over and above the $938 million commitment under the Aurora program.

Our partnership with Canada goes back many years--before the L-1011 and the Aurora. Since 1960, through the end of 1978, we estimate the total value of our direct procurements from Canadian industry to be in excess of $475 million. Much of this was not procurement in the ordinary sense. For example, in the first half of the 1960s, Canadian industry participated with us in a co-production program for 340 of our Mach 11 international fighters--the F-104G Starfighter, known in your forces as the CF-104. Through this co-production, we hope we helped to re-establish in Canada--and other countries as well under similar programs--a modern high-performance aircraft production capability following World War 11.

So, our ties are indeed close and meaningful. They are mostly related to technology, and technology is the subject that 1 want to discuss this afternoon.

Today we are concerned about many economic problems--federal deficits, adverse trade balances, persistent inflation, a decline in the rate of capital investment, lagging productivity. These problems are somewhat common to our two countries. Permit me for a few moments to develop some thoughts based on the situation in the United States. It would be extremely presumptuous of me to try to specifically adapt my observations to Canada, and I will not. However, you may find a degree of relevancy to your situation.

Today our attention in the U.S. is focused on inflation. It has played havoc with our economy. It has tended to discourage the degree of capital investment needed to increase productivity. Basic economics and common sense tell us that the only way to keep raising people's wages without having to raise prices is through the production of more goods and services more efficiently. This means greater productivity.

Today this is not happening. We are raising wages without a commensurate increase in production of goods and services. Prices are increased so the raised wages are not real--and the result is inflation.

What has happened to our productivity? Let's look at some facts.

Today, the rate of increase in U.S. productivity is below that of any of the other major industrial countries and is at the lowest level in a hundred years. In fact, the year 1978 saw almost no growth. From 1970 to 1977 the productivity increase in the United States was about 2.5 per cent. During this same period Japan's rate of increase was 6 per cent, West Germany's was 5 per cent.

Why this marked deterioration in the United States? I believe we have an inadequate rate of capital investment needed to encourage the application of technology to improve productivity.

If we look at the investment ratio (investment expressed as a percentage of gross national product) of the three countries I just mentioned, we find that Japan over the same period had an investment ratio of 33 per cent, Germany 23 per cent, and the U.S. 15 per cent.

It is also interesting to note that in the last decade individuals in Japan saved approximately 24 per cent of their after-tax incomes, in Germany the rate was 14 per cent, and in the United States about 7 per cent. These individual savings constitute an important source of funds available for investment.

A moment ago I mentioned technology as a key to increased productivity. Let me cite some statistics. Technological innovation is estimated to be responsible for approximately half or more of all productivity gains. Technological innovation means jobs--it is estimated that advanced technology has created some thirty million jobs in the United States over the past quarter century. Industries that are technologically intensive grow half again as fast as other industries. And productivity grows faster in high technology industries. A recent Commerce Department study shows that high technology companies create jobs 88 per cent faster and yield productivity growth 38 per cent more rapidly than other companies.

Let's look at trade. As an employee of a high technology corporation, I am acutely aware how much aircraft and other high technology products contribute to my own nation's balance of trade. In 1977 aerospace generated export sales of $7.6 billion. The net favourable contribution to the trade balance was $6.85 billion--second only to agriculture. We have no figures as yet for 1978 but I expect they will be just as impressive, if not more so.

Look at how underdeveloped nations view technology. We are all aware how intensely those countries seek access to the technology that will move them into the twentieth century and the ranks of the world's industrialized nations. The People's Republic of China is a clear example--its change in thinking is dramatic. I was recently there, and I can tell you their emphasis on technological growth is indeed intense.

Technology connotes innovation. Cost reductions and efficiency gains come primarily through innovations in methods for production and distribution. Innovation in new products and services is vital to the process by which an economy grows and renews itself.

Now, where does the US. stand today in the support of technological innovation? We are beginning to realize that we have slipped in recent years. Let me give you some examples:

(1) Total U.S. research and development spending has been declining as a percentage of gross national product since the middle of the last decade. We used to spend 3 per cent of our gross national product on research and development--today it is down to 2.2 per cent.

(2) The number of students enrolled for advanced engineering and science degrees in American schools has dropped 10 per cent over the last decade.

(3) The fraction of our scientists and engineers engaged in research and development has been declining. Industry has been putting more emphasis on short-term development, less on long-term research.

(4) And now a final example--a quote from U.S. Defense Secretary Harold Brown in a statement to the House Armed Services Committee in February of last year: "The fiscal year 1979 Department of Defense budget request . . . reflects our growing conviction that we must reverse the erosion of the technical and development lead the U.S. has had over the Soviet Union. During this past year debate has shifted from whether or not our quality lead has eroded to how bad is the erosion and what corrective actions must be taken."

I admit that this is a selective list that may be unduly frightening when taken out of context. Still, there is enough evidence around to cause genuine concern about the loss of our innovative thrust and the support and direction of research--particularly basic research.

