A Great Economic Opportunity

MR. LANGLEY:

A background of banking and chartered accountancy, coupled with a B.A. and a Master of Business Administration degree from the University of Michigan, help to explain, in part, the qualifications that have contributed so much to our guest's success in the Presidency of Chrysler. Only forty-four years of age now, he left the firm of Touche, Ross, Bailey and Smart, where he had been a partner, joining Chrysler in 1957 as Comptroller. Subsequent promotions to Vice-President International Operations, and Administrative Vice-President of the Corporation, culminated in his election as President in July 1961. Those best qualified to know would add to the formal qualifications I have listed--drive, imagination and organizational skill of a high order. This navy veteran is very active in a remarkable number of associations and community activities, all of which benefit greatly from his manifold talents and proven energy. His company, in this past year, has achieved most impressive successes in the automotive industry and it is therefore a genuine pleasure to have the opportunity to meet with the dynamic leader of this organization, and I proudly present to you Mr. Lynn A. Townsend.

MR. TOWNSEND:

Those of us who live in the Detroit area regard it as a great advantage to be so close to Canada. For me personally, coming over to Toronto is like coming home, because a few years back, when I served as group vice-president for international operations at Chrysler, I spent a great deal of time here in Ontario, as well as in the other provinces. So it is a very special pleasure as well as a great honour for me to be privileged to speak in Toronto at the Empire Club. I hope to make the best possible use of that privilege by presenting for your consideration a few thoughts concerning the great economic opportunity that lies ahead for the people of Canada and the people of the United States.

I am going to assume that there are some things about Canadian-American relations that you and I are quite familiar with, things we can take almost for granted. Before this audience, for example, I hardly need to expand on the old, familiar theme concerning the trust between Canadians and Americans that is symbolized by three thousand miles of unfortified and unguarded border. I don't have to repeat the well-known facts concerning the trade that flows in unparalleled volume both ways across that border. I don't have to comment on the many benefits we share in this part of the world as the result of living on the Great Lakes--which are beyond comparison the world's greatest single fresh-water system and which provide us with a superb means of low-cost transportation right into the industrial heart of the continent.

We also take it for granted that we are good neighbours--living on opposite sides of the street, perhaps, rather than next door to one another--but still very good neighbours indeed. No one, as far as I can remember, has ever spoken of a good neighbour policy for Canada and the United States, because between such old and such good neighbours there is just no need to use the words.

But there are other things that we may not take quite so much for granted. We don't necessarily accept as axiomatic, for example, the need for gearing our two economies more closely together than they are at the present time. We don't necessarily agree without any argument or qualification that investment in Canadian industries on the part of business concerns in the United States and on the scale of the last two decades is an unqualified blessing for Canada. If we did agree perfectly on our economic goals--we might find it a bit difficult to agree on ways and means of proceeding from here on to make progress toward those goals.

In my opinion, the time will probably never come when Canadians and Americans will agree on everything, and I don't think any of us would really like to see that kind of agreement. We Americans don't even agree among ourselves, as you may have heard, and neither do you. I hope you and we can preserve the differences within our two countries as well as the cultural and political integrity that keeps us distinct from one another in our values and our ways of life. Without those differences, life in this part of the world would certainly be far less interesting than it is.

All this is quite apart from the complex and difficult problems we share right now as economic partners on this continent. With all our differences in approach, I think you and we realize that we owe it to each other to try to work more effectively and more frankly, as partners should, to find better solutions to those problems. Every Canadian businessman I know would probably agree with me, and many of them have said as much, that you and we just can't expect to pull away forever from the natural magnetic lines of economic attraction that underlie our business relationships.

The businessmen of Canada and the United States are going to be forced by plain, ordinary, good business judgment to find ways of avoiding some of the wasteful duplica tions in production and distribution that exist at the present time. We are going to be forced by our own common sense and elementary business logic to act in line with what we all recognize--that our two countries form a natural market of magnificent size and potential, a market that should not be broken in two by artificial political barriers. Sooner or later we are going to be forced to realign our operations so as to gain for the people of Canada and the people of the United States, who buy and use our products, more of the benefits of mass production and mass distribution.

I think we all know these things. We know that the course of economic evolution in North America is in the direction of a continental pattern--and when we think together about progress in that direction it is imperative that we be guided by concept. Prosperous as we both are at the present time, the status quo is not good enough for either of us. We aren't either of us measuring up to our full potential--and we both have our problems.

