Subcommittee on the Automotive Industry in Canada Committee on March 11th, 2009

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Ostroff.

We'll have Mr. DesRosiers and then Mr. Frise give their opening statements, and then we'll open the floor to questions and comments from individual members, and I'm sure they'll have questions for you.

Mr. DesRosiers.

[Dennis DesRosiers, President, DesRosiers Automotive Consultants Inc.]

Thank you very much for the opportunity to speak to everybody on the committee.

I wrote my first paper on this industry in November 1969. That's 39-plus years of experience and about 5,000 studies later. That first paper built a mathematical model of this industry and came up with this phrase that you hear to this day and is true to this day, that one in seven jobs in Canada is dependent directly or indirectly on the auto industry.

I am the responsible person, and I wanted to bring that up first, because you're dealing with a pretty serious issue here. That number is very, very real. There are 800,000 direct jobs in our industry, and if you look at the permutations through what I call the butcher, the baker, and the candlestick maker jobs, you're looking at millions of additional ones. Keep that as a broad framework.

I've submitted a comprehensive deck. You'll be glad I'm not going to go through it. I tried to dumb it down as best I could, because I knew Jeff was here.

[Some Hon. Members]

Oh, oh

[Dennis DesRosiers]

So I'll let you read it on your own.

[Jeff Watson, Conservative, Essex, ON]

I'm moving the knife as I speak.

[Dennis DesRosiers]

I have followed your committee fairly carefully, and you've been hearing a lot of testimony on what I call the “here now” issues and the cyclical issues. I cover off some of those in my deck, and I'm going to avoid those today. I'll gladly answer questions on them. I have some opinions, but I think it would take too long. I would like to focus more on the structural issues in the sector, where the industry is heading in the next dozen or so years, Canada's position in the industry, the future, and the framework we need for government policy in our industry.

Let me tell you categorically that this industry is going to survive its current crisis, absolutely 100%, there's no doubt about it. Vehicles are ingrained into our lifestyle. Vehicles wear out. Did you know that 240 million people in North America this morning got up and drove to work and drove home tonight, and they're ultimately going to have to replace those vehicles? We will have demand. This industry is going to get through this.

At the same time, the level of demand—which you got into a discussion on with Chrysler—and the growth of demand over the next few decades is definitely going to be lower. Americans have been buying vehicles at a ridiculous rate; it is not sustainable in any way, shape, or form. It's not a Canadian problem; we have been very responsible. It's an American problem.

A couple of things reinforce this. We measure vehicles per driving age population: in America it's 101%; in Canada it's closer to 70%. We get along quite well with 70% vehicle ownership. How is it that the Americans need 101%?

I could use many, many examples. The best second example I will throw out is that somewhere between two million and three million Americans a year, every year for the last decade, took out a second 35-year mortgage on their house and used that money to buy a vehicle with, a vehicle that will have largely depreciated within 10 years. How do you sustain that?

So there's been a lot of debate in this committee about demand levels. You can count on, even in the best case scenario, demand likely being at two to three million units for the next 12 years approximately, every year, and there's no way around that. Chrysler's actual forecast in their submission is the most conservative and the most realistic. I back what they were saying.

I could get into other examples, but I won't.

If ownership levels in the United States were to drop down to Canadian levels, that's when you get into these nightmare scenarios that you see out of the CIBC, for instance, of eight million or nine million units of demand, and things like that. It won't happen. Technically, since we overbought by 15 million to 20 million vehicles, we could buy zero next year and survive quite nicely...[Inaudible--Editor] It's not going to happen. There's going to be a base level of demand that Chrysler is probably in the ballpark about.

I fully believe that despite this current crisis, we have an unprecedented opportunity in Canada for growth and to sustain this industry. We're potentially facing the best decade in the history of our industry, looking out to 2020. I wanted to make six points on that.

