Merci beaucoup.
Mr. Chair, members of the committee, thank you for this opportunity to join you today. My name is Billy Hewett. I am the Director General for the Policy and Sector Services Branch for the Industry Sector at Industry Canada. Accompanying me today are:
Emilee Pedruchny is director of the sector intelligence and analysis, information and communications technologies branch, and François Delorme is the department's chief economist and director general of the micro-economic policy analysis branch.
This morning I'll begin with an overview of the Canadian economy and industrial pressures, focusing on the broader trends in manufacturing. Then I'll complete my remarks with a sector-by-sector review of the recent performance and circumstances specific to industrial groups, as we understand you're interested in sectors in crisis, those feeling in particular the economic pressures currently pervading the economy.
Manufacturing directly contributes close to 14% of GDP and employs close to 1.9 million workers in Canada, mostly in full-time jobs. It accounts for two-thirds of all goods exports and for a little over half of all R and D expenditures in Canada.
A broad range of related industries depend on the sector as a key purchaser of their products and services.
Despite the strong overall performance of the Canadian economy prior to the last part of 2008, not all sectors were performing equally well. The manufacturing sector, in fact, has been undergoing significant adjustment for much of the current decade, driven in part by strong commodity prices, until recently, and a steadily appreciating Canadian dollar.
Since peak employment in November 2002, some 345,000 jobs had been lost through to the end of 2007, mostly in Ontario and Quebec. During this period, manufacturing GDP managed to be relatively stable, although it contained a range of performance by industry.
It was within this climate that the Standing Committee on Industry, Science and Technology delivered its report on manufacturing in 2007.
More recently, and in the last number of months in particular, the economic climate has changed dramatically. The manufacturing sector has been particularly challenged by emerging cyclical factors that are having a sharp and pronounced impact. Manufacturing GDP contracted 5.1% last year, and manufacturing sales have fallen every month since August 2008 to near 10-year lows. Also, since 2007, an additional 110,500 jobs have been lost across the sector.
The situation is changing so quickly that it's hard to obtain up-to-date information on the current state of the economy. By the time official statistics become available, information is no more than confirmation of what companies and workers already know. Forecasts have been continually revised downward.
Mr. Chairman, in this environment, real-time intelligence from across Canada, such as this committee's March 12 meeting with the forest sector, presents and provides real value.
I understand that this committee is looking at sectors in crisis, and while I will identify some of these challenges going across a number of industries, I also want to pass on some other more hopeful messages that I and the government have been receiving from industry.
Dating back to the pre-budget consultations through to today, one message is clear throughout: in managing the short-term pressures, we also need to keep our eye on the future. Even in this economic climate, many firms are optimistic. They realize it is necessary to continue to invest in innovation, machinery and equipment, and in skills. These are fundamental building blocks for future growth and competitiveness, and we need to keep this longer view in mind when examining the current situation.
Not all industries are facing pressures equally. Some, such as the pharmaceutical industry, electrical appliances, and much of the services sector, have been continuing to grow. Having said that,
there is no doubt that an over-riding pressure facing industrial sectors since last fall is obtaining financing. This was underscored in the January 2009 release of the Bank of Canada's Business Outlook Survey.
The Survey found that the percentage of firms reporting tighter credit conditions was at record highs. Nearly two-thirds of firms reported tighter credit conditions than over the previous quarter. This includes both price and availability of credit.
Canada's exporters have been challenged not only by the sharp drop in demand from the U.S., but also by the volatility of the Canadian dollar. While the value of the dollar has retreated, it remains above the exchange rate of the 1990s and early 2000s.
One might expect that the lower dollar would help exporters, but demand in the U.S. has dropped sharply, clearly off-setting the effect of the lower dollar.
Increasing global competition also continues to be a major challenge for parts of the Canadian manufacturing sector. Canada used to account for the largest share of manufactured goods imported into the United States. In 2005 we were displaced by China. Like industries throughout the OECD, Canadian industries must continue to adjust to new, more globally integrated markets and value chains.
Another challenge has been the volatility of commodity prices. While prices for oil and other commodities, such as non-ferrous metals, rose sharply in recent years, the current drop has been steep as global demand falls. The effect of these and other pressures will continue to vary by industry, Mr. Chairman.
Let me now take a closer look at the performance of specific industrial sectors to provide you with a more detailed perspective.
