Industry Committee on Nov. 2nd, 2006

[Marcel Lussier, Bloc, Brossard—La Prairie, QC]

Bangladesh.

[Ron Watkins]

I don't think Bangladesh is on the list here. I don't have anything below country number 41.

[Marcel Lussier, Bloc, Brossard—La Prairie, QC]

All right. Could you tell me where the steel industries of Ontario get their supply of raw material?

[Stephen Sampson]

It comes from Quebec. Mostly integrated mills are the ones that make steel from scratch, so to speak. The sources are iron ore, largely from Quebec and Labrador. There's QCM, Québec Cartier Mining, which is part of the Dofasco group, and Stelco, I believe, is Wabush Mines in the Quebec-Labrador region.

[Marcel Lussier, Bloc, Brossard—La Prairie, QC]

As far as competitiveness is concerned, what share of Quebec imports goes into Ontario? What is the role of those imports as far as costs are concerned, which relates to competitiveness? Since that steel arrives here by sea, how much of the production cost is related to shipping?

[Ron Watkins]

I don't have the answer to that question with me. I will try to get back to you on it, if that would be acceptable.

[Stephen Sampson]

In a general sense, you hit on a very good point, which is the fundamental linkage of areas such as the Quebec North Shore, the St. Lawrence Seaway, and the steelmaking industry in Ontario. It's very tightly linked, and you really can't have one without the other. But I think we could certainly get the statistics for you.

[Ron Watkins]

It's also important to realize that when you're looking at, for example, Quebec versus Ontario industries, of course, a sizeable proportion of the Ontario industry is not blast furnace or basic oxygen but is electric arc. They work off scrap and other sources of input. It wouldn't have the same linkage, although there may actually be Quebec scrap that goes into Ontario steel and vice versa.

[Marcel Lussier, Bloc, Brossard—La Prairie, QC]

What I also see in the port of Montreal is that scrap, as you call it, leaves Canada for China. Therefore, Ontario is not the only consumer of Quebec scrap. Is that your position?

[Ron Watkins]

There's a surprising amount of trade globally in scrap.

We both export and import quite a bit of scrap in Canada. For example, Manitoba Rolling Mills uses old railway cars as a feedstock. Some of it comes from the United States and some of it comes from elsewhere in Canada. It's quite an active market.

[Marcel Lussier, Bloc, Brossard—La Prairie, QC]

I didn't understand. Did you say railroad tracks?

[Ron Watkins]

Railroad cars.

[Marcel Lussier, Bloc, Brossard—La Prairie, QC]

No, cars, not tracks.

[Ron Watkins]

No, the cars.

[The Chair, Conservative, James Rajotte]

Thank you very much.

I know we kept you gentlemen a few minutes longer than we had anticipated, but thank you very much.

Mr. Masse.

[Brian Masse, NDP, Windsor West, ON]

Through you, Mr. Chair, I would like to ask the clerk to get the different departments. We've had testimony again here today about Korean free trade or the trade deal. I'd like to know from the Department of International Trade and the Department of Industry what studies and consultation there has been with different sectors.

I know there was one on autos. I'd like to know if there was one on steel, for example, and any other sectors. I think it would be important information for the committee.

[The Chair, Conservative, James Rajotte]

Okay. Is that both the departments of trade and industry?

[Brian Masse, NDP, Windsor West, ON]

Yes. Thank you.

[The Chair, Conservative, James Rajotte]

Okay. We can request that information.

Thank you very much, gentlemen, for coming. I appreciate the presentations.

We're going to suspend for a minute or two to allow you to gather your things and to allow the new witnesses to come forward. Thank you very much for coming. I appreciate it very much.

[The Chair, Conservative, James Rajotte]

We'll resume our meeting, ladies and gentlemen, and we'll welcome two of our witnesses.

We have, I think most observers would agree, two of the finest academics interfaced with industry in Canada. We have, first of all, from AUTO21, Dr. Peter Frise, who is the CEO and scientific director; and secondly, we have, from the Energy Innovation Network, Dr. Michael Raymont, who's the president and CEO.

Is this your first time here, Dr. Frise?

[Dr. Peter Frise, Chief Executive Officer and Scientific Director, AUTO21 Networks of Centres of Excellence, Auto 21 Inc.]

I actually testified five or six years ago.

[The Chair, Conservative, James Rajotte]

Many members will remember Dr. Raymont when he was here in his capacity as acting director of the National Research Council.

Gentlemen, welcome to both of you.

Dr. Frise.

[Dr. Peter Frise]

Thank you very much. It's an honour and a pleasure to be here.

