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Dear guests and friends,
When I received the invitation from the Board of Trade of
Metropolitan Montréal to address its members, my first
response was to re-read the speech I made here in 1996 on
the occasion of Transcontinental’s 20th anniversary.
It was an interesting exercise because it made me realize
that things have changed considerably since then.
Michael Sabia, president
and CEO of BCE, and co-president with Rémi Marcoux
of the 2006 United Way subscription campaign for Montreal.
Like your businesses, Transcontinental has grown
a great deal in 10 years. In 1996, we reported $915 million
in revenue; in 2006 we’ll reach about $2.3 billion.
We have also more than doubled our workforce, to about 14,000.
Plus, we extended our operations into Mexico and have become
a major player in the fast-growing direct marketing segment
in the United States.
Many other companies have also grown and enriched Québec’s
economy. Behind high-profile successes such as Alimentation
Couche Tard, there are a number of companies that are less
well-known but are securely established in their respective
niches, both here and internationally. They are the new Quebec
Inc.
Another thing that has greatly changed is the economic environment
in which we operate. In 1996, for instance, I talked about
the globalization of trade. But at that time it was primarily
a matter of Quebec companies dealing with competition from
Japanese, U.S. or European companies in the Quebec market,
and competing with them in their own countries, which mainly
meant the United States. Globalization of trade is a much
different and much more complex reality today.
Which brings me to my topic, which I have titled
“Quebec Inc. in the Chinese Age.”
-- -- --
The past decade has been marked by the rise
of what we call “emerging economies.” This is
not a new phenomenon. You will recall the Asian tigers of
the 1980s such as South Korea and Taiwan, which became highly
industrialized countries. What is different now, however,
is that the emerging economies carry much more weight and
have greater potential.
Take, for instance, the group of countries know as BRIC, that
is, Brazil, Russia, India and China. These four countries
account for 42% of the world’s population and are a
formidable counterweight to the United States and the European
Union. A number of Western multinationals depend on them for
their growth.
Another new feature is the growth of powerful multinationals
from the BRIC countries. A recent study by the Boston Consulting
Group compiled their top 100 companies; the list was published
by Business Week in July 2006. Of those 100, 44 are
based in China, 21 in India, 12 in Brazil and 12 others in
Russia, Turkey or Egypt. Over the past four years they have
grown at an average rate of 24% and are involved in just about
every sector of activity.
To give you an idea of the scale involved, in 2005 these 100
companies had a combined income of 715 billion U.S. dollars,
a combined operating income of $145 billion, and assets
worth $500 billion.
These multinationals are spearheading the economic expansion
of their countries of origin. Their domestic market gives
them a solid industrial base, with cheap labour, and they
have the active support of their governments in external markets.
Plus, they have the financial weight to assert themselves
on the global scene. We all followed the saga of the Brazilian
company CVDR’s offer to buy Inco, the world’s
largest nickel producer, for the mere sum of $19 billion
cash. No U.S. or European company could match the offer. A
major European newspaper called it “globalization in
reverse.”
Because of its huge population and enormous
potential, China is the leader among the emerging countries.
It has grown at an average annual rate of 10% for the past
20 years. Its factories are being built or modernized at a
rapid pace and its domestic market simply cannot absorb the
excess production capacity. We even learned that China has
begun exporting newsprint to the west coast of North America.
That’s in addition to the durable consumer goods, raw
materials, technology, telecom products and so forth that
they already export.
And then there are the cultural goods. We have become major
consumers of cultural products that have local content but
are made in China. These include books, magazines, posters,
postcards and paintings, to mention only the print-related
items. From the time I last spoke to you in 1996, Canada’s
trade deficit for the cultural industry alone has risen from
$75 million to $278 million.
-- -- --
So for our companies, the most urgent question
is: are these emerging economies, led by China, a threat or
a new opportunity for development?
I thought that you might be interested to hear more about
how a Quebec Inc. company like Transcontinental is dealing
with this new reality in its own industry. And, since it’s
a vast and complex subject, I thought I’d get some help
to give you a more general picture. You’ll see what
I mean in a few minutes.
-- -- --
Onscreen, the video statement
of Henri-Paul Rousseau, president and CEO of the Caisse de
dépôt et placement du Québec.
Transcontinental is firmly rooted in North
America. On the international market, the United States is
our priority. In the U.S. market we have pursued a niche-based
strategy: our goal is not to be the biggest, but to be the
best in each of our markets.
That aside, when China first appeared on our radar screen
we perceived it as a threat. Over the past several years,
some of our customers in North America have started getting
certain products printed in China. As a company with responsibilities
to our employees and shareholders, we reacted quickly to the
first warning signals.
First, we determined that China poses a maximum threat when
the job involves print products that require a lot of labour
and where delivery deadlines are not an issue. So we conducted
an in-depth review of our activities in light of these criteria.
On screen you can see the revenue for each of our main areas
of activity, followed by the projected revenue for 2006 in
brackets.