Peter can talk to you more about this than I can. The product that we will drive over the next 10 to 12 years has to be completely reinvented, top to bottom. We won't recognize it by 2020. We have an American government saying that we have to be at 35 miles per gallon. We can't meet that unless we reinvent our product. Right now, we're investing $30-plus billion a year in North America on innovation—in research, design, development, and testing. That's going to escalate. The fastest growing aspect of the Canadian auto industry today is the intellectual jobs and the many developments happening with them. Again, Peter could document a dozen, or two dozen, of these, where Canada is way up in the value chain and doing a very good job on it. I honestly believe that every single blue-collar job that we lose in our industry in this current crisis can be replaced over the next four or five years—and maybe it might take 10 years—with a higher-paying intellectual job. The potential is there. So I'm very positive.

Yves Landry was my mentor. He left this world more than 10 years ago, and I quote him from 15 years ago when he said that the future of the Canadian auto industry is the six inches between our ears. He was right then. He would be more right today. It just shows you how great a man he was to be thinking 15 years ahead of the curve.

Secondly, this industry has become global and will become more global. There is absolutely nothing Canada or the Americans can do about this. So Canada is going to have to compete and to find a way to compete in a global footprint. We have no choice, top to bottom, and there's no way around that. You cannot protect yourself from it. You can't run. You can't hide. This is a global industry. That's the baseline.

My third point is that auto policy in Canada has been very protectionist in the past. There are dozens of protectionist policies that have helped this industry through the last 20 or 30 years--I'm the expert on it. In fact, I drafted some of them--led by the Auto Pact. Those tools are not available to us. Most of those tools are, indeed, illegal. You can't go back to that era.

This is our real challenge. For the first time in the history of the Canadian auto industry, we have to find a way to secure investments based on our competitive position, pure and simple--not on protection, not on all of the policies and crutches we had in the past.

I believe that is doable with the right kind of policy framework. I sense more of a lack of confidence, and maybe that's the Canadian thing--that “Oh boy, we need this, we need....” Well, you're not going to have it anymore. It's a confidence issue in many respects, not just a policy issue. Don't forget that.

Fourth--and I'll be very quick here--government needs to focus its policy on promoting efficiency in every possible way. That's investment promotion to get the latest and greatest technologies into this country, infrastructure investments, tax, regulatory regimes, human resources, etc. Everything has to be focused on efficiency. To be able to compete in a global framework, you have no choice but to be efficient and take advantage of the opportunity.

My fifth point is to be very careful with regulation and taxation of our industry. Quite frankly, our governments--and it's not just the Canadian government, it's also the Ontario government, the U.S. government--have used tax, used the auto sector as their piggy bank. They have taxed and taxed and taxed--and I could go through them in Canada--air conditioning to fuel-efficiency tax, luxury tax, tire tax, GST, PST, etc., and always under the guise that, oh well, the auto industry is big and can support and pay these taxes; it has to pay its fair share.

As we've come to find out, we can't. Many politicians--and it's not specific to your government or previous federal governments, it's across--have used the auto sector to demonstrate to the electorate that they're on top of other issues, the environment being the best example, saying “We're environmentally sound, we're making the auto industry do X, Y, and Z”, with very little regard for the cost of that. And as we've also come to find out through the hard reality of the last six months, that wasn't sustainable or affordable.

So if you want to take advantage of this opportunity, you have to be very cautious on the taxation and regulatory front.

The sixth point--and I'll wrap up with this--goes right back to what Chrysler was saying. The first level of comfort you have to get as you move forward comes down to three words: product, product, and product--all aspects of product programs. If you become comfortable with Chrysler, Ford, General Motors, or any other company that comes to you with where they're heading with product.... Companies, every time, 100% of the time throughout the history of this industry, get themselves into trouble with product and they get themselves out of trouble with product. That is the first step. Without the product, you have nothing.

There has been a lot of discussion and the conclusion that Canada needs some sort of all-encompassing Canadian automotive policy. It's impossible. You will never get it. It doesn't exist.

