Subcommittee on Canadian Industrial Sectors Committee on April 23rd, 2009

[The Chair, Conservative, Dave Van Kesteren]

Welcome, committee members.

We welcome our guests this morning.

We are in the process of studying certain industrial sectors in Canada, such as aerospace, energy, forestry, high-tech, and manufacturing.

This morning we're very pleased to have with us the Canadian Chemical Producers' Association and the Canadian Association of Railway Suppliers.

We're missing a couple of our members. I'm sure they'll come straggling in, but we do need to get going, because I understand you have a lot to tell us.

Our first round of questioning is seven minutes. I generally don't cut you off, but I may give you a warning. If I give you one of these, round it up. If you're in the middle of something, and you need to finish it off, by all means do so. Often we'll allow you to do that. We understand. If you're right in the middle of a thought, we don't want to interrupt that.

Our first round of questioning goes to the Liberal side and we will ask Mr. Garneau to begin that, after we hear from our guests, of course. We're going to hear first from the Canadian Chemical Producers' Association.

[Richard Paton, President and Chief Executive Officer, Canadian Chemical Producers' Association]

Thank you, Mr. Chairman.

I also have Fiona Cook with me, who is our senior adviser on business and economics. Because I heard all those great questions you asked Jay yesterday, I realized I was going to need some help here.

Thank you very much for this opportunity to talk to you about the chemical industry and, more broadly, the manufacturing industry.

This special subcommittee's discussions are very important for our industry and for all manufacturing sectors and I thank you for having them.

I hope to be able to make you aware of the chemical industry's situation and the unique position it is in because of this crisis.

My presentation will build a little bit on what Jay and the Conference Board were raising yesterday. Some of you were mentioning earlier that we all come and talk about our sectors and how important they are, but I'm actually not going to spend a lot of time on the chemical sector. Really, I'm going to talk more about the economy and perhaps the role of the chemical sector in the economy.

I'll begin with some background comments to set the stage. Then I'll have three main points regarding the need for political leaders of all parties to work together, much as you did with the Rajotte committee and the manufacturing report, to create the conditions for a strong and competitive manufacturing sector in Canada, of which the chemical industry would be an important part, of course, as well as the railway industry. Finally, I'll have one recommendation for the work of the committee.

I'm going to start my presentation in a little bit of a unique way. I'm going to ask a question.

In roughly five years, Canada has seen its manufacturing sectors go from 18.1% of GDP to 14%. We lost about 320,000 jobs between 2004 and 2008. I know you were wrestling with the auto industry recently, so you know what that really means in terms of people, lives, and communities. That's more than one in seven manufacturing jobs that disappeared in that period of four or five years. It's just absolutely amazing. One would have thought people would have been ringing the alarm bells long ago on this issue, but it seems we haven't until this recession came along.

In addition to the men and women who have lost their jobs, there has been a hit to communities across the country, especially in Ontario and Quebec. In the chemical sector, we have lost about twelve plants in the past five years, including two major plants in Montreal and several plants in Ontario.

So my question is this: what is an acceptable number for our manufacturing sector? Would letting this number slide to 12% be okay? How about 10%? What do we want to see in the Canadian economy of the future?

Or perhaps we could think about developing a robust manufacturing strategy that would either maintain or rebuild the core role of manufacturing in the economy.

I'm here today to try to convince you that Canada needs to go a bit beyond just looking at the sectors facing the issues that we've seen--the forestry sector, the auto sector, the aerospace sector--and beyond looking at those sectors on an urgent basis, to look more broadly at the interdependence among these sectors and some of the economic challenges we face as a country.

I have three main points I want to make today.

First, I'd like to just position the chemical sector in this and tell you why we're so interested in a broader economic strategy. I'll talk a little bit about our sector. Secondly, I'll try to illustrate that manufacturing should be an integral part of our economy if we want to maximize our standard of living and also employment for Canadians. Thirdly, and probably most importantly, government policy matters. Government policy is currently affecting the health of the manufacturing sector. Government policy can make it more competitive and improve our chances on the world stage in terms of the global economy.

My first point is that the chemical sector basically depends on a very robust Canadian economy, including a resources and services sector and including rail, as well as a dynamic and growing manufacturing sector. We're a $48-billion industry and the fourth-largest manufacturer in Canada.

Basically what we do—as Mike would realize, coming from Edmonton—is transform resources. We transform oil, gas, salt, and electricity into chemical products. Those products are then used by a wide variety of other industries, which can include pharmaceuticals, aerospace, auto, plastics, lubricants, and petroleum refining. Pretty well anything that is part of the Canadian economy somehow comes from some sort of chemical product base.

