Industry Committee on Nov. 9th, 2006

[The Chair, Conservative, James Rajotte]

I would ask members to find their seats please. We have two sessions today, one from 3:30 to 4:15, and the second one from 4:15 to 5:30.

This is the 28th meeting of this session of the Standing Committee on Industry, Natural Resources, Science and Technology. We are continuing our study of the challenges facing the Canadian manufacturing sector and some of the solutions presented to those challenges.

We have witnesses: from Electro-Federation Canada, the president and CEO, Milos Jancik; the vice-president of the Electrical Equipment Manufacturers Association of Canada, Wayne Edwards; the president of W.C. Wood Company, Dave Wood; and Ernie Reynolds, vice-president and general manager of DSG-Canusa. Welcome.

I understand you'll be sharing the time allotted for the opening presentation of ten minutes. I believe, Mr. Jancik, you will be starting. Please start any time.

Thank you.

[Milos Jancik, President and Chief Executive Officer, Electro-Federation Canada]

Thank you, Mr. Chairman.

Thank you for giving us this opportunity to address the committee on this important topic.

I'd like to begin by briefly describing what the Electro-Federation is. It's an association of electrical and electronic manufacturers and electrical wholesalers. Within our group, we have seven councils, including the Canadian Appliance Manufacturers Association, the Electrical Equipment Manufacturers' Association of Canada, and consumer electronic manufacturers, which include some making telecommunications equipment. Those are some of the companies.

The products our members make can be anything from freezers and refrigerators to lamps, wall receptacles, electric motors, automation equipment, home entertainment systems, BlackBerrys, cellular phones, and so on. This gives you an idea of the breadth in the different types of products that our members make.

Our association comprises some 300 member companies, with an annual turnover in the neighbourhood of $50 billion, employing some 130,000 Canadians all across the country.

Once a year, our members come to Ottawa to meet with members of Parliament and have sessions on various issues. This year, in the middle of October, our session was dedicated to the concerns about manufacturing competitiveness in Canada. We had a number of presenters, and their presentations are included with the handouts, together with the covering note.

First, I would like to go over a few of the key points that were made in those presentations, and then make a few policy recommendations—many of which you have heard in the past—where we support a broader coalition of industries, with a specific focus on our industry and the needs of our members.

First, when you look at our membership, these are dynamic companies committing resources to innovation and productivity increases, and they have done a lot of work in the area of cost containment in a highly competitive environment. The presentation that nicely describes the whole process was prepared by Pierre-Paul Riopel, who is the vice-president of manufacturing at Thomas & Betts Canada.

Thomas & Betts employs some 1,300 people in manufacturing, mostly in Quebec and the Eastern Townships. It's a subsidiary of a U.S.-based company that develops products in Canada for domestic and export markets. It has a full engineering and manufacturing capability, and it's a very prominent member of our association.

Some of the key points they make in their presentation have to do with what it takes to implement lean manufacturing. It requires a lot of training, commitment, resources for training—that is why, as you will see later, we're making some of the policy recommendations—and investment in new technology, IT, to ensure that they have the most modern and cost-competitive processes.

When you look at the scope of the products our members manufacture, they include industrial automation products and energy-efficient—EnergyStar-rated—appliances, such as lamps, premium energy-efficient motors, and many similar products that contribute to increased productivity and to reduced energy consumption and energy costs. In other words, the activities of our members not only require support for them to be competitive, but they contribute to the competiveness of the larger manufacturing community in Canada.

When you look at what our manufacturers have been facing—and much of it has already been captured in your preliminary report, which we echo—they have been hit simultaneously with higher energy costs, volatile and rising commodity prices, and a rapid appreciation of Canadian currency, in addition to all of the usual effects of globalization: the Wal-Mart effect, increased competition, reduced prices, and the effect of products coming in from Asia.

The next two points we made in our presentations were contained in Mr. Wood's presentation, and he can speak to the details.

Canadian manufacturers are absorbing higher taxes than importers, and this represents a significant differential to product costs. Our members believe this is an unsustainable competitive disadvantage that is further exacerbated by the high value of our currency. Together with that, there is the issue of the method of tax collection. In our view, it is as important as the amount of taxes collected. This is of particular importance when relating the impact of taxes on domestic products to the impact on foreign competitors.

Mr. Barrett, who is the CEO of Emerson Canada—this is a company with some 3,000 employees in 12 plants—described in his presentation.... We did this in collaboration with the Canadian Manufacturers & Exporters. He is our member, but he is also chair of CME.

He talks about the process by which capital projects are approved. What he is talking about is the need to attain a return on capital that exceeds the risk-adjusted cost of capital and the method by which it's evaluated in terms of the risk associated with a longer-term payback period. In other words, projects that have a shorter payback period are obviously deemed to be more desirable and less risky.

