Industry Committee on Nov. 23rd, 2006

[The Chair, Conservative, James Rajotte]

Absolutely.

Thank you very much for that. And I just want to point out that with respect to the report you mentioned, if you can get it to Mr. Latimer, the clerk, after the meeting, he will ensure that all members get it.

[Mike Hicks]

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go right away to Mr. Kanters, please.

[Ed Kanters, Chief Financial Officer, Accucaps Industries Limited]

First of all, I'd like to thank the House of Commons Standing Committee on Industry, Science and Technology for including Windsor as one of the cities to hold hearings in. It's important that Windsor's voice be heard, as we are a centre of manufacturing in Canada.

My name is Ed Kanters. I'm the chief financial officer of Accucaps Industries Limited. Accucaps is a full-service contract manufacturer that supplies soft gel capsules to a variety of customers in the pharmaceutical, over-the-counter drug, and health and nutritional industries. We have three plants in Ontario and we employ in the neighbourhood of 750 people across those three plants.

A significant issue facing our organization is the difficulty we have shipping our products across the border, here and the Windsor-Detroit crossing. We all know the world changed with September 11. Any Canadian organization that wants to export to the U.S. must be prepared to work within the rules and regulations that exist. The challenge we face is that the landscape continues to change. There are regular changes in customs regulations and procedures that can, at any point in time, significantly delay scheduled shipments across the border. Other agencies, such as the USDA, place complicated permitting and certification requirements on products that can act as non-tariff barriers to trade. Slowdowns at the border and regulatory issues can create the perception with our U.S. customers that it's becoming difficult to deal with a Canadian supplier.

To deal with this risk to our business, we have invested in infrastructure so that the impact on the customers is as transparent as possible, but we need support from our government agencies to address these issues and facilitate the smoother movement of product across the border.

Currency issues have also impacted our business significantly. The instability over the last four years and a steady strengthening of the Canadian dollar has put significant pressure on organizations such as ours. We understand that market forces drive currency over the long run, but fiscal and monetary policy domestically can help to smooth the nature of the currency swings. It adds a level of complexity and risk to organizations such as ours to react to sharp swings in currency value in a short period of time. Continued attention towards keeping our fiscal house in order as a country will help to keep our currency stable and mitigate an element of risk that we must deal with in our businesses.

A third challenge we face is funding the research and development required to develop new products and processes. Research and development has been mentioned by a number of my colleagues on the automotive side of things, but it's important across all sectors of industry. Canadian industries that wish to stay competitive on an international basis must do this investment in research and development. To compete effectively against products from parts of the world with much lower labour costs than ours, we need to be innovative in developing a steady stream of new products and new processes to manufacture those products. The SR&ED program is definitely helpful in supporting this, but this is an area where more is needed if we wish to stay competitive and keep an edge, particularly in our industry.

I wanted to keep things very brief, so I tried to stick to my notes exactly. Thank you for your attention.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Kanters.

We'll now go to Mr. Hrastovec.

[Peter Hrastovec]

Thank you very much.

Good morning, Mr. Chairman and members of the committee.

My name is Peter Hrastovec. I'm chair of the board of directors for the Windsor and District Chamber of Commerce. I'm accompanied today by our president and CEO, Linda Smith; board member Jim Drummond; and policy advisor Igor Siljanoski. Our industry and manufacturing spokesman, Guy Diponio, had to leave on business. He was here earlier today.

The Chamber of Commerce is pleased that the industry, science, and technology committee has taken the time to examine the challenges to our manufacturing sector. We represent 1,400 businesses and employers and over 80,000 employees in this region. Our members expect the government to send a positive signal to investors that Canada is open for business in order to encourage investment in manufacturing in our region.

In order to maintain its place among the G-7 countries, Canada must not take our manufacturing sector for granted and must focus on keeping the industry alive and well. The manufacturing sector in Windsor and Essex County is currently facing a number of challenges, including the high value of the Canadian dollar; competition from low-cost producers like China and India, as you've heard; rising global input costs; skilled-labour shortages; and this, most importantly: inadequate border infrastructure in our region.

In Windsor alone, the manufacturing sector represents 37% of our GDP, compared to 17% nationally. It represents 35% of our total employment, compared to 15% nationally. The unemployment rate in Windsor and Essex County reached 8.8% in October--I suspect it's somewhat higher these days--compared to 6.9% for Ontario and 6.5% for all of Canada.

To improve the conditions for manufacturers in our region, the chamber and its members would like to recommend measures in a number of areas. In the area of corporate taxation, the government must shorten the implementation period for providing tax relief to businesses. The government can allocate funding for corporate tax reduction by using the federal budget surplus.