In doing that, we add five to twenty times the value to those base resources through this conversion process, thus directly creating wealth for the economy as well as the other sectors we depend on for the supply of those resources. But our industry can't prosper without resources and without people to sell our products to. Therefore, we are interdependent with the total economy and we have a very strong interest in the growth and health of the total economy.

As an example, in the pulp and paper industry, chemicals are one of our major input costs. Chemicals are used to break down the pulp. When the forestry industry is in trouble, we're in trouble. Several of my companies almost exclusively sell their product to the forestry industry, and they usually sell it in train cars. There's the other part of the interdependence.

Every car manufactured in Canada contains about $5,000 worth of chemical products: plastics, rubber, some of the lubricants, even electronic displays, and, increasingly, lithium batteries. So we're an area that's also dependent on all those other manufacturing sectors being competitive.

We're also dependent on services. We depend heavily on computer support. Imagine a chemical plant as heavily computerized for waste services and transportation services.

We prosper as the Canadian economy develops. As with most manufacturing sectors, 87% of our products are exported to the U.S., making us part of the overall North American economy as well.

Since 2006, our association, along with many others, has called attention to the decline in Canadian manufacturing. We've seen the current economic crisis exacerbate the loss of manufacturing jobs and investment. But this is by no means a new problem for us. The manufacturing sector has been facing this problem for five to seven years.

I don't know who said that you should never waste a good crisis, but in the midst of this crisis, there is an opportunity to use it to focus on the economy and what we need to do. My members are concerned about the recession and the huge decline in our production, but we know we'll get through it. We've been up and down before. Our main interest is what happens when we are through it and how we position ourselves for growth in the future.

My second point is that Canada is missing a major opportunity to build an economy that maximizes the value-added potential and resource base of our economy. We're a rich resource-based country. We have a growing service industry.

These two sectors are linked and are highly interdependent with manufacturing. Without the manufacturing sector, we'll be extracting resources and sending them out of the country to be upgraded by the Chinese, the Indians, or somebody else. They will increase the value of these products by five to twenty times and then sell them back to us. I would suggest that this is not a very good recipe for a strong and healthy economy. There's a lot of wealth potential in our economy to be had by thinking about how to maximize the upgrading of our resources.

I have been extremely disappointed that we don't see governments thinking about how to maximize the value of our resources, upgrade them, and make sure there's a strong manufacturing sector linked to the resources and services. Probably the only government that is focused on this is Alberta's. They have a strong view that they should upgrade their resources and diversify their economy. As a country, we should be maximizing the value of these resources for Canadians and we should be doing everything we can to achieve this objective.

This brings me to my third point, which is that government has a role to play in ensuring the growth of a robust, value-added manufacturing sector. Government policy does matter. I remember when Mr. Rajotte did his report on the manufacturing sector and made his 14 recommendations. That was an important step forward, because it pointed out a number of policies that could help the manufacturing sector.

There are many areas of government policy, both federal and provincial, that add costs for industry, make it more difficult to introduce products, and create unnecessary overlap and duplication between the federal and provincial governments where there are significant policy vacuums that lead to counterproductive policies. Energy is a good example.

Each year CCPA produces a competitiveness scorecard for various governments, including the federal government. I think you all have a copy. The scorecards analyze all the business factors that make Canada a competitive jurisdiction in which to invest.

The scorecards look at everything from fiscal monetary policy, inflation, corporate taxation, labour costs, trade policies and our legal system to energy supply, pricing, and transportation. We do this because, as a global industry, our companies are looking at different jurisdictions. They're comparing jurisdictions for that next big investment, the next big chemical plant that will then produce all kinds of opportunities for growth and spinoffs.

They don't look at just one factor; they look at all of these factors. If the energy costs are high, the electricity costs in Ontario are high, the rail service is not what we need, the tax structure is not as competitive, there is a mountain of regulations, and there's uncertainty on climate change policy or whatever, there will be decisions to locate in other places. So it's extremely important that we understand this competitive base.

I don't see governments thinking in these terms about the manufacturing sector. They think about problems or specific sectors, but we have to think about the total environment in which investment decisions are being made.

I note that Mr. Lake is a former Edmonton Oiler man, so I'll use a Stanley Cup analogy. This is a very globally competitive world and to win is like winning the Stanley Cup. Every team is good, and you can see that if you've been watching any games. They're all good--

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

Except the Montreal Canadiens.

