Evidence of meeting #6 for Subcommittee on Canadian Industrial Sectors in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was companies.
A recording is available from Parliament.
NDP
Glenn Thibeault NDP Sudbury, ON
Perfect.
One of the things you said in your opening remarks caught my attention, and I'd like you to explain it in a little more detail for me. You were talking about how money is made in the manufacturing sector in services and in a few other areas and that the product is the anchor. Can you clarify that for me?
President, Canadian Manufacturers & Exporters
I will give you an example. One of the great things I do in my job is I get to visit all these manufacturing companies and see what really is going on. If you go out to the Gilbey's distillery in Lethbridge--I also like to visit distilleries and breweries--this is one of the biggest integrated distilleries in North America. They produce Black Velvet whiskey and they produce Smirnoff, so it's a pretty good business. What you see is railcars coming in with grain, and the process then goes from grain handling all the way through to bottling. It's a fully integrated production process.
There are two people who look after production, both of whom have masters degrees in engineering, because they run the computers. It's the same thing in an integrated sawmill. It's the same thing in a pulp and paper company. It's the same thing in food processing, in any process industry, chemical industry or whatever today. You have two people in production.
You need the product. But where is the money made? It's made in the recipe, the R and D, the design, in the marketing, the delivery and logistics that go around it and the service and the warehousing and bottling and quality control. All of those are services functions.
When we deal with statistics in Canada we deal with Statistics Canada, and you would think it would be easy to measure the value of manufacturing production or manufacturing sales. Unfortunately, it is not. Manufacturing sales numbers are the sales of companies with 50% of the value of production in the actual production process as manufacturing, and value is basically labour cost. So as fewer and fewer people are working on the production system and more people are working on quality and innovation, engineering, technology, delivery, and you name it within a company, as manufacturers move into this advanced high-value service-based manufacturing we're actually defining the sector out of business.
We have a lot of companies like RIM, for instance, that don't make their money in production here. They still produce things, but they aren't necessarily counted within manufacturing statistics. But you need that product in order to anchor all of the other services within a company or within the supply chain around it. We have great design and engineering, technicians, IT, services, and everything else in the country, but those jobs disappear very quickly if there isn't a product, and they will migrate to the place where there is a product. RIM is an excellent example. They need to manufacture their newest BlackBerries in Canada because they need to be close to the product in order to re-engineer and redesign and develop new technologies around that. The more customized you are, the closer your supply chain has to be.
That's what I mean by that anchor of activity.
Conservative
Liberal
Marc Garneau Liberal Westmount—Ville-Marie, QC
Mr. Myers, you spoke during your first presentation about investment tax credits for R and D, and you even mentioned the word “refundable”, I think. I'd like to hear you talk a little bit more about what your views are on that and how you see the government's role in that.
President, Canadian Manufacturers & Exporters
We do have some of the most lucrative tax credits for industrial research and development and business research and development, but I think one of the shortcomings of the system we have is the fact that these tax credits are not refundable. That means if you're making investments in R and D, you don't get the tax credit necessarily, or the credit is credited against profitability--and there's a good reason for that: you want to show that the R and D is being commercialized well. The problem is that in innovative companies, particularly in economic times like this, they're investing far ahead of their profits and are unable, at the time they need the money, to take advantage of that tax credit. In fact, in some cases they build up vast resources of these tax credits--billions of dollars of tax credits in the case of some companies--that they can't exercise, but it makes the company extremely attractive as a takeover bid.
Also, there are companies that do a lot of research in Canada but don't take advantage of this tax credit because they are U.S.-owned companies. With the consolidated reporting for tax purposes in the United States, unless the tax credit is refundable, it is no incentive for an American-based company to exercise those tax credits in Canada. We're talking about one of the differences in industrial R and D. The tax credit should be encouraging innovation on the part of all companies here, but a very large segment of our industry is owned by U.S. interests, and those tax credits are meaningless for a number of those companies.
So refundability is an issue. We've been pushing for that for many years, as have most of the 43 associations in our manufacturing coalition. What we run up against is not so much the argument that this is too expensive. In fact, analysis by the Department of Finance shows that there's actually a payback to the tax credit. Frankly, I think the real argument, apart from the fact that the finance department never wants to change anything, is that the tax credit is set up to ensure that product will be commercialized; therefore, it's a credit against profit, rather than given on a refundable basis. But I think there are very compelling reasons for that being done, particularly when companies that are making these investments today need cash, which is exactly what the problem is today.
Liberal
Marc Garneau Liberal Westmount—Ville-Marie, QC
Thank you.
Innovation we've talked about. Productivity is that other thing that Canada doesn't seem to have a stellar report card on. I'd like to hear your views on why it is that Canada is not up there at the top in terms of productivity. This is a modern country. What is it that makes the difference?
I'd also like to hear from the Conference Board on that, please.
President, Canadian Manufacturers & Exporters
When you look at sector-by-sector productivity numbers, the differences really stand out in two areas--machinery and equipment and information technology. We lag behind in those two areas as well as in some areas of pharmaceuticals.
