Industry Committee on Nov. 23rd, 2006

[The Chair, Conservative, James Rajotte]

I'll call this meeting to order, members.

Thank you very much for being with us today.

We're here in Windsor on our cross-country tour, a study of the manufacturing sector, as we finish the study of the challenges facing the manufacturing sector, pursuant to Standing Order 108(2). This is the 32nd meeting of the Standing Committee on Industry, Science and Technology. We're very pleased to be here in Windsor. This is our sixth major centre in about four days, so we're a little weather-beaten, but we're here and we're very glad to be here.

We have with us today four witnesses for the first section, from 9 o'clock to 10:15, a very short time, but we look forward to the discussion. We have two guests with us right now. We have Mr. Patrick Persichilli, director of administration and corporate affairs for Valiant Machine & Tool Incorporated. Secondly, we have the president of Platinum Tool Technologies, Mr. Dan Moynahan, with us here this morning. We are expecting two others, who we will bring to the table when they arrive. Perhaps we could start with Mr. Persichilli.

Mr. Gary Parent, from the Windsor and District Labour Council is here as well. Welcome, Mr. Parent.

We will start with up to five-minute opening statements from the witnesses and then we'll move directly into questions and comments from the members to the witnesses.

Mr. Persichilli, we would ask you to start with your opening statement.

[Patrick Persichilli, Director, Administration & Corporate Affairs, Valiant Machine & Tool Inc.]

Good morning, Mr. Chairman and committee members.

It's an honour to be here testifying on behalf of the Valiant group of companies.

Valiant, founded in 1959 by Michael G. Solcz, is a fully integrated manufacturer supplying automated production systems, industrial parts cleaning systems, and plastic injection and casting production toolings for the automotive, aerospace, construction, and forestry industries. Currently Valiant operates in 17 facilities located in Canada, the United States, Germany, Austria, the Czech Republic, Poland, and Belgium. The company employs over 1,200 highly skilled employees globally.

It's no secret that the Canadian manufacturing sector is facing some significant challenges. One of the most constant themes in any discussion on manufacturing in North America will invariably include the impact of emerging markets on the profitability and competitiveness of domestic manufacturers. We combine that with the effect of a strong Canadian dollar and rising input costs, and the impacts on our economy have been devastating.

To help this struggling industry, the Government of Canada must ensure that Canadian manufacturers have the support and infrastructure necessary to not only weather short-term economic downturns but also a changing global economic environment. It would be deeply troubling for Canada to lose such a critical economic sector because of a lack of government support and action. Valiant's customers are demanding lower, more competitive global prices on all products, programs, and services. These price reductions are driven by the fact that our competition in emerging markets such as China, India, and eastern Europe not only enjoy significant labour cost advantages but also significant government subsidy advantages, thus allowing them to offer their products and services at a much lower cost.

We can look at the Globe and Mail report on business article this morning about parts makers being hit again by the foreign onslaught. It's a common theme. It's daily. It's something that many within this sector, within this region, face on a daily basis in terms of economic challenges and adversities. These challenges have forced Valiant and many companies like ours to look for new ways of doing business. We realize that the Canadian manufacturing sector cannot solely depend on deep cost-cutting initiatives to sustain profitability in the long term. Canadian manufacturers must look beyond cutting worker wages and embrace the innovation paradigm. Valiant believes that the MTDM sector in industry must work with all stakeholders to create opportunities to remain cost-competitive.

I am proud to report that Valiant has had some success in developing and marketing new and innovative technologies. New high-performance niche product developments like Valiant's Valu-Flex vehicle framing system, our four-plus-one roller hemming system, and a hydrodynamic pulse nozzle for a parts washer application are just some examples of how Valiant, and we at Valiant, have created value for our customers and have increased Valiant's global competitiveness through investment in innovation and research development.

However, given the current economic climate, it is becoming more difficult for Valiant and for like companies to make these investments and remain globally competitive. Valiant offers some recommendations on what can be done to strengthen the manufacturing sector in Canada, but given the time constraints this morning, while I could talk for about six weeks on the subject, I'll make some key observations about the recommendations submitted in our report.

We recommend the expansion and/or the creation of a loan financing system that bases repayment on future cashflows derived from product and process innovation. This system must better reflect industry needs and include shared costs for capital investment and administrative and skills development expense. Governments must be willing to accept the financial risk with manufacturers to help improve global competitiveness through increased productivity. We require programs that help companies gain the financial resources to invest in the latest technology and equipment to improve our global competitiveness.