Every single ministry in your government touches this auto industry in some way, positively or negatively. Your policy is an accumulation of putting every minister together with this industry and finding out what can be done to take away barriers, what can be done to help--and that's Environment, Agriculture, Industry--every one--putting them together, and perhaps in a patchwork fashion. If you go through all of those, government is really critical. But you're not going to get an automotive policy in Canada.

Thank you very much.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. DesRosiers.

Mr. Frise.

[Dr. Peter Frise, Chief Executive Officer and Scientific Director, AUTO21 Network of Centres of Excellence, Auto21 Inc.]

I'm not going to speak extensively about the current market difficulties of the auto industry except to say that without any doubt, as others have said, the problems being faced by our auto sector are being played out around the world in every auto-making nation and region, from Asia to Europe and, of course, here in North America. This is not unique to us at all.

I think one of the key points--and I suspect others have made it too, so I won't belabour it--is that this crisis happened at the same time as the industry was making big efforts to create future vehicles that are cleaner, safer, and more efficient. Those efforts can only be financed by the cashflow generated by strong sales, which were taking place in the 1990s and up until early last year or the middle of last year. When those sales dried up, the availability of funds to create new products became very scarce.

The key thing to understand--and it is probably a bit surprising that I would say this--is that R and D is not going to fix this problem right now. This is a short-term consumer credit issue. But R and D, research and development and innovation, is vital for positioning Canada's automotive companies to be viable in the future, to be there when the economy recovers and when sales recover, so that we have great products that people will want to buy and that will keep our citizens working. And that's what I want to talk about today.

I would say that the investments being made today--and they are being made today--are really important for positioning Canada's automotive industry for the future. Each day, a dedicated community of Canadian researchers is helping automotive companies take advantage of the opportunities presented by the present challenges, and the ones coming forward in the future, to which our sector has to respond.

The other key thing to understand about the innovation efforts of Canada's auto industry, and the public sector organizations that work with it, is that the young Canadians who are in school today--my kids and your kids--will need jobs in the future. And those jobs are going to be high technology jobs, as Dennis has very correctly said. We need to make sure we have prepared our young people for those high technology jobs so that not only are the companies positioned with great technologies but we have the people who can go in there and take those jobs and help our country progress in the future. That's why again, I think, even during this period of difficulty, it's important to continue to invest in innovation, because a good part of our innovation efforts are actually training activities for young people.

Through AUTO21's industry-driven, industry-supported research program and our dedicated, award-winning student development program, which, incidentally, won the Yves Landry Foundation award for program of the year in 2006, we've already trained more than 1,200 young engineers for the automotive sector and for other great careers in the idea end of the business, which is really where the business is headed, as Dennis has said. Our present and future programs will help to train thousands more people. This will be a vital contribution during the time when jobs are scarce and our best and brightest have to contribute and have to get on with their lives in any way they can.

So we are providing a place where our best and brightest young people can keep the pot boiling during this very difficult time. I think that's not to be undersold.

When the market returns to more normal levels, the companies that have remained viable and that have retained their key technical staff members and have developed new products, processes, and methods will be well positioned for success, thanks to the new technologies and knowledge developed in partnership with Canadian research experts.

AUTO21 is Canada's national automotive research program, stretching from coast to coast and encompassing 44 universities and research institutes. We support the work of over 300 researchers across Canada. Over 500 graduate students get their living stipends from AUTO21. And more than 240 private and public sector partners support our research programs--I mean financially--and receive the knowledge we create. I think that's a core aspect of AUTO21 that really has to be borne in mind. It's a program that pays its way, because we create knowledge that companies commercialize and use to improve their product lines in the future. And that keeps people going.

In my little brief—there are some copies available here—there are four or five success stories that will illustrate the kinds of benefits that have come from AUTO21 research over the years. I won't read all of them. I just want to feature one of them, really, and these are just representative of the more than 90 patents and licences that have been generated from AUTO21 research, in partnership with our industry supporters.

The one I wanted to feature was just an example of how we work. We were the first Canadian research organization to support a large-scale effort in automotive biomaterials, and that was back in 2001, before biomaterials were really on the scene. At that point they were somewhat of an academic curiosity, but there was industrial interest in them and so we made an investment in this research.