In auto, in metals, in plastics, in paper and wood products, and in our resource-processing sectors, our levels of productivity are better than America's, but it's these areas of more advanced technologies in which we tend to lag behind.
I think a large part of that is because of the scale of companies, the fact that we're dealing with a lot of small or mid-sized companies, which therefore have more people and less scale. I think a part of it is that we have, in many cases, a very specialized production, so we do small batches of product. I think in the future the value is going to be in that level of customization or specialization, for the company that can produce what is called the competitive batch of one. Doing that is pretty labour-intensive. You can't do that. There's an advantage to making it labour-intensive. If you look at a company like RIM or many other companies in Canada, and you look at where labour is, it's not on the shop floor. It's not in production. It's in the R and D, in the engineering.
All I'm saying is that maybe we'd better be careful how we talk about productivity, particularly from the point of view that you can achieve infinite productivity the day that, as is the case in many companies today, you turn the lights out and you sell off the inventory. There are no people employed, and there's a value for a product, but that's not necessarily where you want to go. What we should be looking at is how you produce more with more, not more with less. You do that, I think, by going to a higher value, more innovative, more specialized type of manufacturing that will also bring with it people here too.
I have to add one other point on productivity.
Conservative
The Chair Conservative Dave Van Kesteren
We're running over time. I just want to put this for the committee's consideration. The answers are going, but I think they're important, so is it the committee's wish that we abide by our time? We're in a five-minute round, and you're doing an excellent job, but do we want to have our witnesses finish, or do you want me to cut them off?
Conservative
Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB
With the start of my time, why don't I pass the floor to Mr. Burt and let him finish the answer, because I want to hear what he has to say too.
Conservative
The Chair Conservative Dave Van Kesteren
If you could wrap up, Mr. Myers, then we'll have Mr. Lake ask his question.
President, Canadian Manufacturers & Exporters
Right now we're seeing productivity increase in manufacturing simply because we're seeing less competitive companies disappear. So overall we're seeing an increase in productivity in the sector, but when you look at operational process measures like work in progress as a percentage of sales or inventories as a percentage of sales, the things that make sense to business--productivity numbers really don't make too much sense as a business indicator--productivity may be going up, but those numbers may be going the other way. So you can have a more productive manufacturing sector, but at the same time it can be less competitive.
All I'm saying is that we have to be really careful how we use these economic indicators and be very clear about what we're trying to do in order to boost productivity, which is to invest in those productive assets that generate high value going forward, I think.
Associate Director, Industrial Outlook, Trade & Investment, Conference Board of Canada
A few years ago we went through the exercise of going through Canada's industries, industry by industry, comparing our productivity with that of the U.S., and, as Jayson said, in a number of industries we were actually more productive than were our peers in the United States.
The biggest thing to us is industry mix. The mix of industries in the U.S. is not identical to what it is here, so you're seeing that some very highly productive industries, such as financial services and IT, have a much larger footprint in the U.S. So that helps to skew their productivity picture to be higher than what we have here. But when you get to individual industries and you see where we're lagging behind the U.S., a couple of things stand out. First is openness. Industries that we tend to produce tend to underperform on productivity measures because they're not facing the same competitive pressures that other open industries are facing.
The other place where we saw Canada lagging was in industries that benefit from certain economies of scale or concentrations. A big one that we lagged in was, for example, retail trade. Our retail trade industry is much less competitive than is the one in the United States, and it's simply because we have a much smaller population spread over a much wider area. It's a lot harder to get the economies of scale in terms of logistics and warehousing, and to get products to our customers quickly at the lowest possible cost.
So those are the two big issues that stood out for us.
Conservative
Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB
I have a question about the oil sands. I think it's safe to say we're talking about a cyclical issue versus a structural issue. In the long term, most commentators would say there's a positive outlook.
Mr. Myers, could you talk a bit about the opportunities? You were talking about opportunities for manufacturing that aren't necessarily directly related—in the production of autos. Could you expand on that for the oil sands industry?
Mr. Burt, you might want to add your thoughts regarding the long-term outlook for the industry.
President, Canadian Manufacturers & Exporters
Last year, when projects were going ahead in the oil sands and investments were being made, the outlook was that in the next ten years we were going to see $150 billion in investment, generating over $1 trillion in economic opportunity. Most of that would be open for manufacturers across Canada, and around the world, to take part in. Now, with the slowdown, we're still looking at a combination of investment in new projects and maintenance that wasn't included in the other number. Still, $30 billion will be spent this year in the oil sands, generating opportunity for suppliers—primarily in machining, metals, steel fabricating, pressure vessels, environmental technology, and process technology.
I know this because we've been running a program over the last three years trying to connect manufacturers with those opportunities and partnering them with Alberta companies. It's showing some of the problems of what it takes to go from an automotive parts supplier to supplying the oil sands. It isn't easy, because you're going from high-volume, high-precision, small-scale production to large-scale, one-off project work. So there's a challenge here. In fact, many companies from Quebec, northern Ontario, and the Atlantic provinces have a better opportunity because they're used to dealing with project work.