For one thing, both countries are faced with serious deficits in their international payments. These deficits have persisted over a considerable period, and on both sides of the border we are concerned about doing something to bring about a consistent balance in our international accounts in the years ahead. Perhaps the most practical thing you and we can do about this problem is to stand side by side in the forthcoming round of negotiations on tariff and trade. We have a common interest in gaining access to the growing world markets on something like an equal basis with the countries we have both helped so greatly to become strong. As Mitchell Sharp said so well and so forcefully in Chicago last June, "since the war Canada and the United States have taken the lead in negotiating for the reduction of trade barriers and the expansion of trade on a nondiscriminatory multilateral basis. Our objectives remain the same, but they must now be realized in a world in which Europe has re-established its place and instituted regional economic arrangements, a world in which the frustration of agricultural trade has been recognized as a major problem and in which the less developed countries are pressing foi new and special measures to meet their trade and development needs."

As we work together to liberalize trade, and as we support one another in making constructive recommendations affecting the general problems of tariffs and trade in the world at large, it is well to remember that certain inhibiting barriers to trade still exist between Canada and the United States. But it is not my purpose to get involved in that thorny subject here today. What I would like to do is to explore one possible way for the businessmen of Canada and the United States to help unleash the combined force of our two inter-related systems of free enterprise. If that can be accomplished we can both move out into the rapidly expanding markets of the world more efficiently and effectively than we can on the present basis. By so doing we will both be in a position to do something practical about those adverse balance of payments situations we have in common.

In making my suggestions, I am going to restrict myself to what I know best -the economics of the automobile business. I will do so in the hope that if these suggestions are useful in making the Canadian-U.S. automobile complex more efficient and more competitive in world trade, the same approach may be of use in other sectors.

Let me begin by indicating briefly the dimensions of the total world opportunity for the North American automobile industry. In 1963 Canada and the United States built 9,734,911 cars and trucks. Of this total, 9,108,678 were built in the United States and 626,233 in Canada.

Total world production in 1963, according to a preliminary estimate of the Automobile Manufacturers Association, was 20,699,000 cars and trucks. This means that in the past year Canada and the United States together accounted for 47 per cent of world production--whereas ten years ago, in 1953, our two countries accounted for 75 per cent of world production--which in that year was only 10,436,544 vehicles. In other words, our production of motor vehicles here in Canada and the United States has been growing, but world production has been growing at a much faster pace.

In the years immediately ahead, the share of world production accounted for by Canada and the United States will probably continue to decrease. Whether that share will continue indefinitely to decrease will depend in part on what we do together to increase our effectiveness in the design, production, and marketing of motor vehicles.

A conservative estimate would anticipate a combined U.S. and Canadian production by 1970 at 11 million cars and trucks. Though it is much more difficult to estimate production outside of this continent, it appears easily possible that world production outside of Canada and the United States will reach the level of 13 million cars and trucks by 1970. This would mean a world total of motor vehicle production in the neighbourhood of 24 million units by 1970.

The challenge that appears right on the face of these facts is clear for anyone to read. What they tell us is that the world automobile industry is generating new mass markets everywhere. When mass markets are being created at the present pace, the efficiencies and cost savings resulting from large-scale manufacturing are also being created. To hold our own against the growing efficiency of automotive production in Western Europe, and the cost and price advantages resulting from the economies of scale, we in the automobile industry--in the United States and in Canada--are going to have to make an all-out effort. More particularly, we are going to have to avoid some of the wasteful duplication in the North American automobile industry that up to now has been a luxury we could afford.

You in Canada were the first to call attention to the inefficiency caused by the parallel production in Canada of car lines and car components already being produced in the United States. Many of you have read the scholarly, thorough, and well informed Royal Commission report on the Canadian automobile industry written by Dean Bladen of the University of Toronto after many months of investigation and published in 1961.

As you know, Dean Bladen began his report by pointing out realistically that Canada's once strong position in the export of motor vehicles had weakened as the result of the development of large-scale automobile industries in Europe and the protection of those industries by tariffs and other trade barriers. He then analyzed in depth and detail the benefits as well as the drawbacks experienced by Canada in being associated with the U.S. automobile industry. As the result of his study of the economics of the industry on both sides of the border and in Europe, he was impressed by the very substantial cost penalties incurred in Canada by the established practice of building cars and components for a limited and protected market. He found that it was impossible for the Canadian automobile manufacturers to realize anything comparable to the economies of scale enjoyed by their U.S. and European counterparts.

His facts and his logic brought him inevitably and inexorably to the conclusion that if the Canadian automobile companies were ever going to make themselves com petitive in costs with the U.S. automobile companies--to say nothing of the European companies--they were going to have to find a way of obtaining a high volume of sales outside of Canada. A start in this direction might be made, he decided, by liberalizing the "Canadian content" provisions of the 1936 tariff. Without going into the complex technical features of his proposal, let me just summarize it by saying that it would tend to give companies outside of Canada duty-free access to the Canadian market in return for increasing the manufacture in Canada of automotive components--whether or not those components were actually used in cars or trucks assembled in Canada.

