Subcommittee on Canadian Industrial Sectors Committee on March 24th, 2009

[Billy Hewett]

Yes. Motor vehicles and parts has 11% of the overall manufacturing share; fabricated metals has just under 8%; food manufacturing has 10%; machinery has 7.8%. We can provide this information to the committee in writing.

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

Yes, if you could, I think it would be helpful for a comparison with what we have here, to identify where the real impact is.

We're very focused right now on the cyclical situation, the global situation we're in right now, but I'm interested in the future. Previous to my life here, I worked with the Edmonton Oilers. There was a story about Wayne Gretzky that was always told: that while everyone else was always focused on where the puck was and going to where the puck was, Gretzky used to say that he was focused on going to where the puck was going to be and focusing on that.

In this economic context, where is the puck going to be for Canada? Where should we be headed? When we come out of this very serious global situation that we're in, what are our strengths? Where should we be moving?

[Billy Hewett]

Perhaps I'll begin and then open it up to my colleagues who might like to add more.

As a small, open economy, Canada's competitive or comparative advantage would tend to be in moving to higher value-added, increasingly knowledge-intensive applications, whether from a resources base to begin with or a base of sectors such as ICT and biotechnology. The area in which we're not going to be as successful and in which strategies are not going to be as advantageous to pursue would be in competing against low-cost labour from China and India directly, head to head. We should rather be attempting to connect to global value chains, finding a niche where firms can specialize, differentiate their products or their services, or add new technologies. In things of this nature, whether in a commodity-based business, in a sector that's facing structural decline, or one that prior to the recession had been doing quite well, the message we hear from manufacturers is that for those who are finding ways to focus their business on providing customers solutions in the form of a product that's placed, connected with others in the value chain, at the right point—and there are challenges to doing that.... Those are the ones who see opportunity to succeed and to profit in that kind of climate.

I can't identify a specific sector or industry. It's more about setting the climate. We attempt to put in place a macro-economic framework and some marketplace frameworks and then work with industries and firms to help them exploit opportunities where they may be.

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

That's a good explanation, though it's rather textbook. If you were sitting at a round table with 15 of my constituents, how would you explain that same thing?

[Billy Hewett]

I'll pick aerospace as an example. Aerospace is an industry that has been doing quite well. Canada's future looks quite bright in aerospace. There is a lot of innovation, a lot of R and D, and actual commercial sales. We have both an original equipment manufacturer, Bombardier, with a good global reputation, and there are also a number of small and medium-sized enterprises within the supply chain.

One of the challenges that those in the lower tiers of the supply chain will be facing is that as Bombardier looks to remain competitive on its overall production, some parts of the plane, such as the wing, may be imported from elsewhere rather than be manufactured at home. Almost everyone who is exporting is also importing.

It's important—and this is where some of the challenges come—for the medium-sized enterprises to make sure that as these shifts take place, they look to where the market is going to find their customers and their strategic alliances. That is the kind of thing that was happening prior to the recession. If sales are going to be coming from offshore, is there a way to connect to where the offshore supplier will be coming from, if it's a wing type of operation that you're selling?

I'm not sure that's the best example, but I don't know whether there is a better one. You can feel free to—

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

Well, maybe I will ask you—

[The Chair, Conservative, Dave Van Kesteren]

Mr. Lake, we're well over our time.

Mr. Thibeault.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Mr. Chair.

I want to thank each of you for coming today.

Mr. Hewett, I also want to commend you on ending your report on the positive side. It's always good to hear that there's hope out there, when you always hear doom and gloom. It's good to know there are some positive things happening, especially in northern Ontario. My riding of Sudbury, of course, is well known for being the mining capital of Canada, if not of the world, and many of our peers throughout northern Ontario have been hit hard, in the forestry sector and in general in manufacturing, in many of the value-added products that come from both of those sectors.

As I mentioned, you've talked a lot about those sectors and about how the commodity-based resources have been on a downturn and about access to credit being difficult. One of the things we're hearing in northern Ontario is that it's getting more difficult also to access FedNor. FedNor is a program that of course is in Industry Canada—it's a program, not a stand-alone—so some of my questions are going to be specific to FedNor. Hopefully you'll be able to answer some of those.

Vis-à-vis other regional development agencies, can you explain to me the system and how the amounts of funding that go into FedNor are determined? Would you be able to explain that to me?

[Billy Hewett]

FedNor as a program, as is the case with the other regional development agencies, is funded through the annual budget cycle.

[Glenn Thibeault, NDP, Sudbury, ON]

Okay, so there is a determination made as to how much. Is there anything relating to “per capita” that helps determine that budget?

[Billy Hewett]

Being neither a FedNor program expert nor a budget maker, I can't go into the specifics, except that I will add that in the context of this current budget, there was also some programming, such as the community adjustment fund—which is two years of $1 billion worth of funding, I believe—that is being delivered through regional development agencies across the country. There was a flat rate plus a per capita allocation that was taken into account in the distribution of that fund across the country, including, I believe, the portion that is to be delivered through FedNor.

So there is some per capita dimension that comes into play. But in terms of their overall budget and the availability of funding, I can't comment here on the spot. We could....

[Glenn Thibeault, NDP, Sudbury, ON]

Sure. I would love to talk to you about that after this. I didn't mean to put you on the spot. We can discuss those questions afterwards.