The government must address personal income taxation. The chamber believes that the top marginal income tax threshold should be raised from the current $118,285 range to $150,000 to attract and retain highly skilled and productive human capital. Lower personal tax rates also attract and keep entrepreneurs in Canada.

The government can boost productivity by promoting incentives to work, save, and invest. The focus should be placed on investing in productivity-enhancing areas such as education, skills training, and research. It is our recommendation that the government commit to their plan, lower the federal corporate tax rate, and improve the SR&ED tax credit system, expanding the same to include international research.

The chamber also urges the federal government to permit the writeoff of investment in new manufacturing, processing, and associated technologies over a period of over two years.

To save manufacturing jobs, the federal government should develop a formal system for transferring losses between members of the same corporate group within common ownership.

The chamber has also been the voice for expanding free and fair trade. Non-tariff trade barriers must be addressed when entering into any free trade negotiations with any country, especially if our treaty relationship is not on an equal footing. We've seen and heard examples of that today. Because we increasingly operate in a global marketplace, the government should examine transfer pricing to ensure goods are not being dumped into Canada.

The government can do more to ensure that Canada continues to be competitive and has a skilled and qualified workforce. Our main recommendation is to facilitate further reductions in EI premium rates and reform our EI system.

One of the biggest challenges we face in our region is inadequate border infrastructure. Only the government can provide the necessary funding to improve and enhance capacity—

[The Chair, Conservative, James Rajotte]

I'm sorry to do this, but you're speaking very fast for the interpreters.

[Peter Hrastovec]

I apologize. I'm very sorry. I've got only a couple of pages. I'll slow down.

[The Chair, Conservative, James Rajotte]

Thank you very much.

[Peter Hrastovec]

If I could have an indulgence, I only have a couple of pages more to read.

Only the government can provide the necessary funding to improve and enhance the capacity of the Windsor-Detroit border crossing, our country's busiest border crossing. An estimated $1.2 billion U.S. in trade crosses the U.S.-Canada border daily, over 40% of it at land border crossing in the Detroit-Windsor region. Of this daily trade, as much as $234 million U.S. is automotive-related. By trade volume alone, the Ambassador Bridge is the biggest and busiest border crossing in the world, carrying 25% of the value of trade between the U.S. and Canada.

Our manufacturers see the border as a part of their business process that is currently not working well. Perceived and real delays at the border are hurting both the regional and the national economy. The government must move forward with action gauged at dispelling any doubt that we are serious about solving our border problems.

Manufacturing warrants its own specific political and professional oversight. Assigning a minister or deputy minister who will have a function to oversee these measures dealing directly with the manufacturing challenges would certainly be appropriate and highly desirable.

Manufacturing is the key to our future economic success. We have nothing--nothing--to lose in attempting to improve our lot. We have everything to gain by working together towards solutions that will grow our economy.

Thank you very much. We have written submissions that we provided to Mr. Latimer this morning.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will go directly now to Mr. Storey for a five-minute opening presentation.

[Bill Storey, Partner and Director, MidWest Precision Mould Ltd]

Thank you, Mr. Chairman and committee members. Welcome to Windsor, the automotive capital of Canada.

My name is Bill Storey. I'm a founding partner at MidWest Precision Mould in Windsor. My partners and I established MidWest in 1986. We are mould builders who produce plastic injection and compression parts for the auto, home appliance, toy, and gardening equipment industries.

Our industry has been in a serious and threatening downturn for the last three to four years, and getting worse. At our peak, we employed 55 skilled trade workers. Today, our current number of employees is 25, which is a 56% reduction in our workforce. The number one competitors in our industry for many years were mould builders in the United States. This area of Windsor and Essex County has always been known for its quality and timely delivery of moulds and dies. With that in mind, our customers in both Canada and the United States felt confident in having their various projects done here.

As I stand here today, all of that has changed. We're now dealing heavily with cheap offshore pricing, mainly from China, and it is devastating our industry. Many tool shops have closed or are in the process of closing. Windsor currently is at the top of the list in unemployment in the country, and it shows no signs of slowing down in affecting this manufacturing sector. We are an industrial city, and industry is leaving the area at an alarming rate. Some of the major companies that we used to build many moulds for include Black & Decker, Kodak, IBM, Rubbermaid, Little Tikes, MTD Products, Mattel Fisher-Price, and Graco Products, just to name a few. All of these companies have moved their manufacturing facilities to, or are dealing directly with, China. They now make the entire product in China and sell the finished goods to the Canadian and U.S. markets.