The oil sands offer a tremendous economic benefit for manufacturers right across the country. It is a major opportunity for companies that are trying to diversify their market. It would take, at current trends, 137 years for Canadian manufacturers to realize the same opportunity in China as they will in Alberta over the next decade. This is a major opportunity, not only to supply but to provide the new technologies that we need in the oil sands. That's some idea of the scale.
There are some good examples. A company called Promation in Mississauga has gone from an auto producer to producing exclusively for oil sands and nuclear energy. The same companies that supply oil sands also supply nuclear, refinery developments, and alternative energy projects. The opportunity here is not just to supply Alberta, but to take the knowledge and technology in Alberta and convert it into a resource that supplies the global energy industry. I think that's where the ultimate gain has to be.
Associate Director, Industrial Outlook, Trade & Investment, Conference Board of Canada
Our view is that it's essentially a short-term phenomenon. Oil prices will rise from their current levels. The fundamentally tight global supply-and-demand conditions that existed prior to the current global recession will return. We may not see $150 oil again any time soon, but oil prices will definitely rise, making a lot of the projects that have been delayed viable again in another year or two.
Certainly we will see renewed investment in oil sands, which already accounts for a majority of our oil production here in Canada. It will continue to account for a growing share of our oil production. I think our manufacturers will definitely benefit from this. Even before the current recession, we saw machinery producers and a number of other industries benefiting from the high degree of investment in oil sands. I think this benefit will return once oil prices begin to improve.
The real risk in the oil and gas sector is on the conventional side. We're seeing declining productivity and increasing costs per well. It's becoming more and more difficult for our conventional producers to maintain production at current levels. That's going to play a shrinking role in our oil and gas production going forward.
Conservative
Bloc
Robert Bouchard Bloc Chicoutimi—Le Fjord, QC
Mr. Myers, let me come back to the question that Mr. Garneau put regarding tax credits for research and development.
Currently, the federal government is issuing so-called non-refundable tax credits, which means that a company has to be making a profit in order to benefit from them. Now I understand that you are proposing to make these credits refundable. Thus, a company would not have to be making a profit. Even if it is taking a loss, if it is carrying on research and development, given that the credits would be refundable, it would be compensated right away. Have I correctly interpreted your statements?
President, Canadian Manufacturers & Exporters
Yes, you are right.
One of the benefits of the Quebec tax credit is that it is refundable, and I think you see the benefit of that system by the amount of R and D that is done in Quebec.
Maybe as an economist I can say this. When I deal with economists at the Department of Finance there's this idea that sooner or later, in the long run, everything evens out anyway, so it doesn't make any difference if you pay the money now or pay the money at some point in the future. Well, in the long run we're all dead, as Keynes said, and that long run may not be so long for many businesses today. So the ability to get the money as quickly as possible is what maximizes return on investment immediately, and that's what drives the investment, both in R and D and in overall investment, in a business today.
That, I think, is the same argument I would make for the two-year CCA: the faster you can write off your equipment, the higher the rate of return will be. The Department of Finance will say we shouldn't be treating manufacturing differently from anybody else, and I agree with that, but you have assets that create wealth. They should be given preference, number one. Number two, we should structure a tax system so that you have the least impact on changing investment decisions. But if we assumed a world where we didn't tax companies, they would make, on average, in manufacturing, a return on investment in about two and a half years on capital investment. So now if we're going to put in a depreciation system, it seems to me that instead of the current system, where you try to look at how long you can spin off a useful life of an asset--in some cases 40 years--wouldn't it be better if you put in a depreciation system that actually mirrored the rate of return that companies would be making if there were no taxes? To me, that's a much more compelling way to structure a tax system.
It's the same thing on the R and D side. You want to make sure that the treatment of these investments gives an immediate return. That's what spurs the investment, then, in R and D, as well as in business investment, in general.
Bloc
Robert Bouchard Bloc Chicoutimi—Le Fjord, QC
Thank you.
You said that 50% of manufacturing production was exported to the United States and that it is difficult to do business with the Americans. Canada has some 97 pieces of legislation for regulating various aspects of trade, and the Americans have almost as many of them. Moreover, there is a lack of harmonization.
Would harmonization be of benefit to the United States or to Canada? Which of these countries should take the initiative with regard to harmonization?
President, Canadian Manufacturers & Exporters
Deodorant that has already been inspected in the United States is inspected again when it comes into Canada. Why? I would think that's a good example. American and Canadian underarms aren't all that different. Why do we need a double inspection system?
I'm not saying we should harmonize all regulations, but we should look at those areas of regulation where it makes sense to adopt the same standard. Some sectors do it very well. Pesticide controls do it very well here. In general, we tend to think we need to have our own regulatory systems, and even when we're developing new ones, as in product safety recently, we tend to do it ourselves. We reinvent the wheel, even though the Americans are doing it differently. When it comes to border issues, product safety issues, and food product safety issues, we could be working together to develop new regulations at least, to make sure we have consistency--the same objectives but a consistent interpretation of those objectives, and mutual recognition of standards going forward.
It's a very complex issue, and I don't think it's an issue where you say we're going to harmonize everything. It takes departments to say we're going to do this and work together. I think the onus has to come from the Canadian side to do that. I think we can change a lot. A lot of the regulatory problems and inconsistencies we have are of our own making.