New kinds of research resources are needed to support Canadian manufacturers. While it does have some strengths, the current Canadian infrastructure for supporting industry innovation fails to meet the needs of the MTDM sector. Research and development support vehicles, primarily driven through university-based research, need to focus more on commercialization as opposed to pure research, and must represent leading-edge practices and be linked closer to industry needs. This disconnect needs to be fixed immediately.

It would be prudent for the federal government, given the substantial budget surpluses, to make changes in parallel with provincial governments and enhance investment tax credits and credits for capital acquisition, which would immediately help to offset costs, improve competitiveness, and increase government revenue.

One of the inadequacies of the current SR and ED tax program is the treatment of capital cost allowances. These allowances should be increased significantly and must be done immediately.

Governments must continue to use investment vehicles to encourage growth in the manufacturing sector. The Province of Ontario's successful automotive investment strategy, as well as the former federal Technology Partnerships Canada program, must be continued and enhanced. The federal government must tie these recommendations into a comprehensive actionable policy dealing with the automotive and manufacturing sector.

We don't believe at Valiant that government intervention, subsidies, and investment alone will fix the competitive problems that exist today.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Persichilli.

We'll now go to Mr. Moynahan for a five-minute opening statement.

[Dan Moynahan, President, Platinum Tool Technologies]

Good morning.

I'm the owner and president of a small mould shop in Windsor. We started the shop in 1999 and we presently employ 41 people. Our company specializes in the design and manufacture of thermoplastic and thermoset moulds for the automotive lighting industry.

To give you a little background on the Windsor and Essex County metal-cutting industries, they are comprised of over 300 shops, employing approximately 10,000 skilled people directly. More than 70% of these shops have fewer than 100 employees. There are 75 mould plants, with approximately 3,500 employees, and over 100 tool-and-die and fixture and automation plants, employing over 3,600 people. And there are subcontract shops occupying over 100 plants and employing 3,000 people.

As I move forward with my presentation I will be focusing on the mould industry, as that's where I've spent my whole career, but the same problem exists throughout all the industries.

One of the first challenges is the payment terms. Of the shops in our area, 90% generate their revenues from the automotive industries. The OEMs have stretched payment terms out to be based on PPAP approval. To the OEM, this stands for production part approval process. To the mould shops, this stands for “pay people as you please”.

The terms usually mean that you will receive payment 18 months from the date you receive the PO and start building the tool. The result is that tool shops are financing the OEM and tier ones until the vehicle launch. The result devastates the cashflow for these companies. The banks are continually skittish about investment in the sector, especially with the current state of the North American auto industry.

The government has supplied some relief in this area through the insuring of receivables with the EDC. This affords the tool shops an additional 15% to 20% in margining towards the operating line and cashflow relief.

For domestic Canadian sales, companies pay the 6% GST within one month of the invoice date, while the payment for the receivable is not due for another year. This reduces the additional margining benefit from EDC insurance down to 9% from 14%. Worse yet, the GST payment is made from cashflow with borrowed money for the operating line.

Many companies have been devastated when a domestic customer files for CCAA protection, as the tool shop is an unsecured creditor. There needs to be a system established to allow the tool shops to register a lien against their tools to protect themselves.

The rapid rise in the currency exchange has made all manufacturing sectors in Canada less competitive. Other countries do not allow their currency to float with the world market, contributing further to unfair advantages and trade practices.

As recently as one year ago there was a major shortage of skilled trades workers in this area. On any given Saturday, you could open The Windsor Star and find a minimum of two full pages of ads seeking skilled trade employees. Today you'll be lucky to find two ads, period.

The companies and the government must work together promoting the opportunities these skilled trades afford the youth of tomorrow. Additional funds must be made available to support the training of these skilled trades through such programs as the Ontario youth apprenticeship program.

Windsor and Essex County will emerge from this recession. Once again, the need for the additional skilled trades personnel will return.

The statistics I'm going to read are from over a 10-year period from 1996 to 2005. During this period, exports amounted to over $10 billion in the industrial mould manufacturing industry. Exports increased by 18% over this 10-year period, and 89% of these exports were generated in the province of Ontario.

