Industry Committee on Nov. 22nd, 2006

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I have less than a minute.

Just quickly, we have a real problem today, for instance, with literacy. We're spending millions of dollars because kids are coming out of school who can't read and write. Now, are you still focusing on those kinds of issues, so we're not losing those students? Just tell me that we're not.

[Jan Courtin]

When I got to Port Credit in January 2003, 68% of our grade 10 students passed the literacy test. This past year, 86% passed.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Fantastic. I applaud you.

[Jean-François Michaud]

There's another language we need to teach, and it's called technical literacy. She talked about Shakespeare; we have to talk about report writing and other things.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

We don't want to have to spend millions and millions of dollars on a job that should have been happening in school.

[Jan Courtin]

We're very focused on literacy, but that wasn't on my agenda tonight.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go finally to Mr. Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you.

Thank you for joining us today and for making such interesting presentations.

My question is directed to Mr. Church. You concluded your preamble by saying that if Canada wanted a manufacturing sector, then you had some advice to give. We'd like to hear that advice.

[Art Church]

My recommendation is very similar to the way you run a business. If you decide you want a strong business, you work backwards from there. If this country wants to have manufacturing as what we call our strategic advantage—if it does, versus resources or whatever—then what we have to do strategically, I think, is support it.

In the company, what we do is train our people in lean technology and that sort of thing, because we know that's going to make us competitive. If this country wants to have competitive manufacturing, that's where the focus needs to be: to encourage it. I think that's really important.

Number two is that somehow—and I realize the federal government doesn't have a lot of play in some of these areas, because it's provincial or local or whatever—as a country we have to welcome manufacturing companies. I would like to be welcomed to be in Canada, to stay in Canada, to grow in Canada. Just because I'm human, I sort of like that, and it's nice to be courted by those other guys.

But I think if we want to be successful here—and I'm a Canadian and I want us to be successful—we have to get off our duffs and start to go after this and really encourage it. Maybe it's money, maybe it's just attitude—and then, it's training and having the skilled people.

I realize there's no simple answer, but I do believe Canada has to decide: do we or don't we want to be in the manufacturing game? Then we work backwards from there.

[The Chair, Conservative, James Rajotte]

Mr. Hattin.

[Robert Hattin]

Manufacturing in Canada makes a lot of sense, for one thing because we have such a bounty of natural resources. We have wood, iron ore—all the things that make it right. For us not to be in those transformational businesses, where we take a lump of coal and turn it into coke, turn it into steel, turn it into a car, turn it into an engine.... It makes sense; it's here. For us to dig it up and ship it somewhere else is the wrong way to go. Manufacturing does makes sense, because of the valued-added and the spin-offs it brings.

[The Chair, Conservative, James Rajotte]

Thank you very much, members, for keeping your questions so brief.

Thank you very much to the witnesses for coming in, especially at this time. As Mr. Hattin said, I'm sure many of you had to drive a long way to get here. We experienced Highways 401 and 427 coming in as well, which was quite an experience, especially for those of us from western Canada.

Thank you very much for your presentations. If there's anything further you'd like the committee to think about prior to our report, likely being issued in mid-December, please pass it on to the clerk.

Thank you all for your time and your presentations here tonight. We appreciate them.

We're going to have a brief suspension of the sitting and we will ask the other witnesses who are in the room to come forward to the table.

Thank you.

[Jan Courtin]

Thank you for the opportunity.

[The Chair, Conservative, James Rajotte]

We are resuming our two-hour session here tonight. This is a continuation on the manufacturing sector.

We have five witnesses with us for our second hour of discussion. We'll try to keep our presentations, questions, and comments as brief as possible, in order to allow as many members as possible to speak.

We have Paul Hyatt with us, president of Superior Tire and Auto. Welcome, Mr. Hyatt.

We have from Tempress Ltd., Mr. Bill McLean, president. Welcome.

We have two guests from the Toronto Board of Trade: Mr. Jonathan Barry, senior member, economic development committee; and David Black, policy adviser. Welcome, Mr. Barry and Mr. Black.

Finally, from Celestica, we have Mr. John Sloan, vice-president of operations planning. Welcome.

Welcome to all of you.

I understand there will be four presentations. I know five minutes is a very short time, but if we could ask you to keep it within that, then we could have 20 minutes for opening statements and 40 minutes for questions and comments from the members.

We'll start with you, Mr. Hyatt, for a five-minute opening statement.

[Paul Hyatt, President, Superior Tire and Auto]

Fine. Thank you.

