Industry Committee on June 8th, 2006

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

I have just a quick one on the skill, because you talked about--

[The Chair, Conservative, James Rajotte]

Why don't I go to Mr. Fontana. There's another Conservative spot after that.

We'll go to Mr. Fontana.

[Joe Fontana, Liberal, London North Centre, ON]

Maybe Bev was going to ask the same question as I was.

Of course, in London, Ontario, we share a pretty good success story in Diamond Aircraft Industries Inc., which has become a leading commercial aircraft producer and, in fact, has become the product of choice for the U.S. Air Force to train its new pilots. Yet they can't even get in to see the Minister of Defence in terms of procurement, and I know there has to be a linkage.

Sometimes, in order to start off, SMEs need procurement, and “buy Canada”. Where everybody else seems to have a “buy U.S.”, buy this, buy that, policy, we can't even seem to help some of these SMEs in the aerospace sector.

But let me just ask some specific questions here. I note your performance, and I think we ought to be very proud of what we've done in Canada in the aerospace industry. So revenues are going up, exports are going up. But I need to ask the question. I'm very supportive, obviously, of the tax credits, the R and D, and some of the things we've talked about, but the investment by the industry itself is going down, and employment is obviously flat.

So I'm wondering, while you all talked about research and development, and yes, government has to be there, because I think sometimes nobody else can do some of that basic support, investment by the aerospace sector itself in research and development seems to be on the decline. Perhaps you might want to give me an answer to that.

Secondly, there is no doubt that, just like the auto sector, the aerospace sector needs some pretty good skills in order to do some of the fine stuff that you do. I know you've probably talked about skills, and yet what is it you think we need to do on the human resources side so that we continue to be competitive by having some of the skills, the scientists, the engineers who are required?

My third point is this. Again, I'll talk a little bit about it as it relates to procurement. How important is procurement in terms of making sure those small and medium-sized businesses in Canada, and big companies, can in fact become global, if in fact they're not even given an opportunity?

I don't know, in my 18 years here.... Invariably, it doesn't matter what Canadian technology—whether or not it's aerospace, auto, and certain other R and D—the fact is that we're great at selling things, exporting, but when the other countries ask if the Canadian government, the provincial government, or anybody else uses your stuff, invariably we have to say no. So I'm wondering, because I think you bring it up, has procurement been a link towards research and development and fostering our own regional development?

I congratulate you for spreading an awful lot of these regional benefits across the whole of the country—from Atlantic, to Quebec, to Ontario, to the west. That's great to see.

[Peter Boag]

I'll try to take those in order.

Yes, the investment in R and D is an issue of concern for us. This industry is investing a little over $1 billion a year in R and D on an annual basis, and it's been investing that amount for about 10 years; it hasn't changed. At a time when the industry has grown more than twice as large, our R and D intensity, as we would describe it, has gone from about roughly 10% a little over a decade ago to about 5% today.

That's not an investment rate at which you're going to sustain this industry and growth in the industry. It's a trouble spot for us and was clearly one of the major issues that surfaced in the work of the Canadian Aerospace Partnership last year, and one of the issues that was addressed in the aerospace and defence strategic framework, which we, as an industry, unanimously endorse.

The challenge—and I want to go back to the beginning of my remarks—is that we compete around the world for that investment. What that tells me is that our investment environment and investment climate in Canada is less competitive than in other locations. We're seeing companies choose to invest and develop aerospace businesses outside Canada as opposed to doing it inside Canada. They're using and leveraging the knowledge and investment they have now and will continue to do that for some period of time.

Our success in the past and our success today—and thank you very much for the congratulations—is no guarantee of future success unless we continue to stimulate higher levels of investment. Risk-sharing and the role of government and how we work together are important parts of creating that positive investment climate that will make us compete.

One of the things those sales numbers disguise, to a certain extent, is that while we have grown our overall revenue, the Canadian value-added in that revenue has been decreasing. That's because the top-line revenue has been growing, but we've been sourcing more and more from outside Canada because of competitiveness issues. Whether they are foreign-owned subsidiaries here in Canada or some of our own homegrown companies, as they try to maintain their competitiveness globally, they ultimately look for where they can work best to be competitive.

I'll skip down to procurement, and then I'll come back to skills.