In my brief, which I'll be referring to in my testimony today, I introduce the AUTO21 network of centres of excellence, which is one of over 20 networks of centres of excellence funded by the Canadian federal government in areas such as manufacturing and engineering topics, health issues, and natural resources issues. I'm going to talk today about the importance of the NCE program to Canada, and in particular AUTO21, and also about what I feel are some issues around Canada's innovation system, which in my view bear a look from the standpoint of improving our ability to compete in the world.

In terms of the socio-economic context, the auto industry, as I'm sure you're well aware, is Canada's largest manufacturing sector. I've given some statistics on the first page of my brief, which I think will fill in some useful numbers for people who may not be familiar with the auto sector.

It's a very dynamic sector. Virtually every statistic to do with the auto sector is huge, and Canada, frankly, is a big player in the auto sector. Since 2000 we have gone from the number five auto-making nation in the world to number eight, but we actually make more cars and trucks now than we did then, by a small number, so we're not losing in terms of absolute production. But we are dropping in position, and that's as a result of the rise of other economies such as China. In that respect, I'd like to really support what the previous speaker said. We have to compete in the world. It's terribly dynamic and things change very fast.

One of the key statistics in page 1 is the amount of overcapacity. If members will note, there is a capacity to produce about 80 million light vehicles in the world per year, but only about 62 million to 64 million are produced, so there is a significant amount of overcapacity. In fact, the amount of overcapacity just about exactly matches the amount of capacity that North America possesses in vehicle assembly, so we need to fight for every automotive job and every automotive piece of output everywhere we can, and Canada has to do that on the basis of innovation. As I point out on page 2 of my brief, we cannot do it by being cheap. We have to do it by being fast, agile, high quality, reliable, and innovative.

I'd just like to move to a general statement about the role of university and public sector research organizations.

It's my view that the role of universities and public sector research organizations is to create new knowledge, to advance the state of the art in a wide range of fields, and to educate people to enhance their employability and stimulate their creative energies. Universities do not make cars and do not make auto parts, and I think it's really important, as we hopefully begin a systematic look at Canada's innovation system, to make sure that everybody is carrying out their role and sticking to their knitting.

AUTO21, I hope people would agree, has been a very good investment for the people of Canada. It's an effective and efficient public-private partnership in every sense of the word. The board of directors is led by...and a majority of the directors are from the private sector, from auto industry companies of one level or another. These are committed, very senior level executives who give a lot of time and energy to governing AUTO21 in an effective and efficient fashion, fully within the boundaries of the rules of the NCE program.

One of the most exciting things about networks of centres of excellence is that they allow a very seamless crossing of disciplinary lines. It's very important, I think, to appreciate how important it is to put the right people to work on the right problems. Not all problems can be solved by people in just one discipline. In fact, some of the most vexing problems really require a multi-disciplinary approach.

For instance, in a vehicle safety issue that we worked on recently, we have a team of nurses, physicians, engineers, physiotherapists, human kinetics people, and some sociologists. I think it's really important that this can take place. Under the usual system of funding in Canada, it's not easy for people who span that breadth of discipline to work together, because the funding councils tend to have relatively rigid mandates. They certainly try hard to break out of that, but I think AUTO21 and organizations like it have an agility that is very useful in attacking those kinds of problems.

That really brings me to the core of my message to the committee. I think there are three issues I would ask the committee to consider, and I hope to elicit your support on these.

The first one I would suggest is probably a regulatory change or something like that, and that's the elimination of the 14-year NCE sunset clause. The way the networks of centres of excellence program is structured in Canada--and it was a Canadian invention in the late eighties--their first mandate is for seven years, and they're able to apply for one more seven-year term.

Let me say at the very outset, and I'll probably say it again, that I do not believe in entitlement, by any stretch of the imagination. AUTO21 has no objection whatsoever to a searching, rigorous, and thorough review of our operations, including a demonstration by us of the value we create for the taxpayers' investment. At the same time, in my view, it makes no sense to work hard to create a good program with value and buy-in from the user sector--the industry--that creates a great educational opportunity for young Canadians and then shut it down because a certain number of years have passed. I just don't think that make sense. Yet that is the way the program is designed now. I think this is a flaw.