Several manufacturing sectors face a combination of both ongoing structural challenges, and the new challenges brought about by the recession. These include information and communications technology, electrical and appliances, textiles and apparel, furniture, leather, and pulp and paper industries.
Let me give you some examples from textiles and apparel, and the pulp and paper industry. Over the past decade, the elimination of quotas and the rise of low-cost competitors have hit Canada's textiles and apparel industries. Global competition has generated a steady, substantial decline in their domestic market share and their share of the U.S. market. The recent decline in U.S. demand and the current credit conditions have made things worse. From 2000-2008, this industry experienced average annual declines in GDP of 9.2%.
To remain competitive, the Canadian textile and apparel industries have focused on higher value added niche markets, such as high end fabrics used for body armour and carbon and glass fabrics for composites used in the aerospace industry.
In terms of the regions that have been affected most by the challenges faced by apparel and textiles, Canada has large apparel clusters in Toronto and Montreal. Montreal is the third largest production centre in North America.
Quebec accounts for 58% of Canadian apparel shipments and for approximately half of apparel employment. With respect to the textile industry, about 44% of it is concentrated in Ontario and 38% is in Quebec.
The pulp and paper industry also faces both structural and cyclical effects. Some 34% of the industry is concentrated in Quebec. Ontario has 28% and British Columbia 19%. Between 2000 and 2008, the average annual reduction in GDP of the pulp and paper industry was 2.8%. Average annual loss in employment was 4.9% during that time.
Structural challenges include a decline in demand for newsprint and the emergence of low-cost, highly efficient pulp and newsprint producers in South America and Asia.
Let me turn now to industries in which cyclical challenges are predominant.
Let me turn now to industries where cyclical challenges are predominant. These industries include the wood, automotive, plastics and rubber, steel, and chemicals industries. We have also begun to see cyclical pressures emerge in aerospace and ship and boat building. Still other areas, such as biotechnology and ICT, are being challenged in particular by venture capital financing pressures.
The wood industry, during the last decade, has faced increased competition from abroad, U.S. market access challenges, a rising Canadian dollar, and, more recently, the collapse of the U.S. housing market. Between 2000 and 2008, employment in the wood industry declined by more than 33,000 jobs.
The tightening of North American credit markets has made the situation even more difficult for wood and other companies that need to refinance in the short term. In some cases, companies have closed unproductive mills, curtailed production, or sold their assets.
Quebec accounts for 30% of the wood industry; British Columbia, 29%; Ontario, 19%; and Alberta, 11%.
The U.S. recession has also been very hard on the overall automotive and related industries. Ontario is home to all 13 of Canada's assembly plants and 94% of auto parts output. In January 2009 alone, motor vehicle manufacturing sales dropped 45% and motor vehicle parts sales dropped 27%.
Mr. Chairman, the subcommittee on the automotive industry in Canada is examining these issues right now, so I need not go into detail here. But I would point out some of the other industries that have been hurt by the overall slowdown in the auto producers.
The supplier industries have been hit hard. Nearly 20% of the revenue from plastics and rubber comes from sales to the Canadian and U.S. automotive and parts sector.
The plastics industry is regionally diversified. There are more than 2,500 plastics establishments in Canada, most of which are located in Ontario, Quebec, Alberta, and British Columbia. To stay ahead of competition from emerging countries, some plastics firms have been developing new technologies, such as new products to displace metal parts in automobiles. The automotive industry is one of its biggest customers, but the plastics industry also sells heavily into the packaging, electronics, and construction industries.
This has traditionally been a high-growth industry, but sales have dropped since 2006 and particularly since the start of the U.S. recession. During the six-month period from July to December 2008, the GDP loss in the plastics industry was 11.9%.
Nearly 16% of steel revenues come from sales to the motor vehicles and parts industry. Canadian steel producers enjoyed high product prices until the second quarter of 2008, when global and North American demand fell. The largest demand reduction has been from the automotive sector, steel service centres, and construction. As a result, steel production has been cut back. Two plants in southern Ontario have been closed, and steel facilities remaining now operate at 50% to 60% of capacity. Most of the steel industry's facilities are concentrated in Ontario; however, there are also operations in Alberta, Saskatchewan, Manitoba, and Quebec.