This trend is growing at a rapid rate. We've been trying to find ways to compete with this low-cost competition in order to survive but have met with a few obstacles--the high Canadian dollar, high energy costs, high fuel costs, and extremely low wages in China. As an example, tool makers in China earn the equivalent to roughly $200 Canadian per month at best.

I'd like to speak for a moment on so-called “joint ventures” with Chinese firms. Please find attached a letter from Industry Canada regarding the very concerns we are speaking of this morning. On the second page, third paragraph, you'll find a section under “China Strategy”. Industry Canada explains what some companies have done in order to protect themselves from the fierce Chinese competition. Please keep in mind that Chinese firms have absolutely no interest in North American firms joining them in building moulds or dies for the Chinese market. Their only interest is building our moulds and dies for the North American market. Industry Canada seems to feel that by teaming with a Chinese mould or die builder, this will open opportunities for us in China. This is not the case at all.

China works, in my opinion, under protectionist tariffs. Currently our auto parts are subject to 28% tariffs once arriving in China. Further to this, no automobile that is built outside of China can be sold in the Chinese market without 85% of the parts in the vehicle being made in China. DaimlerChrysler is currently in the process of finishing an assembly plant in China, a Chinese joint venture to supply the North American market with Chinese-built vehicles. Where are current regulations regarding Canadian content entering our market from offshore automakers? In order to level the playing field in this market, in my opinion, we need an auto pact with China, Korea, or any other offshore country that would surely find our open market attractive.

I'd like to explain what is happening in our industry when a mould or die supplier wishes to work with a tier one supplier or directly with a North American-based automaker. I'll use the example of a major North American automaker we are currently dealing with. In the process of a new vehicle going into production in the spring of 2007, this company has implemented target pricing. They set a budget for every level of build for this vehicle. In our case a tier one moulder that will supply the automaker with moulded parts from the moulds we will build has approached us. We were given a target price that the automaker is willing to pay for our moulds. This price comes from a firm that the automaker hired to come up with said target price.

Should we agree to take the project on, we would then pay a fee of 15% of the target price to the hired firm. Since we cannot build the moulds for that price, we are forced to get prices from mould build companies in China, at their recommendation. They will build these moulds in China for approximately 60% less than the target price. This is a China strategy that Industry Canada suggests we should get involved in. We have lost 56% of our workforce, and this China strategy will only succeed in depleting it further. If this is the strategy of our industry in the future, here are the ramifications of this strategy:

We will require very few employees, as the moulds will be built in China. We will become nothing more than a depot. By that, I mean a building where the moulds can be shipped to after arriving from China. We will need only a small number of employees to unload the moulds and clean and inspect them prior to shipment to the end-user.

We will no longer require our many suppliers from whom we purchase components and products for the mould build. We will no longer require new machinery or upgrades to it. We will no longer need computer software upgrades to run the machinery.

This will be the China strategy. Industry Canada seems to feel statistics do not support our concerns. If this is the case, why then did the Government of Canada, along with the United States and the European Union, file a complaint on September 15 of this year with the World Trade Organization regarding China's imposition of illegal barriers to the sale of foreign-made auto parts to China?

Furthermore, it is my understanding that Canada financially aids China in the amount of $30 million or so to aid them in the making of everything from baseball bats to toys. It would appear to me that these are my tax dollars aiding our industry here in Canada to lock their doors.

[The Chair, Conservative, James Rajotte]

Mr. Storey, could I ask you to wrap up? We're about two minutes over our time.

[Bill Storey]

Yes; I was speaking slowly for the interpreters.

Our mould and die industries are fighting a losing battle. I hope this presentation will bring to light the reasons. We may soon inherit the same fate as the textile, furniture, and major appliance industries, which are virtually non-existent in North America for much the same reasons I have touched on.

We merely need a level playing field, and hopefully with government intervention we'll be able to achieve it.

I thank you for the opportunity to speak on our concerns, and I will attempt to answer any questions as well as I can.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Storey.

We'll now go immediately to questions from members. We'll start with Ms. Kadis, for six minutes.

[Susan Kadis, Liberal, Thornhill, ON]

Thank you, Mr. Chair, and gentlemen.

When I came from the airport, the taxi driver told me what I was seeing would not be here in the same way if I came here a year or two from now, and that there would be continual changes in the area, as many of you have referenced today and as earlier speakers mentioned. He had a great deal of insight into what's taking place here, and it was very eye-opening for me as a prelude to hearing you today.

We've heard references to a need to change and improve tax policies, trade agreements, and of course to the importance of research and development investments in partnership with industry. How important is that element--the investment--to develop the new products, in view of a lot of the testimony that has suggested heavily that we are not creating technology at the same rate that we are losing it to China and other markets? I'm talking specifically about the investment in R and D and the role that you believe the federal government--of course, along with the provincial government, but in this case we're talking federal--needs to play in terms of helping to turn the situation around.