Good evening, ladies and gentlemen.

Good evening, ladies and gentlemen.

My name is Paul Hyatt. I'm president of Superior Tire and Auto in Toronto, and I'm also president of the international Tire Industry Association. I'm here tonight on behalf of the consumers of Canada.

Some vehicle manufacturers are restricting access to tools, training, and software to the automotive aftermarket industry. The increased sophistication of today's vehicles makes access to this information extremely imperative. The decision to restrict this information to independent repair facilities prevents them from repairing late-model cars effectively, eliminating consumers' choice.

The vehicle manufacturers' unwillingness to provide all necessary information to the aftermarket industry will lead to a dealership monopoly on the vehicle service and repair industry, a reduction or elimination of independent repair businesses, and ultimately a taking away of consumers' right of choice. The inability of the aftermarket to maintain and repair vehicles will eventually result in a significant dealership monopoly, with eventual evaporation of consumer choice.

I'll give you some facts to consider. The existing dealer network does not have the bay capacity to service the cars on today's roads. Controlled auto repair by a monopoly will impact over 225,000 people employed in the aftermarket industry. Consumers will be at risk of paying higher prices in a non-competitive market, with many repairs delayed or ignored altogether, putting highway safety at risk. Consumers will be inconvenienced by increased travel time, higher waiting times, towing fees, and possible stranded vehicles. Consumers will suffer from repair delays with insufficient bay space within the dealer network.

The right to repair has little to do with parts assembly and loss of jobs in the OEM industry. Fewer choices and higher costs will increase and lead to higher vehicle emissions, being controlled now by over 30 different codes within the car, into the atmosphere, where gains have already been accomplished with regular maintenance and service. The aftermarket is primarily composed of small- and medium-sized businesses, making up over 30,000 independent repair facilities in Canada. Unemployment will cause a huge ripple, obviously across the country.

Some OEM information is obtainable through different venues--the Internet, which is limited, slow, and consumer costly; OEM sites, which are very costly, and Canadian access is denied by some OEMs; OEM-specific diagnostic tools, which are prohibitively expensive, if available; and the on-board diagnostics computer, or the OBD II, controlling hundreds of codes and diagnostics software, which may not be available to highly skilled independent technicians.

Repair shops are not asking for proprietary information, just the ability to service the consumers' cars. Repair shops are not asking for a free ride. They're willing to pay a reasonable amount for access to these codes. Oddly enough, all the OEM dealerships will require access to repair information themselves to repair other makes of vehicles when they're brought to their dealerships.

In 2008 all cars will be fitted with a tire pressure monitoring device--one of which I have in my hand--that uses tiny transmitters to inform the dashboard of tire pressures. This little device is just the tip of the iceberg when we discuss the subject of the right to repair. A flat tire, rotation, new wheels, winter tire installations: those are just a few of the problems that will cause the vehicle's dash warning light to flash permanently unless your technician can reset the system with proper codes, training, and tools.

I will also add that, from my experience, many car dealerships have little training themselves with these TPM systems. Consumers are now paying anywhere from $60 to $300 for each new valve sensor.

Unfortunately, the majority of the vehicle manufacturers in Canada are unwilling to negotiate an industry-led solution and have little impetus to do so. They continually design vehicles that only they can service, leaving the consumer with no choice of facility.

This is an issue that is clearly national in scope, as it has implications for every constituency in Canada. I strongly believe the Government of Canada should investigate a legislative or regulatory solution that would allow the independent automotive aftermarket to better service the consumer with access to all diagnostic and service data that's required, with tools and training for the repair and service of late-model vehicles, to restore the balance at Canadian repair facilities and protect consumers' choice.

There's nothing wrong with taking your car to a dealership. They provide good service and they have trained technicians. But if you go to a dealership for repairs, it should be because you want to, not because you have to.

Lastly, Canada was built on choice; it was founded on choice. We mustn't allow that to be taken away under the guise of protectionism and a controlled auto repair monopoly.

Thank you. I have notes for everyone. As soon as they're translated, you'll all get them. I didn't really have time to get it done, and I apologize.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Hyatt.

We'll now go to Mr. McLean.

[Bill McLean, President, Tempress Ltd.]

Good evening, ladies and gentlemen. Thank you for the opportunity to speak to the committee.

I'm Bill McLean, and I represent Tempress Ltd. Tempress Ltd. is actually a wholly owned assembly facility of a company called Grohe.

Grohe is a leading brand in the sanitary industry. As you may be able tell by the name, it's a European-based company out of Germany. It's one of the most globalized brands in the sanitary business.