The United States consumed 87% of these exports. China, Taiwan, and Hong Kong accounted for 1% of the total exports, or $71.6 million.

China's growth in exported moulds purchased from Canada increased by 120%, in line with the total gain of 118% in Canada. South Korea did not make the top 10 exporting countries that Canada exported to. Over this period, though, Canada's exports to South Korea represented 0.12186% of the total industry total. Exports to South Korea in 1996 were $3.7 million. In 2005 they dropped 30% to $1.1 million.

During the same period Canadian imports amounted to over $5.1 million. Imports to Canada grew by over 120%. Eighty-three percent of these imports came from the United States. Ontario accounted for 82% of these imports.

China accounted for $86 million worth of imports, which represented a 2,246% growth. South Korea imports into Canada increased to $8.6 million in 2005, an increase of 1,568%.

The next numbers are year to year. These numbers are based on January to September 2005 and January to September 2006. Canadian exports to China in this timeframe grew by $9.8 million, Canadian imports from China by $27.2 million. The net result was Canada's trade imbalance grew in 2006 with China to a negative $17.4 million, which represents a 39% increase in the trade deficit.

[The Chair, Conservative, James Rajotte]

Mr. Moynahan, we are running over time here, so if we could have you conclude then we'll move on to the other witnesses. We only have an hour and 15 minutes this morning.

[Dan Moynahan]

I don't know where to stop, but maybe there will be some questions later on.

[The Chair, Conservative, James Rajotte]

There will definitely be some questions. Thank you very much for that.

We will now move to Mr. Parent with a five-minute opening statement.

[Gary Parent, President, Windsor and District Labour Council]

Thank you very much, Mr. Chair and the committee. Welcome to Windsor, as you come to Windsor on this particular day.

I'm the president of the Windsor and District Labour Council, and I represent over 40,000 different affiliates to my organization. I'm also the financial secretary of Local 444 of the Canadian Auto Workers, representing Daimler workers and some parts manufacturing plants here in the city of Windsor.

I share the views of the two previous speakers and the concerns that we have in relationship to the uncompetitiveness we find ourselves in within the Canadian economy and the auto industry. When one looks at what's happening as far as a level playing field is concerned.... And I know the committee has previously heard the Canadian Auto Workers presentation in regard to what's happening. I'm talking particularly about what Buzz Hargrove, the president of the Canadian Auto Workers, said in relation to a level playing field.

We do not have a level playing field here in Canada. What we do have is a continuous onslaught of—and these are my words—dumping from offshore producers into our country and the United States as well, which is having a devastating effect. Contrary to what you may have read in the paper this morning from Mr. Desrosiers, that everything is fine in the auto industry, it's fine if you're an offshore producer that imports 80% of your parts into this country from where their home base is, but it's certainly not good for the manufacturing industry within this community and other communities in Ontario predominantly in relation to the production of the automobile. There are a lot of reasons that I think this is taking place.

There has been a lot of emphasis by governments both federally and provincially on the whole question of taxation. The actual facts are, according to the World Economic Forum, that back in 1999, when we ranked fifth in the World Economic Forum scorecard, Canada's taxes were slightly higher than the OECD average. Today they are substantially lower. Indeed, Canada's taxes have fallen faster since 1999 than any of the 15 countries ahead of us, by 3.3 percentage points of the GDP. According to the Organization for Economic Cooperation and Development, we're at $50 billion per year.

Yet the faster we cut taxes, the further we fall in the competitive rankings. Why is that? We say it's because we're not on this level playing field. We say that it's government policy that is dictating our disadvantage in relationship to some of our other competitors offshore. Why do we not have the same opportunity that they do, and obviously have access to their markets? It's hurtful when we hear the CEO of the DaimlerChrysler Corporation, Tom LaSorda, indicate in the press this week that they're looking to China to have parts imported into this country. That's absolutely devastating to the people to the right of me when they look at this type of an announcement from the head CEO of a multinational corporation that is looking elsewhere.

We can compete as workers in this particular country. We have good skilled workers. We need more skilled workers, and that brings me to another point. As far as funding for schooling in relationship to the whole question of trade is concerned, when you look at trades in this particular economy or in this day and age, the actual funding for education has fallen. It's fallen to the detriment of us as Canadians.