[Ed Kanters]

I'll try to give you my perspective on that.

It's critical that our industry in particular, but also all industries in Canada, has a significant investment—and by “significant investment”, I mean that we need to get to the level of 5% to 10% of our sales dollars on an annual basis—invested in the development of new products and new processes.

We're not going to be able to change the fact that there are going to be competitive pressures on us from across the world, from lower-cost jurisdictions where products are made. What we can do, and where there is a significant advantage in Canada, is in applying initiative, applying the brain power that we have in this country, the education structure that we have, along with industry, to develop a new product that, through either intellectual property or just through technological advancement, we can maintain an advantage in.

We won't compete in the world by applying labour conversion costs at a lower rate than happens in the world. We will compete by coming up with new processes that allow us to have an advantage over parts of the world that cannot develop those things, or not as quickly, and by developing new products that have people chasing us, not us chasing the competition or not us having to try to figure out how to apply a lower labour cost where that's not practical in our economic structure.

What do we expect? What would we like to see out of government, pertaining to that? In my opinion, it's an expanded grant structure; more risk sharing, which was mentioned up front in the SR and ED approach; something that provides a partnership to industry to develop these competitive advantages, so that we can be effective in competing against the world.

[The Chair, Conservative, James Rajotte]

Ms. Kadis.

[Susan Kadis, Liberal, Thornhill, ON]

Thank you.

I'll just follow up on the ongoing South Korea trade negotiations. I'm not sure who it was, but someone suggested that you weren't at the table. Or were you part of that?

[Mike Hicks]

I didn't know that we'd have this committee, so I'm just going from memory.

Last October, a delegation of toolmakers from Korea was invited to the Greater Toronto Area. OEMs from Canada were encouraged to go there. Basically, it was like, “Toolmakers, here are our Canadian OEMs. Go to it.” Again, Korea is a low-cost country, and here was a way for our Canadian OEMs to save some money. That's what I'm against.

Obviously we've had great ongoing relationships with the government. At the MP show in 2003, there was a luncheon hosted by the Canadian government. They invited a Mexican delegation to go with our Canadian toolmakers, and that was a really good thing. The Canadian government identified a plumbing issue in Mexico, and a lot of our people could build plastic pipe and so on and so forth for things related to the plumbing industry in Mexico. They said it was going to be about a $1-billion overhaul of the Mexican sewage system, and that was a great opportunity. And there have been several other great trade missions.

I'm not trying to throw the government under the bus for one thing, because we've had other good things. But the good things that you should focus on are good trade missions like that, positive trade missions in terms of identifying a problem. There's a shortage of skilled work in that field in Mexico, so that's a really good example of the government working with us.

[Susan Kadis, Liberal, Thornhill, ON]

In case I have any more time, I'm just interested in knowing what areas you have consensus on. I know there are some on which you have different viewpoints in terms of trade specifically.

In other words, do you communicate a lot with each other on some of the issues, some more than others, and ones that you're building consensus around? It's something I'd be interested to know.

[Bill Storey]

Typically, in the mould industry, we all know one another. We all work together. We all know the end user. We're all in exactly the same boat.

Work is leaving here at a very rapid rate. We can no longer compete with our Chinese and offshore competitors. As we said earlier, plants are closing and people are being laid off. We need a level playing field so that we can build our moulds and sell them to our customers at a reasonable price, and so that we're not having the cheap offshore competition that is devastating our industry. And we all know it. We've known it for awhile. But in the last year, it has quadrupled as far as the devastation goes. This is not a crisis, this is devastation.

[The Chair, Conservative, James Rajotte]

Mr. Hicks.

[Mike Hicks]

Thank you.

We had a gentleman here at this table earlier, in the first session. He did everything you should, on paper, be doing right. He was taking advantage of the R and D programs. He was innovative. He was a progressive-thinking person.

Again, as Mr. Storey has alluded to, it's the labour issue from China. In a mould, approximately 20% to 30% of the content in the mould is labour, so we'll give them a pass and say they have free labour. We'll give them that. The prices are coming over here 60% to 70% cheaper than ours. How can that be? That's our question.

We appreciate one, as it's as much innovation as possible. But we can't compete with that. If you want to use the word “tariff”, that's where you should get together with the U.S. government, because they're going to listen to you. Again, we'll talk later, because I have this book. The U.S. will listen to you because they're in the same situation. Right now, we should be losing work to the United States because of the currency. In our industry, it's not a big factor right now, because Michigan is in worse shape than we are because they're in the same situation.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. Kadis.

We'll go to Monsieur Crête.