[Some hon. members]

Oh, oh!

[Richard Paton]

Yes, well, they have injuries, though.

The game is rough and it's fast and to win you need to have a total package. You can't say, “I have one scorer and he's going to win the game”. You need to have the total package.

This scorecard in front of you today is our total package. Without reading the text, just by looking at the pluses and minuses, you can see that there are things where we're ahead and there are things where we're going down. We have to address the areas where we're weak and reinforce the areas where we're strong.

Industries like ours do not favour subsidies, handouts, or even special treatment, but we expect governments to do their part by creating the policy environment required for manufacturers to compete globally and by avoiding the introduction of measures that undermine or reduce competitiveness. We need policies that encourage investment in manufacturing and upgrading resources that stimulate progress toward sustainability objectives, which we believe is integral to that.

Although some progress has been made recently in corporate tax, and we think the harmonization of taxes in Ontario was a big step forward, the fact remains that there are major obstacles to investing in Canada compared to other jurisdictions.

These issues were well documented in the excellent all-party report by Mr. Rajotte, which made 14 recommendations. Some have been addressed, but I think it's fair to say that the response has been relatively tepid and there's still a lot of room for government policy improvement in relation to manufacturing.

To conclude, we are at a critical time. The creation of this subcommittee corresponds to the urgency that has been felt in many sectors of the economy. But as trying as these times are for manufacturing, there's a real opportunity to create some policy direction for the Canadian economy after this recession. There's an opportunity to rethink some of our assumptions about Canadian manufacturing and develop a road map for the future.

I don't know if that's your mandate, but who knows? These days, people can make their own mandates.

I would like to encourage you and your committee to build on the work of the Rajotte committee report, think beyond the problems of particular sectors and even this recession, and address the medium- and long-term requirements for a competitive manufacturing sector as part of a strong Canadian economy.

Thank you.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Paton.

It should be pointed out that there were 21 recommendations in the industry committee headed by James Rajotte.

[Richard Paton]

Yes. Sorry.

[The Chair, Conservative, Dave Van Kesteren]

I was part of that committee, too, and I believe that the government acted on 20 of those recommendations, directly or indirectly, but you're absolutely right, there's always room for improvement. That's why we're talking to you this morning. We thank you for that.

Mr. Nordenstrom, I believe you're up next, sir.

[Jay Nordenstrom, Executive Director, Canadian Association of Railway Suppliers]

Thank you, Mr. Chair.

Esteemed members of the committee, let me preface my presentation, if I may, by echoing complete agreement with Mr. Paton's analysis, which is truly a “forest from the trees” perspective on manufacturing in Canada and what's needed. So I won't spend much time saying similar things here, because we in the Canadian Association of Railway Suppliers agree 100% with the comments made this morning.

First off, what I'd like to do for you is give a brief overview of the association and the membership and a little bit of a scope of the railway supply community in Canada, because I think it's not a story often told. Then I'd like to give a bit of an overview of the presentation, which I believe I submitted in time to Ms. Tittley and which you all have a copy of. I believe it has been translated, so I'd really like to focus on this, if everyone has a copy.

The Canadian Association of Railway Suppliers represents about 400 companies supplying the rail industry. This is without the tier 1 folks, so we don't include steel producers or petrol companies and whatnot. These are people who build and provide software to the railway operators so they can be, of course, the most environmentally friendly mode of transportation in North America.

In the last couple of years, we have had between 50,000 and 60,000 jobs in Canada directly related to the rail industry. Domestically, on average, we do about $4 billion in sales per year, and 80% of those folks in the rail supply community generate about $5 billion in export sales, for a total output of $9 billion, so we are quite important to the economy.

I'll start with the challenge. I'd like to go over the short-term challenge that we're facing here and then go into a solution and a proposed implementation plan for our specific sector. We've even priced it out, too.

On the short-term challenge, we have been hit incredibly hard, as have most manufacturing sectors. A lot of our large OEMs have had to furlough thousands of jobs just to stay competitive. A lot of these folks are now on a part-time basis.

You may ask why that's happening when we're investing in public transit like we've never done before. However, I'd like to preface that argument by saying that transit and freight should be treated separately but in the same sector. The public dollars are going into transit systems with transit authorities in provincial dollars through federal transfer payments, but on the other side of things, on the freight rail, we're seeing a lot of our folks in really very tough shape, some in bankruptcy protection and some out of work.