He goes through—and you have the handout of the presentation—the steps and the investments when the manufacturer makes the investments, but also where the public sector can make investments: in infrastructure; in throughput, for example, through the ports; in support of training and skills development. In his absence, I would be pleased to answer some questions that may arise from his presentation.

That being said, in collaboration with other industry associations, there are several measures we would support.

The first one is the two-year write-off for investments—capital cost allowance—in manufacturing, processing, and associated information and communication, energy, and environmental technologies; in other words, not just for machinery, but for the whole gamut of investments that need to be made to ensure a competitive manufacturing establishment.

We certainly support the government's initiative and support its maintaining its commitment to lower the federal corporate tax from the current 21% to 19%, and eventually to 17%.

We believe there is room for improvement to the science research and experimental development tax credit. The issue there is accessibility; it's certainty of being able to include the refund, rather than a credit, in the project evaluation right from the beginning. It should be more broadly based and include international collaborative research and development, costs of patenting, prototyping, product testing and other pre-commercialization activities, and not be restricted. It's a very good program, but it's somewhat restrictive, and we believe that if it were expanded it would yield benefits.

We've talked about training. Training is essential and requires a tremendous amount of commitment by manufacturers: implementing new IT technologies, which are vital to communications in dealing with issues, such as cross-border trade—when you have to deal with the broker, submit the documentation on time, make sure the products get across quickly—skills development dealing with new technologies in automation, and so on. Companies that make that commitment should be able to receive some tax credit against their EI premiums, recognizing that a better-trained workforce is less likely to burden the employment insurance with claims.

Finally, the last policy recommendation we would make has to do with user fees and the whole regulatory regime. We believe user fees should be applied to the purpose for which they were collected and there should be some audit trail and accountability, and also that the whole regulatory process should be competitive in terms of costs and in terms of timeliness. We believe there is room for the introduction of smart regulation and mutual agreements with other jurisdictions where similar or identical testing--for example, qualification of products--is being done. So the whole regulatory environment becomes part of the competitive environment for manufacturers.

In conclusion, we believe in the positive future of manufacturing in the electrical and electronic sectors in Canada. We look forward to working with you in advancing competitiveness of manufacturing, and we believe the time to act is now.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Jancik.

We'll go immediately to questions. Mr. Boshcoff is first. You have six minutes, Mr. Boshcoff.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Thank you very much.

I'd like to focus on your emphasis on energy costs in Ontario--in particular, northern Ontario and northwestern Ontario--and the forestry and mining sectors and how we are ever going to get into the global game in those two sectors in particular. Our cost per tonne for pulp, for example, is $56, and in the rest of the world it's $36. That's a huge gap to get there.

Is there a solution that is obvious to someone in the manufacturing industry, and is there a federal role that you see us being able to play in a provincial domain?

[Milos Jancik]

I'm not sure I'm qualified to answer that question, but certainly energy costs are a key element in manufacturing processes and the amount of energy consumed goes with it. The Government of Ontario in particular--this is not necessarily part of the scope of our presentation--is going through some soul searching in how to meet its future energy needs in terms of what kind of power should be generated, where it should be generated, how to fund it, and should the market be deregulated, as the previous provincial government had suggested, or should it be controlled.

There are a lot of issues there, but basically, from our perspective, we believe energy costs must be competitive to manufacturing. In the same way, if it leads to a higher per tonne cost, for example, in paper manufacturing, obviously that renders manufacturing non-competitive. So to that extent, the energy costs are crucial.

I'm not sure that answers your question.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

It's only that the Canadian manufacturers identify three major issues, one of them being energy costs. Rather than go into currency or something else that I don't know so much about, we in Ontario are really frantic for some kind of solution. So we're looking to groups such as yours to offer their perspective as to what could be done.

There have been suggestions of things called regional energy or district energy or some kind of fair-pricing formula whereby if you produce it in an area at a low price, they should be able to do it. In the province of Ontario, of course, everything is averaged, so that for high-priced nuclear, consumers get the same price as for low-cost hydro, and those types of things.

Can you offer anything, now that I've given you that much more information?

[Dave Wood, President, W.C. Wood Company, Electro-Federation Canada]

Yes. I would like to thank you. Obviously we don't represent the pulp and paper industry. We represent the Electro-Federation.