With the business people
who gave their opinion on China through video statements:
Michel Tassé, Alain Com-Nougué, Henri-Paul Rousseau,
Gwen Klees (representing Laurent Verreault) and Pierre Fillion.
On screen:
• Magazine, newspaper and book publishing ($500 million)
• Door-to-door distribution of advertising material
($100 million)
• Newspaper printing ($220 million)
• Flyer printing ($450 million)
• Direct marketing products and services in the United
States ($275 million)
• Catalogue and magazine printing ($300 million)
• Commercial products printing ($280 million)
• Book printing ($150 million)
At first glance, the threat does not seem that big for us.
For obvious reasons, our publishing and distribution activities,
which represent about a quarter of our revenues, are safe
from this type of competition. Similarly, so are many of the
products we print, because they have very time-sensitive production
and delivery deadlines: newspapers, flyers and other retailer
products that are printed every day or week. For its part,
direct marketing, with integrated data management and the
design and printing of complex items, and direct mail, are
also safe. These activities account for three quarters of
our revenues.
However, we are more vulnerable when it comes to printed catalogues
and magazines, commercial products like posters or brochures,
and books. But to different degrees. For example, there’s
a big difference between a weekly magazine like Time,
for which we print the Canadian edition, and a monthly or
quarterly magazine.
But we wanted to find out more, so I went to China with two
of our senior executives. We visited a dozen printing plants
in several major cities, talked with their managers and their
European or North American suppliers and met with observers
of the Chinese economy.
-- -- --
Overall, we found that our image of China was
dated. China has a development plan for each of its sectors
and its model is largely based on the approach adopted by
South Korea.
15 years ago, Korean companies like LG Electronics and Samsung
were producing low-end, fast and cheap electronic equipment.
They were experts in low-cost production. Today they have
reached and even exceeded the Sonys of the world in terms
of quality, technology, design and brand management.
That’s the model that China wants to follow. By focusing
on technology and innovation, China is trying to move from
an economy based on cheap labour to an economy based on knowledge
and added value. It therefore has much less need of our capital
than it does of our know-how and technologies. China wants
to end its technological dependence on the West. In 2005 alone,
one of its flagship companies, Huawei Technologies, a direct
competitor of Cisco in the telecom industry, spent $558 million
on research and development. It has an R&D centre that
employs 7000 engineers.
This is the backdrop to the development of China’s printing
industry and our positioning as a company.
-- -- --
The printing industry in China has gone through
a major transformation over the past several years. The small
unproductive state-run outfits have been consolidated or closed;
ultramodern plants have been built and specialized, and the
government has allowed the creation of private companies or
partnerships between the government and foreign companies.
Plus, they have modernized existing plants. From 2002 to 2005,
the printing industry grew at an average annual rate of 20%,
double the rate for the Chinese economy as a whole, and it
was one of the best-earning industries. China’s official
goal is to become a key player on the global scene by 2015.
We came back to Canada with two conclusions: that we would
encounter increasing competition from China in some segments
of our industry; and that the most vulnerable activity for
Transcontinental is book printing, a segment that is part
of our growth strategy. Note that Transcontinental is Canada’s
largest book printer and that 60% of our production goes to
the U.S. market.
So, what’s our plan?
-- -- --
The biggest advantage Chinese printers have
is their very low prices. They have the benefit of a very
cheap labour force. A press operator, for example, earns about
$1000 a year, whereas here the salary would be $60,000. In
terms of raw materials, not only is the paper made in China
less expensive than here, but the government also subsidizes
exports by 12% to 15%. However, on the other hand, the biggest
enemy of Chinese printers is time.
In other words, competition from China is greatest for books
that are labour-intensive or for large format, high-priced
fine-art books whose publication dates can tolerate turnaround
times of more than a few weeks.
Centre, Isabelle Hudon,
president of the Metropolitan Montreal Chamber of Commerce.
At Transcontinental, we have specialized in
short and medium-runs, that is runs of a few hundred copies
up to 200,000 copies for a bestseller like Harry Potter,
with very short production cycles. This is the positioning
we decided to strengthen in light of the threat from China.
For instance, for several years we’ve successfully developed
short-run digital printing. We print about a hundred titles
a month with an average run of 800 copies and a turnaround
time of barely 10 days. This means publishers can do a market
test and then decide whether they want to do a longer run
afterwards. We’ve specialized our Sherbrooke plant in
these very short runs.
Plus, we are investing more than ever to improve our efficiency
and provide value-added services before and after printing.
This past June we opened our ultramodern printing plant in
Louiseville, an investment of $25 million. Not only will
it reduce our costs, it will also cut our turnaround times
by half, so our customers can get to the market much faster.
Our Louiseville plant also strengthens our positioning in
the black-and-white book market in North America, particularly
for short and medium runs. In this category, publishers gain
few savings if they print their books in China.