These aren't small widgets that they're building. At the end of the day, these are large locomotives with some of the most state-of-the-art technology. We're developing hybrid locomotives and environmentally friendly locomotives as well, using chemicals to produce track lubrication. I don't know if you've ever seen these. They deal with friction, where you get little squirts of this non-harmful substance and the beads move across the rails. It's amazing how much efficiency you can create off that chemical.

Just as you were mentioning about the interdependence of sectors, we have developed hybrid locomotives where we're using a lot of battery technology, and dynamic braking technology as well, to regenerate power and use it more efficiently. We're not laggards here. We're environmentally innovative in the realm of transportation technology.

However, the past year has had a very chilling effect. As I mentioned, a lot of companies have been hit very hard, very profoundly, such as National Steel Car in Hamilton, Electro-Motive Diesel in London, RailPower in Brossard, near Montreal, and Brandt, the largest private company in Saskatchewan. We've estimated that we've lost close to $1.2 billion in sales to date in a year over year comparison with 2008 levels. By the time this report was written initially, we knew that on the private side CN and CP had $400 million in reduced capital expenditure plans. Now we're seeing that number growing exponentially.

It's not that they're not investing; it's that they're delaying investment. The money is there to invest, but the problem is that when our shops aren't generating orders, we have to let people go. We're seeing this in a lot of areas. However, rail typically spends about 20% of revenue on infrastructure and rolling stock. This is good news for our sector. The problem, as I said before, is that it gets delayed, so what happens to our shop in the worst-case scenario is that we have to fold and go somewhere else. But we know those orders are coming back,so we have to hold fast. We have to make sure we survive the next two years, or three years, if that's the case.

If I may, I'll talk about the international picture. We've seen an increase in international growth. This is where it's really important, because a lot of governments have nationalized rail systems for freight and transit. That's where the money's being pumped in right now across the globe. Countries like Oman and Qatar, where they have never had rail before, are starting to invest.

Whether it's for a strategic need or part of an economic stimulus, or maybe a bit of both, it doesn't matter. There is business to be had over there. We talk about jurisprudence, but it's not dominated by protectionism. Whether we call it protectionism by this name or another name, we know that when it comes to procurement, there are some markets we can enter as Canadians and some markets we have no shot at. We can bid, but there's no way in town that we are going to be able to do that.

So we really have to go after this strategically. We saw 9% growth between 2006 and 2007 and we have about $116 billion worth worldwide. These figures are from a report that just came out on the future of rail supply. Internationally, we're looking at a 2% or 2.5% annual growth. We need to be a part of this. We can't let this sector slide away from us.

Not only are we trying to help our OEMs, but we know that 55% to 80% of their sub-component suppliers are Canadian. If they're building freight cars, using hopper cars for grain, or building national steel cars and tanker cars for some of the chemical products, not only are we helping OEMs, but we're helping these sub-supplier components and the other 400 companies that are adding to the industry. There is a trickle-down effect.

This is what we're up against. What is the proposed solution? Obviously, I don't think I need to go into figures on how environmentally friendly rail is as a mode of transport. We do 75% revenue tonne kilometres and we do between 3% and 3.5% GHG emissions. That's quite astounding. How were we able to get those numbers? The railway operators will tell this great story to death, and they're right to say this, but it's our technology that has enabled this. That technology has been developed in Canada. We want to see that trend continue.

With the proposed solution, we were hoping to get not only the domestic demand that we see is going to come around, and it will, but.... I'll throw this out. There are 300 locomotives parked right now. They've been taken out of service. There are over 20,000 freight cars out of service right now. If we're ever to upgrade, this is an ideal time to do it. They're out of service so we don't have to take a hit on capacity to make these more environmentally friendly.

A lot of these locomotives and switcher locomotives are in the yards closest to the communities, and oftentimes they're 30 to 40 years old. We have the technology to retrofit these things and make them up to 60% to 70% more efficient. This is the time to do it. By doing so, we would get our production facilities back in line, and we would be able to repatriate a lot of these lost jobs.

How would we do that? To get this program going, we have put together an idea for a railway manufacturing stimulus program. It's envisioned, if you will, as a one-time funding program between Canadian OEMs and the Government of Canada to help to offset the cost of rail equipment made in Canada with a recommended two-year lifespan. The program would increase production activity in Canadian OEM facilities, resulting, obviously, in job retention and creation.

Here's a spinoff effect. I talked to all of my guys and they said if we're able to get up to capacity.... Obviously, they have a lot of union responsibilities, so they'd bring back those folks who have been furloughed or who are part-time, but if they can go above and beyond that and grow--because we know that we have a growth industry here--we can transfer the lost jobs in the auto sector with very little retraining and get them working again in key areas in Quebec, Ontario, and Alberta.