We've come up with a policy or at least what we believe to be changes to policy that impact all costs, and I think you're quite appropriately phrasing this as how do we control all costs. When we look at pulp and paper or any manufacturing, we need to understand all the costs involved. Energy is obviously one of those, but what we focused in on is how government can partner with industry, with manufacturing, whether it be small industry, large industry, or medium-sized industry, which is what I represent. And in our presentation, one of the things you'll note is that the largest cost to the major appliance industry, aside from materials, is actually taxes. We can talk about energy, but within our mandate, what we have come up with from our group and association is how we can control the tax cost and the differential in taxes that Canadian manufacturers are paying as opposed to what importers are paying, primarily those in Asia as well as in Latin America. But it is a way we can control costs and it is a way we can make the industry competitive and try to improve the competitive nature of both Ontario and Canada as a whole, and that's a lead role that the federal government can play.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

When the manufacturing sector looks at its own research and development, how important is location in terms of sectoral support? The size of the university is what we're looking for as well, I guess. For those of us in regions that are larger regions but perhaps not so close, manufacturing is just as important as it is to those elsewhere.

Have you as an association thought about the dispersal of intelligence across the country, providing for centres of excellence in the Maritimes, Quebec, central Canada, or in the west, that type of thing?

[Milos Jancik]

Typically we would be speaking to the research and development done by manufacturers in their facilities, generally, and certainly with the support of the academic community. From our relationship with the academic community, we know that the room for centres of excellence is certainly there. As you know, Ontario has some, and other jurisdictions have been looking at it.

The real issue for us is around the risks associated with the development of new technologies, the development of new products, at the manufacturer level, and the fact that often it's done through a collaborative effort, be it with a parent company or other companies. We'd like to see this recognized in programs geared to assist the research and development.

Certainly we would like to see, aside from our recommendations, the development of intellectual capital. Centres where expertise could be concentrated can only be helpful.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Boshcoff.

We'll go to Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chairman.

My question is for you, Mr. Wood, because you spoke about taxation rates earlier.

One of your document explains that export duties paid by Canadian manufacturers are not the same as those paid by other manufacturers, especially in the case of China. Further on in the same document, you state that where a given appliance is made in Canada it would be subject to $52.28 in taxes of all kinds, while if the same appliance were made in China it would be subject to only $18. What I find the most troubling in this situation is that manufacturers would have to set up shop in China to have access to the same advantages.

What can we do to help you keep our manufacturers here in Canada while also insuring that they can compete with China?

[Dave Wood]

Thank you, that's an excellent question.

You're asking how we wrestle with the challenge of taxes that are paid on an imported good, of $18, versus taxes on a manufactured good, of $52.28. I think the biggest thing the committee has recognized is that manufacturing in this country is becoming very challenging, whether it be the increase in the Canadian dollar, whether it be the increase in commodity prices, or whether it be global competition.

Speaking specifically to global competition, China has a significant advantage in labour. We all understand that. But they have a significant disadvantage in skilled labour infrastructure as well as freight. The biggest advantage for the appliance industry is actually taxes, as you pointed out. There is an 11% total differential in costs, based on the tax burden.

The proposal we sent actually lists, on the second-last page of the presentation, an alternate tax method. It identifies a proposal that would reduce personal income taxes by 53%, corporate income taxes by 20%, and property taxes by 50%, eliminating entirely capital taxes as well as reducing payroll taxes by 8%. Those taxes can then be offset by increases in the provincial GST, the federal GST, and consumption taxes, which place more of a burden on the imported product. Currently the imported product contributes only 22% to the tax revenue of Canada, whereas manufacturing is contributing well over 80% of that tax burden.

This proposal would double the tax burden on the imported product to 43% of the tax revenue generated at all levels of government, and would decrease that gap, as you noted, between the $52 in taxes paid by a manufacturer and the $18 paid by an importer, by about 40%. That would bring us much closer to being able to compete. In fact it would allow us to export more tax-efficiently, and compete not just within Canada but globally.

[Robert Vincent, Bloc, Shefford, QC]

If I understand you correctly, the solution would be to introduce a border tax on Chinese products in order that yours remain competitive. Currently, the greatest problem manufacturers face is that, in order to compete in the same market, they have to be based in China.

Do you think that this is a good solution, I understand your argument that we should introduce higher border taxes on Chinese products so that Canadian industry can remain competitive. I think that you have hit the nail on the head. I would like you to explain this solution further so that everybody understands it and we can move towards implementing it.

[Dave Wood]

The challenge is it requires a lot of political will. Changing our tax base is extremely challenging. What we have to recognize is that China's tax model, as well as many countries' tax model--including not too far south, where we have another facility in the state of Ohio--is moving away from a tax that bases their tax revenue on value added, on income, on payroll, and moves more towards a tax based on consumption. That consumption tax isn't designed to penalize importers. It's designed to level the playing field. The goal is not to penalize manufacturers domestically, which is currently the challenge.