Procurement is clearly an important tool, and it's distressing to us, as we look at procurement over the last number of years in Canada, that many Canadian firms--world-class, market-proven, with cost-competitive technology and product capabilities--are overlooked by our own Department of National Defence. They have this eagerness to see anything foreign and yet are very slow to recognize that we have world-class capabilities here in Canada. We need to see a greater predisposition to Canadian solutions.

That's not to say we should have broad buy-Canadian policies that emulate what our friends south of the border are doing. But we really do need to look at how we can better use the capabilities and better stimulate and strengthen those capabilities through either a first-use demonstration or through looking at how we can build Canadian solutions into the legitimate procurement needs of our Department of National Defence. That's clearly an issue.

[The Chair, Conservative, James Rajotte]

We still have two members left who want to ask questions.

I want to give Mr. Bain a chance if he wants it. It's up to him.

[Stewart Bain]

I'll try to go quickly.

The common thread I see running through a lot of this, to touch on it very quickly, is this word that gets thrown around that means something different to everybody, and that's the subject of competitiveness. The aerospace industry has gone through a very tough time, so the war chest is dry. When you talk about R and D investment and people being able to invest in R and D, they are just happy right now to have pulled through a difficult time. The Canadian dollar is doing extremely well, and that makes it a little more difficult for our competitiveness. When you start looking for R and D dollars, you have presidents of small to medium-sized enterprises in Quebec thinking about the bottom line. You might want to take that into consideration.

Employment is flat. There's a certain context in Quebec that we've been discussing at the board level with the AQA, and that is that the skilled labour is not necessarily going into the aerospace industry anymore. They don't see it as a sexy place to be. They don't see it as a place they want to be. And we have to do something about educating the public about that being an interesting place to come back to. So that's a consideration.

On the subject of procurement, I took it from the perspective of major procurements in Canada being linked directly to any kind of R and D. Well, for me again that goes back to my opening remarks and has something to do with all these things. As far as the Quebec Aerospace Association is concerned, the development of our SMEs up the food chain is the answer in all these areas. If you're actually providing incentives for the Quebec SMEs to either coalesce, work together, or find an infrastructure so they can provide more added value, it puts R and D back into those organizations, and it gets people to come to Canada rather than go elsewhere.

[Peter Boag]

I would agree on that issue of skills. One of the biggest attractants for skills and for growing those highly qualified people is R and D--research and development opportunities.

[The Chair, Conservative, James Rajotte]

Thank you.

We have two more members on the list. I have Mr. Carrie and Monsieur Vincent.

[Colin Carrie, Conservative, Oshawa, ON]

Mr. Fontana touched on the questions I wanted to ask, but I want to come at it from another angle. You did mention that research and development was about 10% of sales earlier and now it's down to 5%. I don't necessarily see that as a government problem. It appears to me that the government has been supporting your industry quite substantially. I almost see it as if your companies are just not putting that extra money into it.

As you say, there's a global competitiveness issue. If the government gets up to the plate for their portion while it seems you guys are putting a little less into that, how would you respond to that argument?

[Peter Boag]

The argument is the lever that the government investment is and how then that levers significant private sector investment. I'll put it in very simple terms.

We'll have a company that's looking to continue to develop an existing world product mandate it has here in Canada. Let's use the example of an American-owned subsidiary that's been established here in Canada to develop a certain product or system and has the world product mandate for that, so it's not serving the Canadian market, but the global market. They're now looking to continue to further expand and develop that product mandate, or potentially there's an opportunity to bring another product mandate here to Canada from the company. That's going to require a significant degree of investment in research and development to develop those new technologies.

They'll look at the business case to see how they can do that in Canada. They'll look at the tax system and the potential for some funding under a mechanism like TPC. Then there are all of the other issues that impact doing business from Canada, and some of those now are further constrained by technology constraints in the U.S.

On the other hand, they can look at their own environment in the U.S. They'll see they can get virtually 100% of that R and D funded by the U.S. Department of Defense on a cost-plus basis, and it's going to be totally non-repayable, so that's a pretty sweet business case. They can look abroad to countries like Korea, China, and India, which are looking to grow their aerospace industries and ultimately poach Canadian jobs.