In making the proposal, Dean Bladen was hoping to encourage not only freer trade in automotive products but was also hoping for a start toward the development in Canada of automotive parts manufacturing on something like the scale that he had found was necessary to be competitive in cost. In other words, if Canada could begin to produce greater quantities of certain automotive components--such as transmissions, engines, frames, springs, batteries, tires, stampings, and the like--and begin to be less concerned with the assembly of full lines of cars, some progress might be made in the direction of achieving optimum volume for the Canadian automotive industry as a whole. Once Canada achieved that volume, she could begin to bid on equal terms for a bigger share of the total North American market for automotive products. In the long run this specialization of effort would increase Canada's exports and help to balance her international payments.

The most immediate result of the Bladen report was the removal, as he had recommended, of the federal excise tax of 71/2 per cent on passenger cars. This was a progressive move towards encouraging the purchase of cars and widening the automobile market in Canada. I hope we in the United States will find it possible some day to follow your lead and eliminate Our own 10 per cent excise tax on cars and trucks.

What happened last October, when your Minister of Industry announced his plan for remitting import duties on motor vehicles and components, was undoubtedly the most important single step taken in many, many years to strengthen the Canadian automobile industry and in turn the entire Canadian economy. Although Mr. Drury made no reference to the Bladen Report when he announced the remission of the duties plan, it seems clear that it is a logical outgrowth of the Bladen recommendations. What the plan holds out as incentive is that to the extent Canadian automobile companies increase their exports--in excess of exports in the year ending in October 1962--they will be forgiven their import duties on an equivalent value of vehicles and components brought into Canada.

I cannot speak for the other automobile companies, but for Chrysler Corporation I can say that the Drury plan is providing a very strong stimulant to our business imagina tions. If, without dislocating our present patterns of supply and production too abruptly and violently, we can begin to bring across the Detroit River from Windsor, for example, a greatly increased volume of automotive parts for assembly into our U.S.-built cars and trucks--and if, in return for this volume of Canadian-built components, we can ship into Canada an equivalent volume of parts and vehicles duty free, we can begin to realize a substantial saving in a very short time.

In this connection, I would like to make absolutely clear my own belief that the immediate financial benefits realized by any one company as the result of the Drury plan are relatively insignificant compared with the longer-range benefits to the people of the United States and Canada growing out of a freer exchange of goods and services across our border. Any liberation that can be achieved from the constricting limitations of tariffs will help the businessmen of the United States and Canada move toward a more logical integration of production and distribution on this continent. This in turn will mean improved efficiency, more jobs, better values for consumers in both countries, and faster growing markets for our products throughout the world.

I would like to say at this point that I am not arguing for absolute free trade--or for the immediate wiping out of the tariffs between our two countries. That may come in the course of time. But you and I know that protection has had its usefulness to Canada and to the Canadian automobile industry. Now that the decision has been made to exchange somewhat less protection for somewhat greater competitive strength and greater access to foreign markets, great care must be exercised so as not to disrupt existing arrangements too suddenly.

Before the Drury plan was in effect, we at Chrysler were buying automotive components in Canada for our U.S. plants. At the same time, part of the needs of our Canadian plants in Windsor were being supplied by our own and other U.S. sources. In the years ahead, with so many of our facilities being located in the Detroit-Windsor area, we are in an ideal position to move toward an even closer integration of our Canadian-U.S. operations. This should bring many benefits to the people of our two countries. As a result of the Bladen report and the Drury plan, a start has been made toward what should eventually prove to be a highly rewarding interdependence of the Canadian and U.S. automotive industry. No one can say, of course, that the evolution initiated by these first encouraging moves will be smooth and easy, and entirely free from difficulties. There are bound to be problems of the kind that almost invariably arise from the disturbance of long-established patterns Of employment, trade, and investment. But a bold move has been made toward something better and economically sounder than we have had. The job now is to keep the process Of evolution in motion.

It may help, as we enter this period of evolution, to have some idea of the goals we would like to move toward. To this end I would like to describe very briefly what the Cana dian automotive industry might look like twenty years from now--in the year 1984.

To begin with, the new cars on the streets of Toronto in 1984 will probably be identical in their name plates, styling, and specifications with the cars over on the other side of the lake on the streets of Buffalo. Long gone will be the days when it was considered necessary to build in Canada virtually the full range of models built in the United States.

