Business in a Fast-Changing World

BRIG. GEN. LEWIS:

Members and friends of The Empire Club of Canada: No subject is more in the forefront of our thinking these days than energy. And to most of us energy is synonymous with oil.

A recent Financial Post article leads off with the remarkable sentence: "Nobody loves the major oil companies." "Love" is likely the wrong word here. The writer could have used "understands" and have conveyed his point. A man who figures prominently in that extensive article on our energy industries and energy prospects is our guest speaker today, Mr. C. William Daniel, President and Chief Executive Officer of Shell Canada.

Mr. Daniel is head of number three in the group commonly known as the "big four" in oil circles: Imperial, Gulf, Shell and Texaco. And he is the first Canadian to be appointed President of his company. Indeed he is a native son of Toronto, born and educated here, graduating from the University of Toronto in 1947 with a B.Sc. in mining engineering. In that same year he joined the Royal Dutch/Shell group of companies and then followed assignments in Houston, Texas, The Hague in the Netherlands, and Venezuela, before returning to Canada as Shell's district petroleum engineer in Edmonton in 1952.

From here he had further assignments in New York, The Hague again, Calgary, and Trinidad.

In 1968 he became General Manager, Information and Computer Systems; Vice-President Transportation and Supplies in 1969; a Director in 1973; and appointed to his present position in July of 1974, a particularly turbulent time in the oil industry.

Apropos of his travels over the years, when the company magazine wanted a picture which could be regarded as typical, his wife, Ruth, suggested: "Photograph him at the front door with a suitcase in his hand."

Although the extremely busy senior executive of a major Canadian corporation, Mr. Daniel makes time to serve community interests. For example, in 1973 he was Chairman of the Metro Toronto United Way appeal.

Mr. Daniel's experiences both here and abroad, with a large international company, puts him in the forefront of those who can speak with authority on the position and direction of business, commerce and industry today. We are grateful that he has found time in a very busy life to speak to us today on the subject "Business in a Fast-Changing World."

Ladies and gentlemen, I am honoured at this time to present to you Mr. C. William Daniel, President and Chief Executive Officer of Shell Canada.

MR. DANIEL:

It gives me great pleasure to be with you today and I am honoured to have the opportunity of addressing one of Canada's most renowned speaking forums.

Looking back, I found that it was in December, 1903 when the Rev. Professor William Clark of the University of Toronto gave the first address to the Empire Club. His theme--imperialism--covered a subject which I am sure was hotly debated in the early 1900s. Today, I am not even going to talk about the British North America Act. My topic is "Business in a Fast-Changing World"--a theme which suggests that in the intervening 75 years our society has not succeeded in eliminating all its problems. We just have a different set to cope with.

To begin with, I would like to take a few minutes to discuss some recent trends in our society which are of major concern

to business people today--and then do some crystal ball-gazing by describing two possible contrasting scenarios for the future. Following that--a few suggestions as to what I believe Canada should be doing now, in preparation for the years ahead.

Society in this country, as in many other industrialized nations of the western world, is at a crossroads. We have low growth, high inflation, high unemployment and a general scepticism about large institutions of all kinds. Big business, big unions, big government--all have come in for their share of criticism, because of their apparent inability to get us back on a sound economic track.

Consider for a moment how we reached our present situation. In the 1960s the industrialized world was riding high on a strong economic upsurge. In many areas, boom conditions prevailed. Economic growth was being taken for granted and social service had begun to expand rapidly. Concern for the quality of life and more emphasis on redistribution of income led to the emergence of the "entitlement society," in which an unprecedented range of social services began to be taken for granted.

Then came the shocks of the early 1970s: the OPEC oil crisis ended the era of cheap energy; the stability of the American dollar was eroded; government expenditures rose steeply and double-digit inflation arrived. Economies suffered, and suddenly countries were forced to question their ability to pay for the demands of the entitlement society.

Virtually all consuming nations were caught off-guard, and in their attempts to grapple with these serious problems, governments inevitably were drawn to intervene more heavily in economic affairs. Energy strategies in particular became a top priority of governments in most countries--and recent events in Iran have only served to emphasize the importance of this sector.

Quite an upheaval in a relatively short space of time. As a businessman, I am sometimes asked what the impact of all these events has been on our decision-making process. I must say they have made it more complex, more challenging and yet more frustrating compared with a decade ago. The parameters then were mainly economic. Now, increasingly, they are social and political.

The disruptions of the early 1970s have proved to be much more than a hiccup in the growth curve. They were a watershed and have forced us back to a position where we must again come to grips with economic realities.

I would now like to look at some significant trends which have emerged, and at the challenges they present for the future. The first trend is what I have chosen to call "the risk-avoidance syndrome"--the reluctance to take a chance--which has resulted from the evolution of what I have referred to as the "entitlement society" or the philosophy of "society owes me a good living."

In such a society, it becomes necessary to further redistribute income. More must be taken from those who generate wealth to provide for the expanding needs of the social services sector. Inevitably, rewards for business success are reduced.