The apparent threat comes at a critical time because never has our economy needed more help from our technology than it does today. Back to what I said before. To curb inflation we must increase productivity. And the preponderance of productivity gains comes from technological innovation.

How, then, can we stimulate technological innovation? The answer lies in the health of the economy and business. It lies in stimulating capital formation, stimulating investment, creating the incentive to invest and invent.

Technological innovation does not come quickly and it does not come cheaply. It usually involves high risk, and it requires financial nurturing over many years before it brings results. To support it, private industry must have the resources. It must be profitable and it must be able to attract venture capital.

How, then, can we stimulate capital formation in the U.S.? There are five positive steps that could be taken in our tax structure:

(1) Further and significantly lower or defer the current capital gains tax. Japan and West Germany have no capital gains tax. Recent tax legislation did lower ours from a top rate of 49 per cent down to about 28 per cent but that latter rate is still too high. It particularly discourages investment in high technology companies or in new technological ventures where extra risk must be balanced with extra reward.

(2) We need to eliminate the taxation of dividends. It really does not make sense to tax corporate income and then to tax that part of the residual income that is distributed as dividends. We would be much better served if that distributed income were fully available for reinvestment.

(3) We need to further decrease the corporate income tax rate. This year it was lowered 2 per cent, from 48 per cent to 46 per cent. Many favoured a further decrease, to a rate of 44 per cent. The end result would be more funds available for investment.

(4) We need to give serious consideration to some form of partial tax credit for research and development expenditures. This could be similar to the investment tax credit concept applicable to investment in fixed assets. I understand that you have such a concept. This kind of credit should be high enough to encourage greatly increased private research and development efforts while causing only a modest, short-term loss to the Treasury. It should be structured to encourage long-term product development. It might be desirable also to structure it to provide increased incentives to smaller companies, where the need for help may be even more critical.

(5) We need to relook at our depreciation rates. The United States lags behind many other countries in the amount of write-off allowed in the first three years, on the average. I understand Canada, on the average, allows 100 per cent--in the U.S. it's around 70 per cent.

In addition to these changes in our tax structure, to some degree we probably need a re-ordering of our national priorities. In recent years we seemed to be more concerned with social and environmental factors. In our federal budget, outlays for health, education, welfare, and other security programs have grown from 30 per cent of the total in fiscal 1969 to an approximate 48 per cent in fiscal 1979. It would appear that our President recognizes the priorities problem in his initial fiscal 1980 budget proposal. It will remain to be seen whether the Congress will support him. I hope it does.

To sum it all up, I'm convinced that if we would give serious attention to incentives for capital investment, we would once again see a resurgence in technological innovation. And with it would come greater productivity, one of the key factors in stemming inflation.

I've talked from the U.S. point of view. I suspect that since our economies are rather closely related, some of the points I've expressed do apply to Canada. I have heard that you are concerned over technological stagnation. I understand your government has embarked on a new program to give high national priority to research and development, and that you have increased tax incentives for industrial R. and D.

I am impressed with the recent observation made by your Finance Minister Jean Chretien, when he said: "If funds are going to be put into industrial R. and D. in sufficient amounts, the whole climate for investment and innovation in Canada will have to be improved."

At the inception of my remarks I mentioned Lockheed's offset commitment to Canada. This commitment had two basic objectives: to stimulate employment in your aerospace industry, and to effect a transfer of some of our technology to you.

As to the first objective, your Minister of National Defence has noted that the program has created 2,200 new jobs directly and another five to six thousand indirectly.

As to the second objective, we believe progress is being made. We are training Canadians in our own plant in Burbank on digital computer and software development and every system of the world's most advanced patrol plane. We have given Canada access to advanced and classified data. One of our subcontractors, Sperry Univac, has built a new plant in Winnipeg to manufacture digital magnetic tape units and to train Canadians in these skills. C.A.E. Limited in Montreal is providing operational mission simulators for crew training. Litton Systems of Rexdale, Ontario, is providing an advanced mission data interpretation and analysis centre. Ronyx and Bristol Aerospace are providing major structural components of the Aurora as well as the P-3 Orion. We have begun to set up a software consortium to develop and maintain computer programs.

Let me say that we at Lockheed sincerely hope that our mutual efforts on these programs will lend impetus to Canada's program of giving high national priority to technology advance through research and development. If it could be said that we were helpful to some degree in that regard, then we would be most pleased.

Finally, I want to express my very great appreciation for the opportunity to be with you today. On behalf of all of us at Lockheed, let me repeat how proud we are of our long association with Canada and how pleased we are that that association continues today--with Air Canada; with the aircraft companies with whom we are currently working; with your government whom we are working with in the defence of North America; and with the many Canadian friends we have gained over the years.

We are privileged to have enjoyed this close association. We have worked together to help solve many problems. We look forward to solving new ones with you in the critical years ahead.

The appreciation of the audience was expressed by Major Arthur J. Langley, a Past President of The Empire Club of Canada.