The project has been led by a University of Toronto forestry professor, and it involves a multi-disciplinary team of researchers at a number of schools across the country, in collaboration with the Ontario Centres of Excellence. This has resulted in a spin-off company called GreenCore Composites, which was named one of Canada's top 10 Cleantech companies last year, and it has resulted in a number of new product innovations that are just entering the market now, albeit at a slow pace because of the sales, but they're there. The Woodbridge Group has a new product out called BioFoam, which is going to be used in the headliner of the car, which is the overhead part, inside the roof of the car. Decoma International, a division of Magna, is involved in this research program, as well as Canadian General-Tower, and so on.

So on these research projects, it's not a bunch of professors doing curiosity-driven work. It's real work that is generating real outcomes for Canada's economy and, in the process, creating training opportunities for, at this point, over 1,200 young Canadians who are now becoming experts in these new technologies. And as I say, there are other success stories in the back of the brief.

This is what we call a knowledge-pull model. We don't start a research program until we have a knowledge receptor company that is interested in the work, making an in-kind financial commitment to the work and a commitment to receive the knowledge and to commercialize it in Canada first. Over 160 private sector companies have participated in our research projects, and that number has grown significantly over time.

Other countries are recognizing this model and are adopting it, and I have a lot of contacts around the world, as does Dennis and other auto industry people, because as Mr. LaSorda said, it is a global industry. The German and American models are terrific, but they're very large countries, operating on a scale that is difficult for us in Canada to replicate. But I think one of the best models I've seen on a scale that's commensurate with Canada is called the AutoCRC, or the Cooperative Research Centre, which is in Australia.

Now, Australia's auto industry is literally about a tenth of the size of ours. The AutoCRC was founded in 2005, which is four years after AUTO21. They actually have a larger budget than we do, but they have adopted a very good model. It was actually founded on the layout of AUTO21, but they've done some really interesting things there that have been very good. I just participated in a review of that program in its third year of operation. It was very good, very well done.

I'll just conclude, because I know we're short of time, by saying that government investment plays a key supporting role in innovation by providing specialized people and facilities that industry simply doesn't need all the time and really can't afford to maintain, especially Canadian companies that are generally of a scale that doesn't support large in-house R and D efforts.

Those facilities and people are often at universities, and so organizations like AUTO21, which can broker the relationships and help buy down the risk of doing innovation work in Canada, really can make the business case very attractive to do it here, and that will help our companies to be viable and competitive in the future.

I look forward to your questions.

Thank you.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Frise.

Before we begin, there'll be about 45 minutes for questions and comments from members of this committee.

For those witnesses who may not know it, we use both official languages on this committee.

Members will be asking questions in French and English.

Without further ado, we'll begin with Mr. Valeriote.

[Frank Valeriote, Liberal, Guelph, ON]

Thank you, gentlemen, all of you, for appearing tonight on short notice. We very much appreciate it.

You know the crisis we're in essentially and what were're trying to address. We're trying to address the balance between investing taxpayers' money, should the government decide to loan the money, with the expectation that as a bank of last resort we're going to get it back, and the need to preserve jobs right now.

I'm comforted by the fact, Mr. DesRosiers, that you say this industry is going to survive. I agree. Cars aren't to go away. They'll transform, but they're not going to go away. And in essence I agree with this idea that we'll be thinking our way to prosperity in the future.

Having said that it's going to survive, though, we have to think about the short term here.

You're the expert. Given the 5,000 submissions you said you've made and that you are considered the expert in the industry, I would be remiss of I didn't ask you something quite bluntly. You've no doubt looked at the Chrysler proposal. You've looked at the General Motors proposal. Do we support it, or do we not support it?

Take your time to discuss all the reasons why or why not--the deficiencies as well as the strengths.

[Dennis DesRosiers]

I will try to be very tight with my answer.