We're saying that such a program would be implemented on a per unit, price preference basis. Procurement order applications would be placed with government authorities by Canadian OEMs with a partner North American railway operator. Such a fund could be managed through Industry Canada, with a framework similar to that of the structured financing facility, SFF, for Canadian built vessels and offshore marine structures program. I won't get into that structure itself, but it's an example of what's already happening.

There's also an example that we're using to cost something. We don't want to just talk about some challenges. You talked about challenges and solutions in the 21 recommendations that you proposed in order to deal with some of these issues and we're asking you to make sure that all of those recommendations are dealt with to benefit all manufacturing sectors.

In this case, I also want to make sure that we propose a solution. The Ontario government's Canadian steel preference policy puts together 10% price preferences with Canadian structural steel products identified in bids. We believe that if we did something similar it would take $120 million and we could get our production facilities up and running. We know it's not a small amount of change, but this would put us back into the game internationally and domestically.

Thank you very much for your time.

[The Chair, Conservative, Dave Van Kesteren]

Mr. Garneau.

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

Thank you, Mr. Chair, I'll focus my initial questions on the Canadian Chemical Producers' Association.

Richard, if I understood you correctly, it seems that the downsizing that's occurring in what is happening in your industry is not just a cyclical thing, but seems to be a structural downsizing as well. You didn't commit on whether you thought this was just a normal thing or was because of greater efficiencies or less demand for your products.

I'd like to get a sense from you as to whether you think this is something that's going to be permanent. Or do you think better days will be ahead eventually in the long term?

[Richard Paton]

There are structural changes happening, absolutely, and one of them, of course, is the emergence of the Chinese and Indian markets. From a chemical point of view, growth of chemicals is roughly 3% a year globally. There is a growth pattern notwithstanding the recession, but the growth in China is something like 12% a year, with huge demands, so therefore there's a tendency for investment to flow from multinational companies to China in order to capture that demand. In terms of scarce capital, that capital is flowing to China and India.

The second structural thing is that the Middle East is now becoming a huge player because feedstock--as you know, it's oil or natural gas--is a huge proportion of the cost of our products, and their feedstock costs are 20% or 30% of ours. They have no trouble figuring out that they need to diversify their economies, so the Middle East is now building huge manufacturing facilities for chemicals. In fact, you may have noticed recently that NOVA was purchased by a Middle Eastern company. As well, Dow was trying to make a deal with a Middle Eastern company. There are definitely some structural shifts happening.

Overall in the longer term, the people who analyze the chemical industry see that more production will come from offshore to North America, which will displace some of the production in North America. However, the U.S. chemical industry is a $600 billion industry. Ours is about $25 billion to $28 billion. We will remain a part of that North American industry, and in some regions and in some areas we are very competitive. Our productivity level, thanks to John Margeson over there at Industry Canada, is about 30% to 50% higher than that of equivalent American plants. We're quite well positioned to capture a large market share of the North American economy, particularly in Alberta, where we have probably some of the most efficient plants in the world.

So the answer is kind of complicated. Yes, there's a structural change. It's going to be very competitive. We're going to get undercut in terms of price by some Middle East production. On the other hand, we can, with the right conditions, still grow the Canadian chemical industry. We would say that we could probably double it in 20 years with the right pipelines, the right feedstock, and the right economic conditions. Also, North America will always be a major consumer of chemicals, so therefore, being right here, there are certainly advantages to supplying that market.

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

Thank you.

I have a couple quick questions. I think of the petrochemical industry as being part of your sector.

[Richard Paton]

Yes.

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

What about upgraders, where you take bitumen and turn it into synthetic crude oil? Is that in your sector as well or is that a different one?

[Richard Paton]

Yes, I would say it's kind of in our sector, but it's a transition. It's between the resource and the chemical production. In fact, we are working with Alberta on this. We are extremely interested in upgraders being developed in Alberta, mostly in Alberta because that's where the feedstock is, and that would then provide a base feedstock for the production of a stronger petrochemical industry.

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

Okay. You kind of went to my question there, because I wanted to know your views on whether, from your perspective, it's better that we make this transformation into synthetic crude oil in Canada rather than exporting bitumen.

[Richard Paton]

That would be a huge yes. Otherwise, we're just sending it in pipelines down to Houston and letting the Houston guys upgrade it and create the value for their economy.