So when that business, which is ultimately in business and accountable to shareholders, looks at where the best business case is to make that investment, that's the environment we compete with. Companies are looking at what is the business case, what is the leverage they get from government investment. As a result, as our investment case and business case weakens, although their business is still here in Canada, ultimately they're going to grow that business somewhere else. The sustainability of that business in Canada ultimately becomes questionable. Those investments are being made, and companies are choosing not to make them in Canada because it's no longer, in their view, competitive to grow their investment in Canada.

[Colin Carrie, Conservative, Oshawa, ON]

What would you say is the solution? Does it make sense that the government is still putting forth partnering for this research and development when the companies are just going to decide to do it overseas anyway?

[Peter Boag]

Well, they're not going to decide to do it overseas anyway if there's a solid business case and a strong partnership. They don't expect to get free money; they're looking at, ultimately, the instrument of TPC, a risk-sharing investment model. They're looking for someone to share the risk so they can help to build the business case; there are other positive elements of serving global markets from Canada, but that's one element they clearly do look at as important.

These companies would like to grow their businesses in Canada, but they're also up against the business imperatives and, ultimately, their accountability to shareholders on the best place to do that.

[Colin Carrie, Conservative, Oshawa, ON]

Do you have a solution for us, though, as a government? What else could we do that we're not?

[Peter Boag]

It goes back to how we strengthen or reinvent programs like TPC. How do we look at improving the investment climate through tax structures and making our SR and ED program more effective? Are there issues around regulatory barriers? The investment climate is ultimately made up of many different factors.

From the very direct factor of technology investment, programs share the risk and ultimately share the rewards for governments. Industry's not interested in direct handouts and subsidies, because you also need to understand how mechanisms like TPC work.

This is not the government cutting a cheque to a firm to go do some things and not be accountable. The TPC contributions are based on a very clear and agreed-upon statement of work. A company agrees to make this kind of investment; there are these kinds of milestones. Payments under the TPC program are not made until after the company has expended the money and made a claim, those claims are then verified, and they get progress payments, maybe over a period of several years. Then there's a repayment period that ultimately recognizes that if the government has shared the risk, they're going to share in the rewards.

Certainly one of the major rewards is the economic activity that happens in Canada and the indirect benefit the government gets, which is ultimately what the purpose of those programs should be. It's a policy tool. It's not investing to get your money back; it's a way to stimulate economic growth in Canada.

We need to look at the continuation of programs and at ways to make them more effective, and ultimately more effective from the government's view.

[The Chair, Conservative, James Rajotte]

We'll go, finally, to Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chairman.

I understood your remark that the government should invest more money in research and development or that there should be a partner. And yet, according to the aerospace figures, your revenue in 2000 was $20.3 billion. You invested $2.4 billion in research and development, and, at that time, there were 91,000 jobs in the industry. In 2004, your revenue was $21 billion, whereas you invested only $1.3 billion in research and development and there were only 73,000 jobs. That means nearly 20,000 fewer jobs.

You said earlier that, in order to be competitive, we have to engage in research and development. Did you and your partners want to invest more money in research and development, or were you waiting for the government to do it? You said that, if we didn't give you any money, or if there were no R&D partnerships, those corporations would move to other countries because that would be better for them. However, they invest $1 billion less. Do you think companies should invest a little less in R&D? That's my first question.

My second question is as follows. You said earlier that Mr. Bain didn't have access to U.S. technology. How can Canadian businesses take part in the manufacture of C-17 aircraft? Then how can they gain access to that new technology, when we know that there are five places in the world where Boeing can maintain those aircraft, three in the United States, one in England and one in Australia. Since those aircraft will remain on U.S. soil, how will we have access to that technology if we don't even have access to the aircraft?

[Peter Boag]

On the issue of investment, I think those higher investment levels we saw through the late 1990s was not just R and D investment; it was also capital investment. For a period of several years, a number of our companies were rapidly expanding their facilities, so there was a significant degree of capital investment in buildings and equipment, not just R and D. Their actual R and D expenditure has remained relatively constant over the last 10 years at $1.2 billion a year.

The employee numbers reflect some productivity increases. This is an industry in terms of competitiveness, and we also need to be very productive. As time goes by, we have increased our productivity, so while sales have come back to pre-2001 levels, we have not seen a similar increase in employment, and much of that has been driven by productivity increases.