Lastly, we have always been known for innovating with the
latest technology. We now aim to be the world leaders in this
area. That’s why this past June, at our plant in Beauceville,
we installed the first press in the world to use the new Goss
autotransfer technology. This highly automated press cost
$20 million and will decrease our costs, shorten turnaround
times and improve product quality.
Our investments at Louiseville and Beauceville also reinforce
Transcontinental’s position in a niche where time is
of the essence: issuing reprints of bestsellers. Publishers
have to get the books out when the market is hot. We can now
offer them the shortest production times in the industry,
whether for books in black & white or in colour.
Those are some of our strategies for dealing with the competition
from China. We also have competitive advantages that I call
“permanent and sustainable.” I’m thinking
of the fact that our business model is based on being close
to our customers, and of our ability to understand our customers’
needs and to develop appropriate products and services. This
category also includes our qualified and dedicated workforce,
which has the ability to adapt quickly to new technologies.
I do not in any way wish to underestimate the competition
from emerging economies, but I believe that Transcontinental
is in a good position to face it.
-- -- --
Rémi Marcoux (back
to the camera) in a press conference after the speech.
A few words now on the other aspect of the
question: Is China a development opportunity?
At first glance, the printing industry looks attractive. Domestic
demand for print products will grow exponentially in the coming
decades. Indeed, in late September, the printing equipment
manufacturer Heidelberg opened its plant in Shanghai and immediately
announced the plant’s expansion during 2007. Plus, foreign
investment in printing is still low compared to other sectors:
a bare 2% compared to 29% in the plastics industry or 37%
in textiles. U.S. printers like Banta have announced plans
to buy in to local companies as partners and private enterprise
is more encouraged now than it used to be.
For Transcontinental, however, doing business in China is
a medium-term prospect.
When we went to China, we discovered the other side of the
coin. China remains a closed economy. It still has deep roots
in a planned economy, a legacy of more than 50 years of communist
rule. Industry sectors are still run by government corporations,
which are all very powerful and independent. Plus, the printing
industry faces an additional obstacle. Printed products are
the country’s primary method of disseminating information
and the government is not ready to transfer control to a private
corporation, and even less so to a foreign one. Even when
partnerships are accepted, foreign companies are restricted
to a minority share.
So the liberalization of the economy will be a slow process.
-- -- --
From the beginning, I’ve spoken specifically
about the printing industry. I thought you might appreciate
having a slightly broader picture, so I’ve asked five
other business people to talk about whether they view China
as a threat or as an opportunity for development.
Let’s first listen to Henri-Paul Rousseau, president
and chief executive officer of the Caisse de dépôt
et placement du Québec.
(Videoed statements:
• Henri-Paul Rousseau, president and chief executive
officer of the Caisse de depot et placement du Québec
• Pierre Fillion, the Canadian Plastics Industry Association’s
interim general manager for Québec
• Alain Com-Nougué, president of Aciflex
• Michel Tassé, president of Groupe Fertek
• Laurent Verreault, chairman and CEO of Groupe Laperrière
& Verreault)
Thank you, Henri-Paul, Pierre, Alain, Michel and Laurent.
-- -- --
It’s now time to wrap up.
When I founded Transcontinental in 1976, Quebec companies
had started to play a significant role in our economy. In
fact, the business community only needed a little help to
get things rolling.
That help was provided in 1979 by the creation
of the Quebec Stock Savings Plan. The famous QSSP! By encouraging
Quebecers to invest in Quebec companies, the QSSP gave a generation
of entrepreneurs like myself the leverage we needed to grow
and thrive. Plus there was the invaluable role played by the
Caisse de dépôt et placement du Québec
and the Société générale de financement.
All that was part of the first model for “Quebec Inc.”
Since the early 1980s, our businesses have gone through two
recessions, experienced radical technological change with
the Internet and digital technologies, faced globalization
and the creation of megacorporations such as AOL-Time Warner,
and confronted the first stirrings of Third World emerging
economies such as Mexico, South Korea, Singapore and Taiwan.
The new emerging economies will force us to adjust, of course,
but will also offer us new opportunities to grow. In any case,
we have no choice. From now on, to rephrase the message of
Thomas Friedman in his book, The World is Flat, our
market is the world.
I’m not worried, especially when I look at the next
generation. In the family businesses that formed the first
wave of Quebec Inc., including Transcontinental, we are seeing
the rise of the second generation, which is very encouraging.
As a society, we have to continue investing in education,
stimulating entrepreneurship and being open to other cultures.
At the start of this presentation we talked about Centraide.
That leads me to another type of second generation that’s
very important to me: those who will follow in our philanthropic
footsteps. That’s why I’m very proud that my daughter
Isabelle has gotten involved with the Fondation du maire de
Montréal pour la jeunesse which, among other things,
encourages young professionals to help other young people
get started in business.
In 1996, I ended my speech by making a date with you to celebrate
the 40th anniversary of Transcontinental in 2016. I came back
ten years early. At this rate, I should probably say: “See
you in five years!”
Thank you for your attention.
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