We have representation in 130 countries around the world, and we are currently owned by a private equity group. We have an interesting cross-section and an international brand that is owned by a private equity, with a small assembly facility in Canada.

What are we actually doing here? It's really an interesting development of history. Tempress Ltd. was part of a company called Danfoss, which developed a pressure balancing valve. It's the valve in your shower that keeps you from being scalded when somebody flushes the toilet or turns on the dishwasher. In the mid-1990s, it actually became legislated for installation in new homes that were being built.

At that time, Grohe was developing in North America and had decided to buy a little entity called Tempress Ltd., which had a pressure balancing valve, and it was a good match. Grohe bought the small facility in Mississauga and had a good position from which to continue to grow their brand in North America.

As time evolved and the ownership structure changed, there was an opportunity to further develop the industry in North America. Being a European-based company, there was a reason to develop operations elsewhere. They looked at Tempress as a platform for growth.

Why would Tempress in Canada be a platform for growth? Our cost structure, mainly for labour, against the European cost structure is very low. If you look at CME data or a lot of the data that's out there, on an average basis, you can see we have likely one-third of the costs compared to somewhere like Germany, maybe slightly below the U.S. but significantly above low-cost countries.

We had other advantages, such as proximity to markets. We had a late differentiation of product that we could offer, and we had a currency advantage at the time.

We took an interest in development. In 2000 we started expanding the product line offering for North America. We took on new product lines in 2001, 2003, 2004, and 2005. Our business grew from basically 50 people to about 150 people currently. Obviously, everything that went with that grew: our revenues grew and our capital expenditures grew. We had a nice little development.

In the current situation, how do we sustain that growth? How do we continue to be competitive? How will we offer our company and our customers an advantage to stay here? Basically, how do we face the challenges going forward? We view our business as a way to develop solutions for our internal and external customers to provide for their success.

One of the big pieces of our puzzle is obviously cost, and manufacturing is about cost. We started to focus on lean manufacturing as a technique or as principles to drive out costs. We belong to the HPM consortium that supports this.

We must continue to focus on cost. Our currency advantage has disappeared, and a number of other structural issues in global manufacturing have changed. It puts a heavy burden on our facility here for the challenges going forward.

To me, the question is this. How does the government interface with that?

In the way I see it, countries compete on infrastructure, and that infrastructure supports the business and the economy. We need a lean infrastructure that makes doing business, whatever type of business, viable in Canada.

What can we do to add to a lean infrastructure in Canada? We need access to skilled people. We need technology transfers from the universities to manufacturing. We have to find better solutions for border crossing. We need to further develop our transportation infrastructure. Our roads, ports, and railroads really need some serious consideration at the government level.

Our company moves goods internationally. We buy from China, South America, and Europe, and we ship goods in through all the ports in North America. We need good infrastructure.

The final piece of the puzzle is that we need a corporate tax structure to support manufacturing investment. If you look at a corporate tax structure and divide that base into resource versus manufacturing, resource businesses really can't move. You have to get out of the ground. You have to cut the tree. But in today's environment, manufacturing companies can move, and we need a corporate infrastructure that makes it interesting to do business in Canada.

Thank you for listening. I welcome any questions.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McLean.

I believe Mr. Barry will be presenting on behalf of the Toronto Board of Trade.

[Jonathan Barry, Senior Member, Economic Development Committee, Vice-President, Entreprise and Bell Canada, Toronto Board of Trade]

Thank you. Thanks for having me here tonight.

I am representing the Toronto Board of Trade, although I do work for Bell Canada. I'm the vice-president of enterprise for Bell Canada, and the manufacturing sector is one of the sectors I'm responsible for. I'll bring in and draw on as much experience as I can on the downturn that, in fact, even we feel through the manufacturing competitiveness. It reaches out and hits a lot of companies, including companies like Bell Canada and the whole ICT sector.

The Toronto Board of Trade is the largest local chamber of commerce in Canada. We represent a wide variety of businesses and sizes, including nearly 200 manufacturing companies. It is a key sector for the Toronto economy, and it remains a key sector. According to the Greater Toronto Marketing Alliance, manufacturing still employs roughy 470,000 people in this area. That's 19% of the total employment in the GTA. It's a major contributor.

Federal government action in support of this sector is really critical to maintaining the overall economic health of the whole GTA. It is the economic engine of the nation. Most of you would agree with that. In the city of Toronto, taxpayers alone contribute $20 million to the tax coffers in Canada. Our manufacturers' ability to meet the competitive challenges to survive, succeed, and grow is significantly affected by the policies, and all levels of government contribute to this.