The aerospace sector has also started to face some cyclical pressures. The Canadian aerospace industry is one of the few manufacturing industries that grew consistently between 2000 and 2008, at a rate of 1.6% annually. The industry entered this recession with a strong order book. However, the declining demand for air travel and financial uncertainties have affected the demand for commercial and business aircraft. As a result, some orders have been deferred and others cancelled. In light of this, production rates for both commercial and business aircraft have been reduced and layoffs have occurred in Canada and elsewhere. Even with these ongoing pressures, however, new product R and D is continuing.
Any slowdown in production that does occur would be felt mostly in Quebec and Ontario. In 2006, Quebec accounted for 56% of aerospace sales, while Ontario accounted for a 28% share. Smaller aerospace clusters can be found in Atlantic Canada, Manitoba and British Columbia.
Ship and boat building has also been hit by the recession. This industry is small by global standards and depends on large orders, which tend to be cyclical in nature. The downturn has resulted in many ship order cancellations, but the existing order book enables many shipyards to continue construction of vessels. However, some clients have been affected by the ongoing credit issue, and in at least one case we are aware that Export Development Canada has stepped in to help with financing.
The non-pharmaceutical part of the chemical industry is also facing challenges of a cyclical nature. This industry is regionally diversified, with over 3,000 chemical establishments in Canada: 40% are located in Ontario, 28% in Quebec, and 13% in each of Alberta and British Columbia.
Since 2005, real GDP in the chemical industry has declined 2% per year. From July to December 2008, output fell over 15%. The economic downturn has significantly reduced demand for many chemicals, which feed into the automotive, plastics, construction, textiles, and pulp and paper industries. Major international chemical companies have announced plans to close facilities temporarily and to cancel previously announced mergers and acquisitions.
Mr. Chairman, let me now turn to other industries in which financing issues are the predominant concern. These include information and communication technology, or ICT, and biotechnology sectors. Canada's ICT sector is driven by innovation and is in a constant state of change. Nearly 98% of ICT firms have fewer than 100 employees. The sector depends on research to create new products, services, and applications.
In recent years, the Canadian sector's traditional leadership in communications equipment has been declining. The sector faces competitive pressures, such as the emergence of China and India as major players. These countries offer low-cost options for manufacturing, and more recently they are able to take up significant R and D positions.
The current economic climate has resulted in a cyclical downturn in demand for ICT products. In the last quarter of 2008, ICT output fell by 2.5%. Overall, the slowdown in both product demand and access to venture capital severely challenges ICT companies. More than half of Canadian ICT shipments originate from Ontario, followed by Quebec with 19%.
Let me touch next on the biotechnology sector, which is mostly comprised of companies in human health and is concentrated in Quebec, Ontario, and British Columbia, accounting together for approximately 87% of total industry employment.
This industry has experienced positive output and employment growth during the past five years; however, many of the firms have low cash reserves and could be forced to close operations if they are unable to find partners. Canadian biotechnology firms are highly dependent for their survival and growth on the inflow of venture capital and on raising money in public markets, both of which have essentially been closed to them. In the absence of near-term funding, many Canadian biotechnology firms and their intellectual property could be sold off at discounted prices to large multinational enterprises.
The global recession has placed pressure on a number of other Canadian industries, especially mining and energy. In the past year, non-energy commodity prices fell by more than 31%, and energy commodity prices have fallen by over 57%. In the case of energy, the most significantly affected area is Alberta. Statistics Canada reports that non-residential capital spending there will fall more than 15% this year. This would represent the first such cutback in a decade. The drilling of new wells also has been scaled back, as has the development of large oil sands projects.
Finally, Mr. Chairman, let me close with some good news. Not all industries are facing cyclical and other pressures of the same magnitude. As I mentioned at the beginning, some manufacturing industries, such as pharmaceuticals and electrical and appliance industries, performed reasonably well during 2008. During the last half of 2008, the pharmaceutical industry output increased almost 6%, and the electrical and appliance industry output increased over 2%. Also, most service industries had positive growth in 2008. But even the service sector is not immune to recessionary forces and financing challenges. Canadian retailers, for example, are apparently encountering difficulties in securing credit to finance inventory.
Let me conclude by thanking the chair and members of this committee for providing us with the opportunity to appear before you. I hope this overview will be of some assistance in your deliberations.
Thank you very much.