There is, however, another side to the coin. Where will the resources come from to pay for what is being demanded? Or put another way, is our society now providing adequate incentives to those who are creating the necessary wealth?

It is helpful to go back to basics on occasion, and to do so here I would like to echo the thoughts of Dr. Walter Eltis, a Lecturer in Economics at Oxford University, who addressed you earlier this year.

All economies have a great many activities where nothing directly marketable is produced--education, the armed forces, the police, health care, government administration. These services are essential in today's society. But they use up a great deal of market output and it has to come from somewhere. It comes, in fact, from the activities of many thousands of private sector corporations, large and small, and to a lesser extent from crown corporations.

The key point is that what is paid for publicly must come from the surplus of the market sector. If the market sector cannot produce a big enough surplus to pay for all the public spending, then large deficits will inevitably result, forcing governments to borrow. Balance of payments problems, a depreciating currency, inflation and high interest rates are certain to follow. In the past decade we have seen this occur most graphically in Britain, but also, and to a lesser extent, here in Canada.

The entitlement society has contributed to this situation. The growth of the entitlement perspective has lessened people's understanding of the wealth-creating process--a dangerous situation, since people seldom support a system which they cannot understand. And governments everywhere have encouraged the notion that they have it in their power to offer voters not only an ever-widening spectrum of services, but also a virtually riskless society.

Here is the great concern. If this trend continues, the possibility arises that business-people may join the risk-free bandwagon and shy away from seeking risk-rewarding opportunities. Yet this is not our nature. Given the chance and the prospect of reward, we do take the plunge. The needed creation of new wealth through successful risk-taking is the essential role of business in a free enterprise system.

I would now like to turn to a second major trend which is presenting enormous challenge to business-people the world over: the new international competitors.

As some Canadian industries have discovered, new countries outside the western industrialized bloc have become a major force as they emerge to compete in world markets. This process applies to natural resources, as well as to manufactured goods. For example, Mexico's oil and gas and China's coal are emerging to compete aggressively.

Where else are these new competitors? We now face the new Japans," the rapidly developing countries of South-East Asia and other growing nations such as Brazil. Should we blame the Canadian manufacturer for switching some of his production to Taiwan or Korea where labour costs are substantially less than half the level in our country? And we should not be misled into thinking the only attraction is cheap labour. These developing countries have used a combination of imported technology and capital, their work ethic, and their adaptable, abundant manpower to out-perform many of the traditional industries of developed countries in Europe as well as North America, including Canada.

As a producing and consuming nation, we would do well to ask what our reaction will be to the growing challenge of the new competitors.

Protectionism is always politically attractive because Canadian jobs are at stake--at least in the short term. However, we should recognize that, at heart, protectionism is a defensive posture and represents the road to a weakened society. A "closed society" of this type unfortunately tends to sustain uncompetitive industries and often fails to explore ways of concentrating efforts in other areas where a competitive advantage can be secured. In short, protectionist practices tend to blunt the wealth-creation process.

A dynamic society, on the other hand, accepts the challenge--of change and competition. Moves are made towards freer international trade. The creation of new jobs is encouraged, rather than the protection of those in declining industries. This is a difficult path to follow--for both businessmen and politicians, but it will ultimately lead to a stronger, more competitive Canada. So much for the trends which we see developing. I'd like now to consider where they are likely to lead us. I think it is possible to conjure up two alternative scenarios--both realistic--yet having very different implications for the 1980s and 1990s.

The first scenario is what I have chosen to call "a world of internal preoccupation." It shows what could well happen if risk-aversion and protectionism were to become more dominant and more pronounced in the future.

Here we find conflict between the forces promoting and opposing growth. Although people continue to expect a rising standard of living, the market sector is not encouraged to grow. Governments increase their intervention in the economy and are preoccupied with the redistribution of wealth rather than its creation. Marginal industries are protected to serve limited domestic markets, and export opportunities are allowed to decline. This scenario reflects an environment of economic under-performance which eventually leads to a lower standard of living because there is not enough wealth left to redistribute. If you find this scenario disquieting, so do I.

The second, alternative, scenario I have labelled "the world of the productive society." This shows an environment of reduced government intervention, reflected by lower expenditures and lower budget deficits and increased emphasis on productivity and market forces. Strong links are made into the international trade system and there is increased understanding of the wealth creation process, with adoption of government policies to foster it. The pendulum swings away from risk-avoidance to creation of new investment and increased employment. Altogether a more encouraging outlook. But this scenario does not imply "boom" conditions. Even here growth rates in the industrialized world remain relatively modest.

Two scenarios--a "world of internal preoccupation," and a "world of the productive society." Most of us would prefer the second. But which, in fact, is more likely to evolve?

Perhaps I'm over-optimistic, but I see some glimmers of hope that we are moving in the right direction. There are some positive signs: the taxpayers' revolt in California resulting in Proposition 13; and closer to home--the current studies by the Economic Council analysing the effectiveness of government regulation; British Columbia establishing a Ministry of Deregulation; and the intergovernmental studies on reducing duplication of services, agreed to at the 1978 First Ministers' Conference on the economy.