I'll focus on three areas. I'll focus on an area that we certainly talk about at Bell Canada and at the economic development committee at the Toronto Board of Trade, and that's productivity growth. I want to talk about the factors around investment, innovation, and regulation that impact on productivity growth.

Productivity growth in Canada, as you probably know, has been either low or stagnant over the last several years. It's a key area that we need to focus on. There's a well-established positive relationship--and you heard it here--between investment in equipment and technology and our capacity to become more innovative and address the productivity gap that we've been suffering from here in Canada. We need to find ways to encourage investment by the manufacturers, not only in key capital but in areas as far-reaching as ICT, in the information, communication, and technology sectors--everything that we can do to address the competitiveness of the sector.

You've heard a lot of people talk today about the workforce taxes, transportation infrastructure, investment in innovation, and regulation. We'll agree with all of those, and I'll speak to some of those specifically. But it really comes down to our overall competitiveness, which comes down to productivity growth and the relationship between how we invest in and get some benefits on productivity growth. I'll talk to some of the specific things that we would want to look at from the Toronto Board of Trade.

First, we want to look at taxes. I'm sure you've heard it before, but we do need to look at reducing corporate tax rates. We've made a lot of progress toward reducing those rates since 2000. We now have the fourth highest marginal effective tax rate in the G8, instead of the highest. That's good. However, our rate of 36.6% is still well short of the G8 average of 33.3%, so we're still not there. In the 2006 budget the government promised to get to the general corporate income tax rate down from 21% to 19%; that's between 2008 and 2010. We think that implementation period is arguably too long. The problem is now, and we need to look at it and act now. The sector needs to get competitive now. We need to do what we can, and act quickly.

We also want to look at the general corporate income tax rate, moving it from 20% in 2007 and reducing it by a percentage point in each of the following three years.

Another critical area of support for manufacturers is encouraging provinces like Ontario to have a look at the retail sales tax and at whether or not a value-added tax makes sense. We look at that because if you look at some of the notions of a value-added tax and how that can contribute to the relative price of the inputs, at least the pricing of the inputs can become more competitive, which hopefully would make us more competitive at the output end.

If you look at things like the reduction in the GST from 6% to 5%, which the government is heading toward now, how would we use that to help provinces defray those transitional costs of moving from a retail sales tax to a value-added tax? How do we use that to address some of the perceived vertical fiscal imbalance and better match some of that revenue-raising capacity and public spending responsibility?

So encouraging the provinces to integrate some of those sales tax systems with the federal value-added tax could help create a simpler, hopefully more efficient and more competitive tax regime for manufacturing.

On tax policy, the board believes the federal government really has to take a serious look at investments in equipment and technology. How do you address the productivity gap that I spoke about? If we look at the CCA or capital cost allowance rates, let's make sure they're truly in line with the useful economic life of those assets. In 2004 the Department of Finance study found that every dollar in tax reductions on capital costs gave us $1.40 in long-run economic gains. Canada's economy and the federal government's finances have proven to benefit from a greater incentive to manufacturers in this key area.

Last, the best manufacturers can't succeed if they can't get their parts to market. For those of you who commented about the Highway 427 and 401, I will tell you that if I were coming up here today and were part of a just-in-time manufacturing line, I would have stopped the production line. We have to get our traffic, transit systems, and infrastructure in line, as you heard here. Getting goods to market is a critical component of any successful manufacturing capacity and any successful manufacturing business, so anything we can do to increase our transit support is good. For example, the things we've done around the sharing of the gas tax have been great; sharing the gas tax has been a good move, gratefully received, particularly here in Toronto. It's still falling short of even maintaining a good state of repair in Toronto, let alone looking at how to improve and invest in the infrastructure we need to grow.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Barry. Thank you very much for that.

We'll go now to Mr. Sloan. And we do want to thank you, on behalf of the committee, for changing your schedule at the last minute to be here at a different time. We appreciate that.

[John Sloan, Vice-President, Operations Planning, Celestica]

That was no problem. Thanks for the opportunity.

Celestica came into existence just over 10 years ago when IBM divested itself of its Canadian manufacturing operations at the corner of Don Mills and Eglinton here in Toronto. At that time we had about 1,000 people at the site, which was our single location. Since then we've grown to have 40 sites around the world. Our total workforce is approximately 55,000, and we've gone from a $1 billion operation at that time to about $9 billion in turnover now.