The other element of it, though, is what I referred to a few minutes ago. We're seeing more outsourcing from companies to foreign countries because of competitiveness issues, some of it around the issue of market access, because as we have industrial regional benefit programs in Canada, other countries employ their offset programs. As we supply into defence markets in other countries, although not in a large way, we're also bound by their regional benefits or offset programs to place work in those countries.

So there are a number of factors: productivity and more outsourcing, in part driven by competitiveness issues that have impacted that growth in sales, but not seen a similar growth in employment. The R and D issue is around some capital investment. It fundamentally comes down to the fact that we need to partner. There's a high degree of risk in aerospace investment, and around the world there are countries willing to step up to either maintain and grow their own aerospace industries or create new aerospace industries, so we're competing for that investment.

On the C-17, how we lever that is still very much a strong point for Canada. The advantage if Canada were to buy C-17s is not participating in the building of potentially four airplanes. That's short-term work that's not going to last for long. How do we lever a relationship with Boeing to get preferred access to and into the supply chains and technology sharing in their space business and their defence business and their commercial aircraft business that will last 20 years for Canadian firms, not over the short duration of a purchase of a potential C-17 airplane?

[The Chair, Conservative, James Rajotte]

Merci, monsieur Vincent.

[Stewart Bain]

Regarding your questions with respect to R and D, again, the Quebec Aerospace Association looks at it from the perspective of SME development.

The Montreal area or Quebec aerospace industry represents, if not the third, one of the three largest aerospace centres in terms of cities in the world. The largest proportion of how those numbers are calculated is based on sales. It's not based on how much we manufacture in Canada.

So when you see R and D going down, it's got to be largely driven by the OEMs, who are no longer investing in their own infrastructure in Canada. They're looking for cheaper solutions outside. They're going to China, they're going to Mexico, they're going to other places to find alternative supply.

What we would encourage in terms of R and D investment--and I tried to make the point in my opening remarks--is that we actually invest in developing the SMEs, because that's the infrastructure that will bring people to Canada. It will not just attract the OEMs who live in Canada and the major suppliers of business in Canada, but it will also bring the others to Canada, as a competitive place.

For example, competitiveness is not always defined just in terms of cost. You can go to China and get cheap parts, but you can spend a lot of money setting up a facility and you can have a much higher rejection rate on components when it's coming from an organization that doesn't have the same level of skills, quality, procedures, and so on that we're used to in Canada.

So if we can get the level of performance of our SMEs up to the point where they're actually adding value, it starts to look a lot more attractive for outside companies and Canadian companies to look to Canada, and then SMEs will actually be in a position where they're not just relying on the OEMs in Canada, but they're getting business from outside Canada. They will have their own war chest to invest in research and development, to develop their own business.

That's a major component that I think we're missing. It's largely overshadowed by what the OEMs are facing, and the SMEs are just living in the background of all of this.

So I'd encourage us to look at it from a perspective of how we get the SMEs to a point where they're also masters of their own destiny.

With respect to accessing C-17 technology, I would imagine that on a program like that, if Canada was going to pursue the procurement of that kind of equipment--just as we're participating in the joint strike fighter program--there would be agreements and technical assistance agreements, TAAs, in place to allow Canada to participate. Through the folks I've met here in Canada and the folks who are here...certainly Boeing is very aware of our industry and our capabilities and would be very interested in working proactively with us to try to find a solution to that.

So I would not see that as a walk-away or a total roadblock. It's just a question of going through the proper channels and proper registrations and proper documentation to be able to access the technology. It wouldn't be a roadblock for us.

[The Chair, Conservative, James Rajotte]

Thank you very much.

I want to thank members for staying.

I want to thank you for extending your time here. I genuinely appreciate that. I want to thank you for your presentations and your answers here today. Furthermore, if you have any more suggestions or recommendations that you would like the committee to consider, please forward them to me and I will ensure that all members receive them.

Thank you very much for being here today. It was a real pleasure to listen. Take care.

[Peter Boag]

Thank you very much, Mr. Chairman.

[The Chair, Conservative, James Rajotte]

The meeting is adjourned.