In my paper, on pages 4 and 5, I bring out the example of the Australian collaborative research centres program, which was modelled on the Canadian NCE program. In fact, one of their newest collaborative research centres in Australia is the AutoCRC, which is modelled directly on AUTO21. It says that right in their proposal. The Australian program permits networks to continue to apply for successive terms. These are granted, as long as the user sector continues to back it. As long as the user sector is committed--and I mean financially committed too--to leveraging the public sector funding, then the government remains committed. That has enabled Australia to make research progress and contributions and, more importantly, to support their economically key sectors to an extent, in my view, that is way beyond what a country with a population of 21 million or 22 million would normally be able to do. I think it's because their program is designed systematically to succeed and create certain outcomes. I think that's something we really need to look at.

Again, I do not believe in entitlement. If AUTO21 stops working properly, stops creating value, and if the industry stops supporting it, I will be the first one to suggest that it be shut down.

The other thing I would like to talk about very briefly is the issue of collaboration and cooperation among the various research funding programs. I have some examples in my brief that I would draw your attention to. The way it is right now, you basically apply for equipment money from one source, and people support money from another source. Those two programs don't really communicate very well. I think that's a flaw. Again, we need a systematic approach here.

Finally, I feel programs that create value and work well should really have inflationary increases in their funding to allow them to remain current and competitive. Just as business has to compete worldwide, researchers have to compete worldwide for the best people, the best equipment, and the best ideas. I think Canada has done a great deal of work over the last number of years in supporting research and innovation, but I think there's a lot more to be done.

I would urge the committee at this juncture to call for a systematic review of how all the programs work and how they interlock, to try to ensure that things happen in a way that makes sense.

I think I'm out of time. Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much, Dr. Frise.

We're going to go to Dr. Raymont for a 10-minute opening statement.

[Dr. Michael Raymont, President and Chief Executive Officer, Energy Innovation Network]

Thank you very much, Mr. Chairman and members of the committee. It's a pleasure for me to speak to you this afternoon, and I thank you for the opportunity.

As the chair suggested, my career has been a combination of things. Most recently I spent some time in Ottawa with the National Research Council, but prior to that, I was in the venture capital business as an entrepreneur. Essentially all of it has been in technology commercialization and technology innovation.

I come here today representing an organization called EnergyINet. We are a not-for-profit, non-lobby, impartial consortium of government and industry devoted to the acceleration of energy technology innovation.

There is nothing particularly I'm asking today other than to try to present you with a picture of energy innovation in Canada and where it isn't as effective as it should be, and with some suggestions on how it can be improved.

First of all, it's obvious that energy supply and availability and security in the right form, in the right place, at the right time, to the right customers is critical to our industrial sector and in fact to our society as a whole. And you've no doubt heard this from many witnesses over the past few months. What I'd like to do is address a few comments to energy itself and why it's so important, and then talk about why innovation in the energy industry is not being pursued as effectively as it might be.

The first main slide, at the bottom of the first page, deals with an undeniable and essential link between energy consumption and economic prosperity. While we might alter the angle of that curve, there is no doubt that if we want to move from the bottom left corner of the page, we have to consume more energy, whether we like it or not. This is part of sustainability, and I use the word “sustainability” here to include economic sustainability and sustainability of our society and our way of life, in addition to the usual use of the term, which is just about environmental sustainability.

So is energy a bane or a boon? Well, as I've said, energy consumption correlates very strongly to our GDP and living standards, and it's clearly very important for a healthy manufacturing sector. One of the key points I'd like to make today is that energy production and consumption per se do not contribute meaningfully to global warming. If we took every joule of energy that is produced and converted it to heat--and thermodynamics determines that most of it is converted to heat--we would not warm the temperature of the planet by more than one-tenth or two of a degree. The byproducts of energy consumption and production are what contribute to global warming.

So increased energy use is not axiomatically problematic, and it is not contrary to responsible usage, sustainability, or a sound environmental set of policies. Indeed, energy helps solve many of the global world problems, whether they be social or environmental.

Desalination requires energy, carbon dioxide sequestration requires energy, and so on. So I put it to you that we should be actively accelerating energy production technologies while mitigating the byproducts of production and use to prevent further environmental deterioration. And this applies to both fossil and renewable and alternate fuels.

Rising energy global demand is driven not just by Canada--in fact, it is driven by Canada only in a minor way--but particularly by countries like China and India, and you've seen the statistics I've shown there. It is inevitable that global consumption of energy will rise. The good news is that, actually, we have plenty of energy resources in the world. It's simply a question of how we exploit and use them.

So really, some energy supply conclusions would be that we have sufficient energy resources in this world for hundreds of years, if not indefinitely. But the extraction technologies and the byproducts of these industries are problematic. There is no magic bullet solution. Every energy source will be needed, and fossil fuels--carbon energy sources--in particular will supply most of the world's energy needs for the next 100 to 200 years. There is no way around that.