Canada is incredibly important in this equation, but the future of GM, Ford, and Chrysler resides in only one person's hand globally. That's it. That is Mr. Obama, period. If he does not play, then GM, Ford, and Chrysler do not survive. There is not a scenario that anybody, not just me but anybody, can come up with where GM and Chrysler survive and probably Ford would fall in at some point—longer term, mind you, as they are in much better shape—without the U.S. federal government or the U.S. treasury.

The amount of money currently being asked for is probably light. If you look at it all-in—GM and Chrysler money, supplier requests, and Ford asking for money to help convert to fuel-efficient vehicles—it's already at close to $150 billion and growing. It's a very significant commitment. In order for them to make that commitment, they have some pretty critical issues they have to get their heads around.

It comes down to, first, that they have to decide whether they want part of the North American industry to be American-owned, because it's the American-owned companies that are in trouble, not the import name plate companies. That is a big decision, and also whether they want one or two or three to survive. That is one level.

Then you come into two other very important things that have to be determined. What will indeed happen to the market? I've touched on some of that. We will, quite definitively, see probably two million to three million fewer units of demand every year for the next 12 years, minimum. As you get into worse and worse case scenarios all the way down to the nightmare scenario, on a North American basis, on a U.S. basis, it could go down to 15 million, 14 million, 13 million, 12 million—stop me. That is the second one. You have to get comfortable with that, and that really is hard to do because it is making a prediction on the culture of cars in America.

Most of us are optimistic that this culture is not going to disappear. It may just come down to sustainable levels, and thus we're calling for two million to three million units. That's what Chrysler is at. I looked at and I have studied in depth General Motor's submission—Ford hasn't made one—and I thought it was much too optimistic and unrealistic. Chrysler's is more realistic, even though Chrysler itself is a little on the high side, but still manageable.

That is the second one. Do you want an American-owned company? Will the demand ultimately be there to support it? On the level of demand, can you support the industry at the level of demand we are going to get to?

The third is that no amount of help to these companies will allow them to succeed unless at some point they turn around their market share losses. It wasn't that long ago they had a 90% market share in North America. They're now down into the mid-40% level. They've lost almost 50 points of market share, and since September, every month over the previous year's month they have lost seven or eight points more. So they had been losing two or three points a year; now they are at seven or eight points, and if they cannot find a way to turn around their market share losses, they can't survive, period. That is a very big if.

The solution to that and the answer to that comes down to those three magic words: product, product, and product. People like me—and I could put you in contact outside of the committee with four or five other experts in the U.S. who study their products to death—for the most part, we are optimistic that the product programs are coming together well. The issue they have is that it's all there on the drawing board, but they have had to cut back billions of dollars out of their product programs today to survive.

Lee Iacocca, who saved Chrysler in the early 1980s, had a very famous statement that is being violated today. He said, when Chrysler was in its dire, centimetre-from-bankruptcy stage in the early 1980s, that he would sell the furniture before cutting a product program, and he did, but he never cut his product programs and thus Chrysler survived. GM, Ford, and Chrysler today, because of their financial condition, are cutting product programs. It is there on paper and there are all the good intentions, but what was going to come out in 2010 is now in 2011 or 2012 or 2013.

So I'm worried. That is a lot of ifs. But ultimately that is the U.S . Department of the Treasury. I'm assuming they've got very good analysts who go through this--I know some of them working on this and they're incredibly bright people--and they will say, maybe for political purposes more than economic purposes, we will support this industry with the kind of money it needs for the next one or two or three years, then you can come in under that.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. DesRosiers.

Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chair.

Welcome. I listened to your testimony earlier, and you were in the room when I was asking the Chrysler representatives my questions. Unless I'm mistaken, you are saying pretty much the same thing that I am.

Also, car manufacturers will have to adjust to today's consumers, particularly given the wage cuts, and so forth. We cannot keep $25,000 or $30,000 vehicles, or even $15,000 vehicles.

Given the plant closures that I referred to earlier, the job losses, the wage cuts, manufacturers will have to open their eyes wider and think of new ways of doing things and of manufacturing new models with a $6,000 or $7,000 price tag, so that people can afford to buy them.