Our Canadian operation peaked at $4 billion in output per year and 7,000 people. Now it's down to $1 billion of annual revenue and just over 2,000 people. Our competition is global. We are in an industry where there's overcapacity.

I'm sorry, I need to explain what the company does. We are in the business of manufacturing the electronics that go inside the OEM products, and we continue to build for IBM and HP and a lot of leading-edge companies in communications and IT and consumer products. So we build for them; it's not a Celestica-branded product, but their product. We do the manufacturing of the internal electronics, and often the finished product.

So there is overcapacity in the industry, with many strong players. The largest company in the industry is Hon Hai, a Taiwanese company with 18% market share. Celestica is number six in the industry, at just under 7% market share. So it's very fragmented, with a lot of very strong players. Eighty-five per cent of our revenue is material flow-through. We are happy to realize 6% or 7% gross on 2% or 3% net earnings, which is typical in our industry. Fifty per cent of our costs are labour. We have to compete, depending on the opportunity, by either having a unique offering or more speed in our production process than our competitors. Obviously cost is always a factor at the end of the day in our competitive structure.

Among things that would help us compete would be attracting a workforce that brings us the skills we need from day one, and there are two elements to that. One is that manufacturing is typically not the destination of choice for people coming out of our universities or community colleges, in spite of the fact that there are some great opportunities and a lot of very interesting content in engineering design—maybe not in products, but in our manufacturing processes and material management processes. Anyway, we need to attract people to come to this industry and we need to retain them. They have to come to us not just with the technical knowledge, which we find they have, but with manufacturing knowledge, which they don't have. You've heard a number of people talk about lean manufacturing or Six Sigma techniques; for us, materials management skills are critical. Those are things for which we typically have to provide the training, and it can take people a few years to get up to speed and contribute to the benefit of the company. So having people come to us with those skills is one thing that would help us be competitive.

Almost all of the material we buy is imported; it's typically all silicon of some sort, electronics of various shapes and sizes. So getting it in and out of the country expeditiously in a manner that makes the border seem transparent to us and our customers is paramount. Very little of our product stays in Canada; most of it what we build in Canada goes to the U.S. When bidding for business, often we have to convince them that doing business in Canada would be the same as if we were building for them in one of our operations in the U.S. I would say, to a large degree, that's true; we have very few problems getting things in and out of the border, but occasionally they do crop up. Sometimes it's our fault because we haven't done the documentation properly. Sometimes other factors have slowed it down, but every one of those puts a seed of doubt in our customers' minds about whether they should be doing business with us here in Canada.

The last thing I would talk about in the way of competitiveness is the Canadian dollar. All of our contracts are in U.S. dollars. Because the material flows in and out of the country, this kind of nets out for us. But we pay our workforce in Canadian dollars, so as the Canadian dollar rises, we need more U.S. dollars to pay that part of our expenses. To some degree the dollar going up and down is a fact of life, and there are pluses and minuses, but it is a factor for us that we have to keep in mind as we try to improve the competitiveness of our Canadian operations.

So in net, it's having a workforce that can hit the ground running for us through the curriculum in our schools, having borders that are transparent to us and our customers, and having a Canadian dollar that doesn't put us at too much of a disadvantage in our competitiveness here in the Canadian operations.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Sloan.

We will now go into the first round of six minutes of questions and comments, and because there are five witnesses, we encourage you to be brief. If you do want to respond to a question, just make yourself known to me and I will endeavour to have you answer.

We'll go now to Mr. McTeague for six minutes.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Chair, thank you.

I want to thank the witnesses as well for coming here this late to make their time available to us. We believe this is a very important issue, probably the most important facing the country today.

I noted that none of you mentioned, and perhaps this is a trend within the GTA, that there is not the real overarching concern—and I don't mean to minimize it—about reimportation, the bringing in of goods at much cheaper prices to menace your industry. I leave that as an observation, but I think it's something that we are certainly noticing here.

I was very interested in your comments, Mr. Hyatt, with respect to the right to repair and the restrictions on the ability. I take it that this is a new direction by many of the companies, but I wanted to ask you and you didn't cite which ones. I was most concerned about the fact that those who are repairing in Canada had their access denied. Am I to understand that Canadian companies have not been provided with the same courtesy as companies in the United States?

[Paul Hyatt]

That's correct. When you phone over, much of their network is through the Internet, of course, and some of our IP addresses will not be accepted into their websites.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Can you cite examples of a company that has done this?