You talked a little bit about global value chains. In trying to understand how that would affect many of the manufacturing sectors, what is a global value chain, first of all, and how does that affect value-added mining programs or forestry sectors? Maybe you can talk to me a little about that.

[Billy Hewett]

Essentially, rather than any given manufacturer of a product having to house all of the various different dimensions of production from design through extraction, and through manufacture, distribution, and marketing, all in one facility or in a vertically integrated type of an operation, it's about that business model being broken into a series of tasks, if you will. Through advances in communications, technology, and transportation, it's possible for enterprises to basically literally look around the world at where they can find the greatest value in their supply chain, from the R and D through the development, design, fabrication, and delivery.

If a small parts maker in Canada can sell the value of their particular unit of production into an engine manufacturer in the United States for diesel vehicles or to someone who is producing wood product for prefabricated homes, they can connect into a larger manufacturer, who is then actually the international seller. They don't have to be expert in everything.

Basically, it's about that business model being divided up into a series of tasks. There are both opportunities and challenges associated with that. If you're a very small producer and you have someone down the road who is actually trading internationally, it's not necessary to do the trading yourself, but there are opportunities to tap into a global value chain by connecting into other operations that do so.

[Glenn Thibeault, NDP, Sudbury, ON]

Great.

I have more time, obviously.

[The Chair, Conservative, Dave Van Kesteren]

Yes, just about a couple of minutes.

[Glenn Thibeault, NDP, Sudbury, ON]

What you're talking about is getting me a little excited here, because we have a mining cluster in Sudbury that's doing a phenomenal job in the supply sector in the creation of mining innovation. Many of the companies are finding it difficult right now. We have some big mining companies in Sudbury, but how do they get their technology out? Is there a program or are there programs available through Industry Canada that will allow them to do that and support them? Maybe it's FedNor. Are there other programs they could access to market themselves so they can be part of this global value chain?

[Billy Hewett]

Generally speaking, what we're looking at is a combination of both. The FedNor type of regional development agencies have some on-the-ground federal presence, and the Department of Foreign Affairs and International Trade is also attempting to align its resources along a sector basis so that it can assist with the export market development and investment attraction business, such that you have Industry Canada attempting to take, if you will, a bit of a border-in perspective in terms of competitive positioning, and then DFAIT looking at a kind of a border-out perspective, but there's a cross-hatching between them.

We're attempting to connect with those firms and those enterprises through a provision of sector expertise in the two departments and through the specific programming, of which there's a suite. The Province of Ontario also has some programming with its new Ministry of International Trade and Investment, where they're attempting to help connect up.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Thibeault.

Round two is five minutes. We will begin with Mr. Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Chair.

The Conference Board of Canada talks about Canada's performance in innovation as being, I would have to say, lacklustre. In the recent statistics--and they've been keeping them for quite a while--I think we were thirteenth out of a number of countries. Certainly, countries ahead of us, like Switzerland and Ireland, shouldn't seem to be sort of out of our own reach. We should be able to do as well.

This is not a new problem. It does go back a ways. I'd like to have your personal take on why that is and what it is that we're not doing right to be ranking higher on innovation. What solutions do you in the policy sector think we should be focused on?

[Billy Hewett]

As you allude to, it's a complex topic in terms of the innovation cycle, the ability to not only develop the new technologies but to be a part of an innovation system that involves both the research and then the ability to translate that into a commercializable product or process. I don't have a personal opinion to share with you on that, but rather I would suggest that the government, the department, is attempting to continue to work to address both the funding for, if you will, basic research and facilities and architecture, and to try to work continuously with the private sector to try to find ways to help, whether it be through consortia or other arrangements, and some co-funding in some cases, to bring closer together the private sector, the people who actually commercialize these applications, with the R and D capacity. It's a work in progress. I think that's a fair way to put it.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

It's been in progress for quite some time.

Do you look at best practices in other countries? Why is it that Ireland and Switzerland and Finland and the United States have got their act together? I'm curious about it and I was just wondering if you have identified things they seem to do particularly well that make them more innovative.

[Billy Hewett]

We do look at best practices, and we also look at how to apply those and where they can apply most effectively here. Not every practice translates directly. So if there was something more specific on that that we could follow up with, we could do that, but I don't have anything more concrete to add off the top of my head right now.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

One of the elements of a national innovation system--that's a term I'm sure you're familiar with that the Europeans use--is the availability of tax credits, and I'm talking about where the federal government comes in, and venture capital as well. CATA and BIOTECanada have commented on the fact that the process for SR and ED tax credit applications is cumbersome. They're difficult to fill out and get approval for.

Is this something you're aware of and are working on, and are steps being taken?

[Billy Hewett]

Yes, the SR and ED tax credit is, as I understand it, the largest federal tax expenditure on this, and it is an area where the Department of Finance has identified the operation of the program as being a need for an opportunity to enhance how it's actually being administered. That is an area they're attempting to enhance right now. Some additional funding was provided to them, I believe a year ago, with a view to enhancing that operation. So that is an area, yes, that I'm aware of, that has been identified.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

What about refundability to non-Canadian companies that are doing research in this country? Is that something that's being looked at or does it have to be a Canadian company?