China gives you a full tax credit on finished goods of between 13% and 17%, essentially eliminating all taxes paid on an exported product. To your point, we can't access their cost structure on materials because there is actually an export duty on things like aluminum, copper, steel, and other base commodities. The only solution, currently, is to relocate to China. We have to recognize that if we want to stop that, we have to stop penalizing domestic manufacturing. We have to stop allowing China to have free access to our market and allowing them to continue to provide export subsidies.

The goal, as I mentioned, is to look at the implications of not just what taxes we collect, but how we collect those taxes. I think there's a strong movement always to lower taxes in general, but I'd ask the committee and the government to take a look at how they collect that tax. Try to collect that tax revenue based on an economic model that recognizes that industry and the economy are global; don't collect tax based on the value added domestically, but based on the goods traded throughout the entire economy. And that moves away from the income tax model and towards a consumption tax model.

Does that answer your question?

[The Chair, Conservative, James Rajotte]

You have 30 seconds, Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

You spoke about reducing the tax burden. I would like you to give us a clearer explanation of how this could be achieved.

What sort of tax cuts will help Canada compete with China?

[Dave Wood]

As I mentioned on the second-last slide of our presentation, to reduce our income taxes we would have to raise our consumption taxes. The GST and the PST would have to increase between 25% and 200% to try to compensate for that decline in tax revenues from the income tax. It has to be a balance. And that tax burden would be shared by all levels of the economy, including importers.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Carrie now, for six minutes.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much, Mr. Chair.

I'd like to thank you all for coming here and being part of this very important study we're doing on manufacturing across Canada. I think you've noticed the Minister of Finance has really been committed to starting to lower the corporate tax structure and taxes in general. I think we're on the right track. But I come from Oshawa and I think the majority of the committee comes from Ontario and Quebec, really the manufacturing heartland of Canada. For me, a lot of it is about jobs and how we can maintain the jobs here in this country. So I was wondering if you could be specific to your sector.

What do the corporate and business tax cuts do to increase Canada's ability to attract foreign investment to Canada? What does foreign investment do for Canada? And what does that do for jobs in our nation?

[Milos Jancik]

Clearly, and it's part of our recommendation, reduction in corporate taxes improves the competitiveness. Canadian competitiveness makes for a better investment climate, be it for domestic investors or foreign direct investment. We've seen positive effects when many companies have located facilities in Ontario, in various sectors, in the automotive sector, for instance. Also, in our sector, some of the companies in our group are companies like General Electric, Siemens, Philips. These are global companies that make investments globally and look at the best conditions in terms of proximity to market, in terms of investment climate, in terms of tax regime, in terms of available skill sets of labour, and ultimately calculate their return on capital. So the better the business environment, very much supported by a more competitive tax structure, the better the attractiveness for foreign investment. That directly creates jobs. Certainly we would support that.

[Colin Carrie, Conservative, Oshawa, ON]

Then more people pay taxes.

When you talked a bit about the international tax gap, and what we've done this year and what we've committed to, how much further do you feel we have to go?

[Dave Wood]

The current tax gap in the appliance industry is about 11% of total product costs. As I said, that's more than labour. It's more than the advantage of labour that many people refer to. And this committee I think appropriately characterized that in their interim report in June. We have a lot further to go. The move we've made has changed that from about 11.4% to about 11.2%. That's all. We have a long way to go to try to correct that.

This association, Electro-Federation Canada, represents about 130,000 employees throughout Canada, most of whom work for foreign national companies. There are a lot of opportunities to attract business to our country if we can provide them tax incentives to export. Our economy is not large enough necessarily to draw in the size of industry we need to sustain our economy by the domestic market. We have to represent ourselves as a good base to export. The best way to do that is to provide tax credits based on the consumption tax model that allows you to export product, and by lowering the taxes that Canadians have to pay, both at the business level and others.

[Colin Carrie, Conservative, Oshawa, ON]

Okay.

Looking at your recommendations, you talk about the CCA rate. We had officials from Revenue Canada come in, but they didn't explain it really well to us. If Canada were to accelerate the CCA rate, can you explain in detail how this would improve your industry's ability for procurement and what impact it would have on efficiency, competitiveness, productivity, and the environment?

[Milos Jancik]

What it does is reduce the risk with new investment. Normally, you would amortize equipment over its lifespan, so if a machine is supposed to last five or six years, that's how you would depreciate it.

Investment in new technologies and investment in new processes, new IT--there's always a risk in investment. And in any organization, particularly in broader multinational organizations, you will be competing for the investment dollars with other units within the company. What the accelerated capital cost allowance does is improve or reduce the payback period, essentially, because you get the full benefit of the write-off over a shorter period of time. It does not reduce the total tax take for the government, but it does change the timing of it.

[Colin Carrie, Conservative, Oshawa, ON]

Are you finding that the equipment becomes outdated that fast?