CHANGING COMPETITIVENESS IN THE CHANGING GLOBAL REALITY

Transcription

1 CHANGING COMPETITIVENESS IN THE CHANGING GLOBAL REALITY The Honourable Kevin G. Lynch Vice-Chair, BMO Financial Group and Former Clerk of the Privy Council and Secretary to the Cabinet, Government of Canada to Canadian Energy Pipeline Association (CEPA) Conference Calgary,

2 1. The status quo is not a viable option The world is changing, profoundly. Structural trends are reshaping economies, societies, politics, expectations and these are redefining the drivers of success for companies, for countries. Pervasive globalization: reemergence of Asia, soon 50% of global GDP --- are we really ready? Demographics: we re aging in the West; shortage of skilled workers will constrain growth --- talent is a scarce resource! Information Revolution: from the Internet to Facebook to Twitter --- where next? Global financial crisis: an endless hangover of low rates, low growth, high volatility --- it s structural not cyclical! New Competitiveness: either continual innovation in products or standardized goods at huge scale/low cost --- need to choose! 1

3 2. We need to diversify (a) --- the world s economic centre of gravity is shifting back to Asia, and the demographic dividend and urbanization are powering growth in emerging markets. To quote the Great One: skate to where the puck is going to be, not where it has been. The world s economic centre of gravity is shifting back to Asia --- a 2000-year journey Shifting growth --- nearly 50% of global growth is coming from 440 cities, all in emerging markets Global GDP 2010 Percent contribution Global GDP growth Percent contribution Emerging 440 Other emerging cities and rural areas (Locations weighted by GDP in 3D space, projected to nearest point on Earth s surface) Developed countries Source McKinsey & Company Source McKinsey & Company 2

4 2. We need to diversify (b) in a new global reality of a two-speed world, the OECD economies --- our traditional markets --- are now in the slow lane whereas the dynamic emerging economy occupies the fast lane simple math: to grow faster than the 1-2% world, need to do more business in the 5-8% world. Global Growth Prospects (IMF, Oct 2012) Canada s Top Export Markets Canada s Energy Exports to U.S. (% by value) U.S Japan Country Export Markets Proportion of Canadian exports Coal 3.20% 5.20% 1-2% world 5-8% world Germany France U.K Italy Canada China India Brazil United States United Kingdom China Japan Mexico Germany South Korea Netherlands Brazil Norway 0.6 Total-OECD 90 Source: Industry Canada, 2010 Crude oil (including Oil Sands) 99.20% 99.50% Uranium 21.70% 25.50% Hydro 99.90% 99.20% Natural Gas % % Total 91.90% 91.90% Source: Statistics Canada Russia

5 3. In today s hyper-connected world, your risk is my risk. Consider the 2013 macro drivers of risk that the World Economic Forum thinks we should most worry about, and risk manage for, in this more uncertain and volatile world. 1 2 Unsustainable European sovereign fiscal imbalances: What next for the Eurozone and the EU? Unsustainable U.S. political and fiscal imbalances: after the fiscal cliff still looms a debt wall. 3 Income disparities: is it the 1% vs. 99%, or a struggling middle class? 4 Climate change: time passes, environment changes, but policy pauses. 5 Water supply: who has it? who needs it? who wants it? 6 Demographics of aging: who will fill the jobs of tomorrow? 4

6 4. The competitiveness model is changing and so must we --- it is now a choice between continually innovating new products at premium prices or selling standardized products at low cost and large scale Competitiveness in high wage economies is about productivity and innovation --- and this means new ways of thinking, doing things, more creativity. Productivity is not everything, but in the long run it is almost everything. The first step in winning the future is encouraging American innovation. - Paul Krugman (Nobel Prize Winner) - President Obama (State of the Union, 2011) Competitiveness with rising wages and improving living standards hinges on continually increasing productivity. And, for high income economies, a prime driver of productivity growth over the long run is innovation. - Michael Porter (HBS) The mantra of the hyper-connected global company is increasingly invented here, designed there, manufactured elsewhere, sold everywhere. -Tom Friedman (New York Times) 5

