Business

A plight in the forest

Peter Brimelow February 6 1978

Business

A plight in the forest

Peter Brimelow February 6 1978

Business

A plight in the forest

Peter Brimelow

The rest of the country may have been envying British Columbia’s (relative) balminess, but January 20 suddenly looked very bleak to the 700 workers at MacMillan Bloedel Ltd.’s Vancouver plywood plant. The company, they were told, planned to close down the whole operation. The province’s Social Credit government, which has had a lot of practice at this sort of thing, moved quickly to form a joint government-company-union committee to look into ways of saving the factory, but the problems it faced were formidable.

In each of the past four years the plant has lost more than two million dollars, faced with a long-term decline in demand for its product and increasingly expensive local raw material. And the Vancouver episode stands as a poignant human manifestation of the troubles of Canada’s forest products industry, easily the country’s most important in numbers employed, total production and export earnings, and of the peculiar travail of Vancouver-based MacMillan Bloedel, one of the industry’s largest companies.

Calvert (Cal) Knudsen, 54, arrived at MacMillan Bloedel in the fall of 1976. The company had made its first-ever loss of nearly $19 million on sales of $1.3 billion the previous year, due to a combination of recession, strikes and a catastrophic misjudgment of the shipping market, which left it committed to long-term charters well above the prevailing rate. The previous chairman and president were sacrificed, a ritual whose justice is still debated by observers, and Knudsen was offered the job. He was at that time a senior vice-president with the Weyerhaeuser Co. in Tacoma, Washington, having started life as a securities lawyer (in 1972 he was widely tipped to head the Securities and Exchange Commission, but lost out at the last minute). Then the MacMillan Bloedel board reneged and tried to hire Robert F’andeen, president of Canadian National Railways. One reason may have been financial— Knud. ; n is now paid $250,000 a year—but Bandean eventually declined, and Knudsen was approached again. This tortuous process may actually have strengthened his hand. Although J. V. Clyne, 75, had retired as chief executive in 1972, it was widely believed that the brilliant and autocratic ex-judge still dominated the company and its officers from the boardroom. Four presidents or chairmen came and went in four years. But in a series of internal moves and one head-office purge of more than 90 people, Knudsen made it clear that a new regime was in power and

that he alone was leading it. He even remodeled the executive offices on the twentyfifth floor of the MacMillan Bloedel building in downtown Vancouver so that the heads of me company’s operating divisions are physically closer to him. He says sadly that it’s not possible to go all the way to an open plan like Weyerhaeuser’s, but he is planning more structural changes (“much more glass and opportunity for people to relate to one another”). Clyne will be relating less, however. Due to the lack of space, his own new office is on the twelfth floor, which also means he will be

using different elevators. As the U.S. economy continued to revive, MacMillan Bloedel began to recover. In 1977, the company probably made around $40 million after write-offs—results aren’t out yet—due to increased demand for building products and a dramatic rise in the price of newsprint, up 80% in five years. Analysts generally expect poorer conditions in 1978. U.S. housebuilding will probably stagger, and newsprint, about 20% of the company’s sales, is thought to be about ready to settle down. Knudsen has instituted an extensive cost-cutting program, reviewing all expenditures in a form of the fashionable zero-based budgeting technique, a radical procedure given what critics say is rampant bureaucracy among the company’s 23,000 employees. He is planning to spend almost $600 million in the next five years in upgrading production facilities, principally in British Columbia, where the company’s foundation of timber holdings had latterly been neglected. These policies will take time to work. Knudsen has said that he thinks MacMillan Bloedel’s earnings should be able to grow by an average of 15% a year. Analysts are skeptical. The company is actually earning about what it did 15 or 20 years ago, when its total sales were much smaller. This is part of a general, long-term decline in the profitability of the Canadian industry as a whole, which

is now approaching the point where the companies would be better off buying Canada Savings Bonds with any spare money rather than reinvesting it in the business.

Forest products is a cyclical business. Demand rises and falls over the years in a fairly predictable sequence, following in the wake of the North American economy. The Canadian industry is particularly volatile because it is a “marginal supplier” to its chief market, the United States, the first to be cut out when times are bad. And there is increased competition for this market, from the developing forests of the U.S. South and from Latin America, where trees grow faster and workers are more docile. Like polar bears, the Canadian companies endure hungry periods and make up by gorging themselves when they have a good year and succeed in ambushing a seal. Unfortunately for MacMillan Bloedel, its last seal was partly filched by British Columbia’s former NDP government, which imposed additional taxes on the “windfall” profits of the 1973-1974 commodities boom. This is one reason why the company is significantly deeper in debt than average. But the basic problem is that the polar bears are living on an ice floe that is drifting out to sea and steadily melting. Returns earned by the forest products industry have lagged behind returns earned by Canadian industrial companies by about 25% over the past 10 years, and even behind U.S. forest product companies by about the same amount. And these profits themselves are not keeping pace with inflation. Life on the floe is becoming hungrier and remorselessly less spacious.

Canadian costs are just too high. Canadian labor earns more, Canadian taxes and tariffs are higher, even Canadian forests are rugged and more awkward to operate in. Because of international competition, these costs cannot be passed to consumers: they must be cut directly or by currency devaluation. When the industry considers who is paying for the officials from the combines branch of the Department of Consumer and Corporate Affairs who spent weeks last year living in Vancouver’s Bayshore Inn, microfilming thousands of company documents in the course of an investigation into the possible price collusion, it begins to feel unloved. Already some Canadian producers are in serious difficulty. Reed Paper Ltd. has had to omit its preferred share dividend—a symptom of major disorder—and is for sale.

The government is concerned about the forest industry, and has responded in its own way. By one recent count, there are 26 different studies of the industry underway, sponsored by different arms of federal and provincial government. All of them make separate demands upon the industry for information. In one case last year, the Department of Industry, Trade and Corn-

merce refused to share statistics with the Department of Regional Economic Expansion, on the grounds that there was bad feeling between the departments. Precisely what the government will conclude it can do, given its reluctance to lower taxes, is unclear. There are rumors that it will encourage mergers, although this might conflict with combines policy. Both Ottawa and Quebec are heavily involved in building a new pulp mill in collaboration with British Columbia Forest Products Limited at St. Félicien in Quebec. This will create 1,000 jobs at a cost to the taxpayer of some $50 million, but since pulp prices have collapsed it is likely they will be stolen from other Canadian plants.

There has been criticism of the brutality with which Knudsen has deposed some members of the old guard at MacMillan Bloedel, and even threatened legal actions.

The breadth of the vision that is prepared to eliminate the company’s entire economics department in favor of “outside sources” is also sometimes questioned. But the atmosphere on the executive floor seems sunny enough, and Knudsen has installed his own personal assistant, Junius Rochester, who worked with the U.S. Department of Commerce and is a relative by marriage. Knudsen’s four children now live in Europe and America, including a daughter who recently graduated from Yale and now works for MacMillan Bloedel in Paris, and a son who is in Sweden learning to make furniture. Knudsen camped for over a year in a modest hotel on Vancouver’s English Bay, but his wife has now joined him in a house in Old Shaughnessy, and he’s even making arrangements with the British Columbia Liquor Board to import his own wine from his winery near Portland, Oregon. No matter how slippery the floe, Knudsen appears to be a happy polar bear.