Now, that doesn't mean that all bitumen could be upgraded in Canada. We don't have the railway structure. And here's the interdependence. If we actually managed to produce all that product, we probably couldn't ship it because it would go to Chicago or other places where there is higher demand. But certainly a good portion of it should be upgraded to diversify the Alberta economy and produce more value for the Canadian economy.

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

That was a theme in your presentation, the business of adding value to raw product; you seem to be encouraging that very much. But do you see that as a role and an initiative for industry? Or are you saying that government also needs to be involved? It seems to me that you were saying that.

[Richard Paton]

I think without government involvement, it won't happen. I'll give you an example.

The National Energy Board, in approving pipelines, doesn't think about value-added. If the National Energy Board is going to permit pipelines to be built without thinking about that issue, it's going to be very hard for us to get access to that product and upgrade it. Even the tax structure affects the value in terms of how you reward upgrading. That's partly why we like the harmonized sales tax in Ontario.

So there are a number of factors. We lost several plants in Ontario simply because of electricity costs. If electricity costs are so prohibitively expensive that you can't keep plants in Ontario.... In fact, one of the most productive plants in one of our companies, ERCO, had to close in Ontario. Their most productive plant had to close in Ontario because the electricity costs were so high because they closed a coal-fired plant.

Do you see how all these things are linked?

So yes, government has a very important role in helping to encourage value-added, but I don't see that perspective in government—other than in Alberta.

Fiona has something to add.

[The Chair, Conservative, Dave Van Kesteren]

Ms. Cook.

[Fiona Cook, Director, Business and Economics, Canadian Chemical Producers' Association]

Perhaps I can add something with regard to what we see going on right now in terms of the upgraders. They are not eligible for the accelerated capital cost allowance that's now in place federally and provincially. What we're seeing in the U.S. is that their refineries have been given a special accelerated capital cost allowance to convert in order to handle heavy-grade Alberta bitumen. And once that stuff starts flowing in pipelines, it's very hard to reverse it.

So clearly, yes, government policy has a huge impact on the structure of industry and where things get upgraded.

[The Chair, Conservative, Dave Van Kesteren]

Thank you.

Monsieur Bouchard.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chair. Thanks also to the witnesses for being here.

My first question goes to Mr. Paton. You spoke about the fact that you lost several thousand jobs well before the current crisis occurred. In finance and in manufacturing, many sectors are affected.

How do you explain the fact that, for several years, we have been losing so many manufacturing jobs in Canada, in Quebec and Ontario, and that little or nothing has been done to correct the situation?

[Richard Paton]

That is a good question, sir.

We have asked ourselves the same question. In the midst of what one would have to say was a serious problem, governments were asleep at the switch. What we would get here from governments would be, well yes, the manufacturing sector is losing jobs, but it's a global phenomenon and unemployment is only 6%. We're having surpluses in our budget, governments would say, and we really want to have a service economy anyway, and maybe we're not sure that manufacturing is really critical to the economy anyway. That's the kind of message we would hear from government officials, so you can see they were not that seized with it being a problem.

That's why the recession is kind of important, because now I think we're starting to realize that manufacturing jobs are kind of important, and you can't build your whole economy on the service sector. Take a look at what the U.K. did. The U.K. basically decided that manufacturing wasn't that important and they were going to invest in the banking sector. Now they have the highest rate of unemployment in Europe. It's not a very good strategy to build on just one sector.

But coming back to the second part of your question, it was about why that was happening. Global change, with China, India, and lower manufacturing locations, has meant that manufacturing industries have had to change, modernize, and become more high-tech and more environmentally sensitive, as I think Jay Myers explained so well yesterday.

You heard Jay explain some of that, but in particular during that period, we had two other problems. We had the dollar spike. When the dollar moved from 76¢ to—what was it?—$1.05 or $1.08 at one point, it had a huge impact on those manufacturers. The second problem was energy costs. When we, along with Jay's organization, did a survey of manufacturers, we were finding that energy costs were adding huge costs to our industries. That, plus the dollar, meant that manufacturers had to use all their money just to pay for the energy. Then, when they went to sell their product, they were losing 20% to 30% on the dollar. Essentially what was happening was that they were not making any money, and since they weren't making any money, they weren't investing in technology to increase their productivity.

That's the kind of problem we've had for five or six years. The recession has only made it worse. However, it has reduced energy costs and the dollar's down.

All those problems have been there and we did not see a response by government to those issues, although some of the tax rates did come down, which was helpful.