7 5. The new global reality of energy demand --- look to the fast lane economies. The International Energy Agency (IEA) projects that world energy demand will increase 30%+ between 2010 and 2035, and 90+% of the growth in demand comes from non-oecd countries and none from the U.S. for a net energy exporter like Canada, a game-changer! PROJECTION OF OECD AND NON-OECD COUNTRIES ENERGY CONSUMPTION

8 6. The world of energy is becoming unconventional demand is shifting to emerging economies, supply is shifting to unconventionals, and the energy security of supply security of demand balance is shifting between U.S. and Canada and this is a game-changer for both Canada and the United States. Energy demand + Energy supply + Energy exploration = Energy game-change (1) + Energy game change(2) in the unconventionals non-oecd markets in the unconventionals shale gas, oil sands, alternatives in unconventional terrain the laboratory (e.g. fracking gas) Shifting energy trade flows; shifting geopolitical risks Security of U.S. energy supply rising; Security of Cdn energy demand falling 7

9 7. We can compete provided we embrace change not the status quo Relatively speaking, Canada has fared well due to a number of global strengths. But, to continue to do so, we need to adapt to the new global reality, with a particular focus on diversification, productivity and innovation, and talent. Canada s relative global strengths include: Solid economic fundamentals, including low inflation, fiscal probity and low corporate taxes A diversified, sophisticated and resilient economy and strong human capital A sound financial system Robust natural resources (energy, minerals, agriculture); and Strong institutions, rule of law, civic values. Lowest net debt (to GDP) in G7 Corporate tax rate 9 pp below U.S. 1 st in OECD for PSE education Strong public university system World class university research capacity WEF rates Canada 1 st in world for soundness of banking system Third largest oil reserves in world; major producer in most natural resource categories Global Competitiveness Index ranks Canada 1 st in G7 for quality of institutions 8

10 8. Competitiveness today is about productivity and innovation. We need Canadian firms that are globally-focussed, productivity-orientated, innovationcentric, and talent-obsessed But, notwithstanding this new reality, there are some rather depressing competitiveness facts for Canada. Canadian business productivity growth has been slowing for years, and the last decade was the worst Canadian business spending on R&D now ranks 20th among OECD countries US= annual rate, % Today, Canadian business productivity levels are only 72% that of U.S. business % Israel Finland Sweden Korea Japan Switzerland USA Denmark Austria Germany Iceland France Australia Belgium China Luxemborg Slovenia Ireland UK Canada Source: OECD, Main Science and Technology Indicators Database, June

11 9. Canadian business needs an innovation and productivity focus, and now Why? Because what they do is transform: the price point at which a good or service can be sold, and the cost point at which it can be produced, and the market segment in which it is sold --- they expand the economic pie. Labour Productivity per Worker Price of Output Output per Hour Hours Worked Value of the goods and services produced Price consumers are willing to pay for the goods and services Volume of goods and services produced per hour on average Hours worked on average More competitive companies, countries Innovation in services/markets Innovation in processes 10

12 10. We need a strong Canada brand --- in this shifting and uncertain world, for mid-sized firms, a corporate brand is often partially defined by the country brand. Canada has considerable unrealized brand potential. Our potential global brand: Solid economic fundamentals, including lower debt and corporate taxes than the U.S. Robust resources; both natural resources and human resources A sound financial system, with strong financial institutions Strong universities, strong university research capacity Strong institutions, rule of law, transparency, stability? or Our actual global brand 11

13 11. Conclusion: A profoundly changing world offers new opportunities and new risks: to maximize Canada s energy potential in this changing world requires strong leadership, clear frameworks, and different approaches concluding thoughts: Energy strategy: given scale and scope of energy potential, and change needed to realize it, suggests national interest not just private interest, and a comprehensive energy strategy. Diversification: need to pivot to dynamic emerging economies, particularly Asia and Americas; Canada needs to increase its security of demand. Infrastructure: Canada needs new energy infrastructure to West Coast and East Coast to diversify; consider a public energy transportation corridor to West/Asia. Technology: be clever hewers of wood and smart drawers of water --- R&D/innovation key to making Canadian unconventional energy supplies more economic, more efficient, and more environmentally friendly. Financing: huge project and infrastructure financing needs over next 25 years (500+ potential major projects; $500+ billion) requires security of demand, and market access. Beach-head: energy can establish Canadian business beach-head in Asia, and open doors to non-energy exports. 12