Do you think it would be possible for manufacturers to make cars for that price?

[Dennis DesRosiers]

No, I don't think they'll have to be in those price ranges. I want to pull back just a little bit from what you're saying and use some facts. Last year in Canada, 60% of Canadians bought a small, fuel-efficient vehicle, believe it or not--one of these A, B, and C cars that he talked about. In America it was 28%. So if there are no fuel-efficient vehicles in the marketplace, then how is it that 60% of Canadians found one and bought one, and only 28% of Americans?

Much of the size of vehicle and the fuel-efficiency environmental debate comes down to American consumers disciplining themselves to buy products in the marketplace. Americans bought four million units of gas-guzzling SUVs last year, which GM, Ford, and Chrysler sold them. If they hadn't sold these to them, somebody else would have. If American consumers went to GM, Ford, and Chrysler and said, “We want to buy four million fuel-efficient vehicles”, GM, Ford, and Chrysler would have produced four million fuel-efficient vehicles.

[Robert Vincent, Bloc, Shefford, QC]

You will recognize as I have that if they continued to purchase such vehicles, it's because gas cost less in the United States than in Canada. Since it costs us $1.50 per litre of gas, we quickly learned that we weren't getting our money's worth with big cars. So, it's preferable to purchase a smaller car and to be able to fill it up with gas, rather than buying a big car and having to leave it parked in our driveways.

[Dennis DesRosiers]

That certainly was part of it. The gas prices in America went from $1 to $4, and their fuel efficiency acquisition rate went from 25% to 28%. It's like, duh, where are you?

I also bring you back to my very first statement in terms of the future of the Canadian auto industry. We have to reinvent our product over the next 10 or 12 years, not just because of government regulation in the United States and ultimately in Canada, but because of the social norms and economic norms. Much of that reinvented product will be doing the kinds of things that you were talking about, provided the market supports it.

[Robert Vincent, Bloc, Shefford, QC]

Mr. Frise, I would like to hear your comments on this subject. I understand that there are new products and new technologies, but they are not affordable at present. Let's take the example of new combustion batteries or any new hybrid vehicle. There are no hybrid cars selling for less than $20,000—$20,000 minimum. We are not yet at the point where we have such cheap cars that any old consumer working for minimum wage could go out and buy one tomorrow.

According to your research, is there any breakthrough that would allow us to sell a car at a much more affordable price than we see now?

[Dr. Peter Frise]

Thank you for your question.

I think I'll continue in English, because it's late and I'm slow.

AUTO21 has a number of key goals that we work on. All of our projects are measured against one or more of these goals. One is the enhanced environmental performance of the car and the manufacturing process that makes the car. The next one is the enhanced health and safety performance of the car and the manufacturing processes. The third one is the enhanced economic performance of the companies whom we partner with. So all of our projects are directed at one or more of those kinds of activities. We are always trying to help the companies to develop new processes and materials that will result in better quality cars at lower cost.

Again, I would have to agree with Dennis. I don't think that a $6,000 or $7,000 car is really achievable in North America while, at the same time, being compatible with North American safety standards and environmental performance standards. But I think a lot of our projects are certainly directed at containing costs while enhancing vehicle performance, as measured by safety and environmental performance.

I would have to say as well—and I don't work for the car companies, but work with them—that a modern car is actually a pretty remarkable device, when you measure its performance in environmental and safety terms, as well as its on-road performance, against the performance of a vehicle from the seventies, and then at its cost. It's actually remarkable what you can get nowadays from even the most modest cars on the market.

I'm not sure if I've totally answered your question. We're doing our best on all of those issues—costs, safety, environmental performance—but I don't think anybody really wants to compromise on safety standards and environmental performance, and there is a certain cost below which you really can't go, I think.

[Robert Vincent, Bloc, Shefford, QC]

Mr. DesRosiers, had you forecast that car sales would be as disastrous in 2009 and 2010?