The progress of the current round of world trade and tariff negotiations offers further encouragement. Ambassador Jake Warren, the Canadian co-ordinator for the multilateral trade negotiations, has been cautiously optimistic regarding their outcome. He has said that one massive positive factor in the talks has been the desire to avoid a breakdown of international trade co-operation and the self-defeating chaos that would result from tariff wars and protectionism. Mr. Warren believes it was the fear of this potential chaos which motivated the leaders of the industrialized world to insist, at successive summit meetings, that protectionist forces must be resisted, and negotiations brought to a satisfactory conclusion. I hope his predictions are correct.

What is the message for Canada in all of this? Both government and business are apprehensive about sinking into a world of internal preoccupation. Our choice must be towards a more productive society, and I will therefore be devoting the rest of my remarks to the question of what we in Canada must do if we wish to move in this direction.

First, the wealth-creation process should be given further encouragement. Essential to this encouragement is a better understanding of the interaction between the market and non-market sectors of our economy. The quality of life in Canada rests on a foundation of economic performance, which in recent years has been well below potential. It is perhaps ironic that the expanded social programs of the 1970s were made possible by the economic affluence of the 1960s. But our economic engine is running today at part-throttle, and must be refuelled if we are to generate the wealth required to meet the social needs of the 1980s.

Second, we need continued progress towards restraint in fiscal and monetary policy. We need a stable dollar--and in the long run to achieve this, we must continue to move towards reduced government expenditures and towards elimination of deficits. Nothing can contribute more forcefully to a good business climate than sound fiscal and monetary policies, and nothing can undermine business more quickly than excesses in this area. No one today is looking for a steadily sinking Canadian dollar.

Third, we must do more to exploit our strengths in world trade if we are to remain a prosperous country.

One of our major strengths is our natural resources, which played such a large role in Canada's economic growth in the 1950s and 1960s. Forest products, agriculture, mining, oil and natural gas--all have contributed heavily to providing the necessary surpluses to support additional social benefits. They still account for a substantial portion of Canada's exports, and given the chance, they can make an even greater contribution.

Resource development in Canada needs to be expanded. This sector of the economy is sometimes downgraded because of its relatively low level of direct employment. There is a basic misunderstanding here. The facts are that the capital equipment and technology needed for resource development, and the opportunities it provides for upgrading, have a substantial multiplier effect on both employment and investment in other industries. Governments, in my view, should stop viewing this sector primarily as a source of tax and royalty revenue, and start viewing it more as a creator of employment and wealth.

Speaking as an oil man, you will perhaps allow me a brief comment on oil and natural gas.

Much interest has been aroused by the recent National Energy Board report on natural gas. I think their findings are encouraging.

First priority has been to provide for Canada's growing future needs, and it should be emphasized that the Board's estimates now include provision for potential new gas markets in Quebec and the Maritimes. In addition, over and above domestic needs, an exportable surplus has been determined of close to two trillion cubic feet, equivalent to about one and one third years of Canadian consumption. I believe this surplus estimate is conservative and will be revised upward as a result of continuing exploration and development activity by the industry.

The task ahead is now clear. First, the question of gas pipeline expansion to the east must be resolved. Extension to Quebec City requires some subsidy, but would open substantial new markets. In going beyond this point, however, I am concerned that much greater subsidization would be required. Alternative means of providing equivalent security of energy supply for the Maritimes should therefore be considered.

Second, the gas surplus determined by the National Energy Board must now be authorized for export. Priority should be given to those applications which provide the greatest benefit to Canada, and it is important that these decisions be made as quickly as possible in order to maximize improvements to Canada's balance of payments and to the economy generally.

On crude oil, the position is reversed. Canada is short of domestic crude, and relies on imports for roughly one-third of total needs. The Iranian situation has underscored yet again our supply vulnerability. It is true that Canada has massive untapped resources in both oil sands and heavy oil, and there are projects afoot to raise the vast sums needed to extract the oil. But my concern relates to timing. Conflicting federal and provincial fiscal terms in this area are not yet reconciled, and time to develop these resources is now critically short.

To sum up, in a fast-changing world, the challenge for Canada--and for Canadian business--will be to compete internationally. If we fail, we will see other nations pass us by, and the ability of both government and business to satisfy the expectations of our society will decline. And world competition is tougher today than ever before, and getting tougher.

To move towards a more productive society, a working partnership between governments and the private sector must become more effective in encouraging the wealth-creation process.

The role of government should be to evolve and spell out the societal and political parameters within which technical and economic solutions can be sought. The role of the market sector is to search for these solutions within this framework. And in a competitive environment, private enterprise is still best equipped to carry out this task.

Canada has the resources and skills to go the route of the productive society. Let's put away our differences and resolve to make it happen.

The appreciation of the audience was expressed by Mr. R.A. Robertson, a Director of The Empire Club of Canada.