By 1984 we can hope, with good reason, that assembly plants, parts factories, stamping plants, supply depots, research facilities, and training centres in Canada and the United States will be located not primarily on national lines at all but in a logical economic and geographic relationship to resources, ease of transportation, and markets. By measurements like these, Toronto, Montreal, and Windsor are just as logical locations for a wide range of automotive manufacturing as Detroit and Kenosha and Cleveland.

It is possible that by applying this kind of economic logic, some automobile companies may decide to build in Canada their entire supply of a few basic components--such as frames, engines, transmissions, springs, and so on. This could mean that somewhere in Canada, and probably in Ontario or Quebec, by 1984 there may be at least one engine plant producing a million engines a year. There may be one or more plants building transmissions at the optimum rate of 500,000 units a year. Sourcing in Canada of these and other components in this kind of volume will mean greater total automotive production and more employment than would be generated by a continuation of older patterns of non-specialized production.

By the same logic, assembly operations may also be located in Canada. In 1984, some assembly plants in such cities as Toronto, Montreal, Hamilton, Windsor, and Van couver could be building cars to serve certain sections of the United States as well as sections of Canada. Of course, they would also be building cars for shipment to other parts of the world. It would not be at all surprising to me if in another twenty years something like 10 per cent of total U.S. and Canadian automotive production--including components--will be exported, as compared with only about 3 per cent today.

By 1984 we can expect Canada and the United States to divide the total automotive production of the two countries more nearly in proportion to their population than they do at the present time. Canada's population is now about 10 per cent of the population of the United States--but the value of Canada's automotive production is about 5 per cent of that in the United States. Through the greater efficiency achieved by specialization and increased volume--and through improved access to the markets of the world--there should be no doubt of Canada's ability over the long run to achieve virtual parity with the United States in automobile production. All of this will take time. It will also take patience and a willingness to look beyond immediate inconveniences and frustrations to eventual benefits. As Dean Bladen says, "Immediate preoccupation with the short-run problems of the industry must not inhibit consideration of some long-run possibilities." Success in moving toward the more rational organization of the automobile industry in our two countries will also require confidence on the part of U.S. automobile men in the consistency of governmental policy in Canada. If they were to become skeptical about something like the Drury plan, for instance, and should begin to look upon it as a short-term expedient, motivated by political considerations, they might be reluctant to source all or even a substantial share of an automobile component in Canada. No automobile company can ever afford to put its complete reliance upon one source without strong confidence in the continuity of supply at a reasonable and stable cost.

What we have in the making is the equivalent of a common market in North America. In its first stages, some years from now, it will probably be limited to the trade of our two countries, but eventually, as Mexico and then other countries in this hemisphere become strong enough to trade on freer terms, the scope of that tariff-free area may expand. We have congratulated ourselves for so long on our unguarded frontier and our unparalleled volume of trade that we may have become somewhat complacent, and insensitive to the need for change. The countries of Western Europe, on the other hand, when it became clear that their economic future was being mortgaged by economic nationalism, began more than a decade ago to take steps to free their borders of tariffs and to make possible for their indus-, tries the economies of scale through access to wider markets.

Right now Canada and the United States find themselves at about the same stage in grappling with this new concept of a continental economy that the six common market countries reached in 1953, when they took the first step towards the Common Market by establishing the European Coal and Steel Community. The important thing is that here in North America we have got hold of a new idea. As Justice Oliver Wendell Holmes once said, "Man's mind, once stretched to a new idea, never returns to its former dimensions."

I think all of us, Canadians and Americans alike, were pleased with the spirit of the meeting a few weeks ago in Washington, of Lester Pearson and Lyndon Johnson. The communique issued at that time seemed to promise closer and more effective means of consultation between our governments in the future than in the past. Reaching effective agreement on the kind of economic policy we have been considering today is far more difficult than reaching agreement on the use of the water in the Columbia River, but with enough good will and good sense it can be done.

I was impressed recently by an editorial in the Toronto Globe and Mail which, after discussing in a cool and rational way the problems of Canadian economic policy, concluded with these words:

"Let us make conscious decisions about the direction of national policy, recognizing what is involved and facing the consequences boldly. Let us decide if we are in favour of independence or interdependence, economic nationalism or economic integration. And having decided, let us design our policies accordingly and move with determination and decision, instead of drifting and hoping for the best."

From what I know of Canada, I believe the decision will be made, if it hasn't already been made, in favour of moving out boldly towards vigorous and unlimited economic expansion and a great and satisfying future for the Canadian people. Being as fond of your great country as I am, I couldn't be more pleased.

Thanks

Thanks of the meeting were expressed by Past President J. Palmer Kent.