[Dennis DesRosiers]

We track 16 auto forecasts globally, including our own. For the last five years, I have been laughed at by my brethren for being the most negative SOB in our industry. And I still was about 1.5 million to 2 million units high. I have been ultra, ultra negative.

I just want to make one point for our Quebec member. The Province of Quebec actually has one of the smartest automotive policies in Canada today. What they did, after perhaps swallowing hard, was to say that our future is not going to be with the big, fancy assembly plants; we experimented with General Motors and Hyundai, and that's not Quebec's future. Peter can talk to you further about this, because he's part of this program, where they identified four or five critical core competencies within the Quebec parts sector and have poured money and resources and policies into going after that small niche, most of it through the innovation window. They actually have a small auto sector. It's probably only 3,000 to 5,000 workers, but it's one of the most vibrant parts of our auto sector. And other than for the cyclical issues, it will survive.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. DesRosiers.

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair, and thank you to our guests for coming.

I'll start with Mr. Frise, and then Mr. DesRosiers. I haven't asked this question of the auto companies, because I think the answer, probably understandably, would turn into a bit of a marketing exercise and probably be met with rolls of the eyes by the people watching at home. But I think it's an important question to ask.

There's an argument being made that before we got into this cyclical downturn, a true global financial crisis, companies were already innovating and restructuring, that they were doing it anyway. And I think each of the companies who are asking for money would make that argument. How relevant is this argument?

[Dr. Peter Frise]

I think it's highly relevant. First of all, it's factual. They were. We work with all the companies that have appeared before you, both the North American-based and the foreign-based manufacturers and their parts supply chains. And I think it's also important to understand that about 60% or 70% of the parts of a modern car are made by parts supply companies. They're not made by the automakers themselves; they're put together by the automakers.

So the innovation chain, if you like, really spreads from the automakers right through the entire parts and supply chain right to the materials companies that make the steel, the aluminum, magnesium, and the polymers that go into a modern car. A modern car has 5,000 to 8,000 parts and, I'm guessing, several hundred different kinds of materials. So each of the companies who specializes in those multifarious parts and materials supply chains is innovating all the time. These companies have been working for years on lighter, cleaner, safer, and that is absolutely correct.

I am not an expert on this global financial crisis, but it's very clear to me—and my contacts in the innovation sector around the world have confirmed that the same thing is happening in their countries—that this has really derailed a lot of those activities or slowed them down. So that's a very valid point.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Okay.

[Dennis DesRosiers]

And I'll add to that.

Late last year I published a paper called The 30-Year Problem in Our Industry about how it takes 30 years to truly solve most—not all—of the flaws in a business model. For the first 15 years, interestingly, there is denial, and then it takes legitimately three to four product cycles, with some exceptions, to actually solve the problem.

They are way out of the denial stage. These companies have got it. They don't have incompetent management. They have got it, and they have got it very big time. Some of these inferior business model elements are largely solved, and it took 15 years. Quality today has been the mantra for the last 15 years. The quality today is solved. The structure of their supply base is very competitive. There's very little low-hanging fruit in the supply base. They're largely through that. Some of these elements they're just beginning to do.

One of the best examples is restructuring their dealer body, for instance. They're in the earliest stages of that. Their compensation structure, which we're seeing day to day in the media, is not going to be a 15-year problem because they can't live with that, but they legitimately are $20 to $25 behind a competitive compensation structure within the North American framework. They have to address that very seriously.

And when they address their compensation structure, they've got a new paradigm. It used to be that companies like GM or Ford or Chrysler could sit down privately with their unions and work out agreements, and we had the economic capability of paying for that. They've come to you guys, the government, and they've gone to the consumers, and they've gone to the media, and they've opened themselves up and said, “We need your help.” You don't ratify an agreement with the CAW anymore; you ratify it with your workers, with the politicians, who have to vote on it, with the consumers with their pocketbooks, day in and day out, and the hundreds of media articles. That's what they haven't got yet. They think they can sit down with their unions and negotiate new contracts and that's it. That's not the case. That was GM's big problem with this current problem.