Renewable energy sources will accelerate rapidly, and should, but they will comprise no more than about 20% of the world's energy consumption by 2050 if we do a good job of energy innovation.

So we have a couple of options in front of us. We can carry on with business as usual, which will lead to increasing geopolitical tensions, supply disruptions, deteriorating environmental and climate change, and increased market and supply instability, or we can enter an era of responsible and sustainable energy supply while we focus on fossil fuels, in particular, although we reduce their carbon footprint and we reduce collateral resource requirements, and by that I mean things like water. We need to integrate all energy sources with distribution networks and markets into a “systems thinking” approach to energy. We need to accelerate the development of unconventional and alternate energy resources, so that those can come on stream to gradually transition to a greener type of energy. And that puts a strong emphasis on energy technology development and deployment, but also on a responsive regulatory environment and a more certain and stable business environment, where the long-term investments in energy technology and energy technology projects can be made.

Again, I comment that we need to recognize that fossil fuels will supply most of the world’s energy for the next hundred years or so—we do need to recognize that—but that technology can do a tremendous amount to help mitigate any of the difficulties of using fossil fuels. To point out how technology can be used, I've given one example in the slide, the picture of resources—these are North Sea resources—that were first identified in 1976. The three different-coloured curves—I think they're in black and white in your copies—show just how technology alone doubled and doubled again the reserves that were available from that field.

Our challenge, therefore, is not how to use less energy, although I'm not arguing against energy efficiency and energy conservation as part of our solution to our energy challenges, but how to unleash technology innovation to increase energy supply while minimizing its environmental impacts. The solution to that is to integrate and balance an innovation supply chain for effective solutions delivery.

What do we mean by an innovation supply chain? What is it? On the next page, there's a slightly complex graphic, for which I apologize, but it shows how ideas eventually transform into products, from the bottom left to top right, and produce an economic benefit. That is a supply chain. It starts with knowledge and ends with a product with economic benefit. If we don't have a supply chain that works in exactly the same way as the traditional supply chains work, but a knowledge supply chain with good, integrated linkages and different performers along the way, we will not achieve the economic benefits from the millions of dollars that are spent at the front end of this process.

To compare Canada's innovation performance, take a look at the chart down below. This shows work that is conducted by a group consisting of both me and Lipsey from Simon Fraser, and even Michael Porter is involved with it. We actually present some metrics under which Canada is scaled against some of the best innovative economies in the world. And you see the best practice statistics suggesting an R and D ratio of three parts private to one part public. It isn't clear in that slide, but it should be three parts private sector R and D to one part public. You see where Canada's ratio is.

The result is that what we have in Canada is an imbalance of knowledge push over market pull. We have supply-side innovation economics—i.e., discover it and they will come. We do not have an integrated innovation supply chain. We do not share common vision and objectives between the parties involved in the innovation supply chain. We do not have holistic policies. We have more than 200 government programs focused on innovation, but almost all of them are too small or too difficult to apply for, as I note from my private sector colleagues. The organizations involved are diffuse and uncoordinated. And finally, the metrics and benchmarks we use are not agreed to or are different, depending on different parties. I can give examples of that. So we have an imbalanced supply chain, which is ineffective in delivering economic benefits, given the enormous amount of effort we've put into the front end.

Part of this is a funding dilemma. The next graph shows that the government provides most of the front end, where ideas are formed in university and government labs, while the private sector invests most of the money at the product end—hardly a surprise. The problem is that you have a gap in the middle, where funding for the most difficult part of innovation and technology transfer and technology commercialization, namely pilot plant and demonstration phase and the commercialization phase, is the most weakly funded. This is simply because it's an area where there's increased political risk. The numbers are high and the number of projects is small, so people get accused of picking winners and perhaps putting $100 million into something that doesn't work. But at the same time, it's also the area where the private sector perceives their highest financial risk to be. And so it requires, absolutely, a partnership between both.

The energy industry is one that doesn't differentiate its products. It produces commodities like gasolines or electrons, and so on and so forth, and therefore it's very difficult for them to see the returns from being highly innovative when their non-innovative competitor next door produces exactly the same product that can't be differentiated.

Finally, to summarize on what government should do in improving the innovation cycle, it is, above all, to share technology innovation and implementation risks, possibly by insurance mechanisms, and to strengthen Canada's innovation supply chain to improve the outputs of technological innovation. By focusing those on the energy industry, I can assure you that we will generate huge technology exports and contribute more perhaps to global sustainability than by any other cause.

Thank you, Mr. Chairman, for the opportunity to address the committee.