We believe there have to be more federal dollars and provincial dollars going into the training of our workers, our young workers, and those who are going to be displaced as a result of some of these policies I prefaced my remarks with. We can't have older workers, as an example—and we cite older workers as 50 and older—not having the opportunity to be retrained into viable jobs, not just have access to unemployment insurance, which is another subject I could get involved in, and the whole question of what's happening there in relationship to workers.

We need workers who are going to have the opportunity to be retrained and have the ability to get back into the workforce for jobs that we hope, through government change in policies, are going to be prevalent.

I look forward to the dialogue today with the committee, and we'll be open to questions. I have other information that possibly we can get into later.

I have a colleague with me today, Mike Vince, who is the president of Local 200 of the Canadian Auto Workers. Hopefully he'll have an opportunity to give a personal point of view of what's happening to his particular local in the onslaught he's facing with the closure of an engine plant and what the community is facing with the possible loss of 2,200 jobs.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Parent.

We'd also like to welcome our fourth guest, Ed Bernard, who is the president of Bernard Mould. Welcome to the committee. You have five minutes for an opening statement, and after that we'll move to questions from the members.

[Ed Bernard, President, Bernard Mould]

Thank you, and welcome to Windsor.

Windsor is often looked at as an automotive town and automotive assembly town, but according to the Windsor-Essex Development Commission statistics, there are more people employed by the plastics and tool-and-die sector in Windsor than there are by the three big auto plants. That puts into perspective how many manufacturing jobs there really are in the area.

I've been president of Bernard Mould for 21 years, and exactly a month ago we realized that we have to shut our doors now. I'm still president for two more months. We're not sure where it's going to be going, but Bernard Mould is closing now after 37 years of manufacturing.

We've shipped moulds to China. We've shipped tools to Taiwan, Mexico, Germany, and Malaysia. We've been very involved in different industry associations. We've been involved with the American Mold Builders and we also participated with the United States International Trade Commission investigation--very similar to what this investigation is--two years ago. That group went through Windsor and parts of southern Ontario, trying to understand better. They analyzed 11 different countries. I'll make that report available to this committee.

I agree with everything that's been said previously. We can be competitive. We have some of the cleverest people in the world. The Canadian culture has been very facilitating to attract people from all over the world to bring their skills here. The SR&ED ITC program, the innovation tax credit program, is extremely important. The investigators have begun to clamp down. Rather than being more facilitating, they have become more strict, to a point of being unnecessarily strict, and that's going to really hurt the manufacturing sector. This is a vehicle the government has to help level the playing field, and it's something that really needs to be revamped, if anything.

I know that to set a new vehicle in place that can help out manufacturers is very difficult, but the ones that are in place, and especially the ones that are working well, should be relooked at and bolstered to help where we can't compete in some other areas. One year ago in November there was a group of South Korean delegates coming through, of course with the promise of free trade with Canada. The mayor of the Gwangju area was here. They had over 20 people in the delegation. They put on a presentation at St. Clair College and then another one in Troy, Michigan. They were offering in their PowerPoint presentation to build us buildings in South Korea in the Gwangju area--they showed us the real estate and everything--rent-free for five years, if we would relocate and take the technology that we have over there. We're still viewed by the world as cutting edge in this area, and that's something that really needs to be protected.

The jobs naturally are being created through innovation. They are the highest-paying jobs. The Americans have also recognized that this industry needs to be supported, as we can see through a Great Lakes group--I forget the actual name of the group now--that is trying to identify for the United States how to protect this industry. It's gone pretty much unnoticed because, as Dan said, these are shops that are on average around 20 people. In our peak four years ago we were up to just under 60 people. It's not earth-shaking or a size of company that really attracts a lot of attention, but there are so many of them. Over the last 100 years they've developed to a point where they really do create a lot of multiplication of jobs and they do create a lot of other opportunities and spin-off businesses. They're big spenders. They do a lot of investment in technology and work a lot with the universities and colleges in the area.

I think it's that innovation that everyone's identified that's going to make the difference with protecting jobs here and keeping the high-paying jobs in Canada. I think it really needs to be supported.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Bernard.

We will now go to questions from members. The first round will be six minutes for each member. Be aware that time is limited and try to keep your responses very brief. Also, a member may pose a question to one of you. If another one of you would like to respond as well, just please indicate it to me, and I'll ensure that you have the opportunity to do so.

We'll start with Mr. McTeague, for six minutes.

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

Thank you, Chair.

Good morning, everyone. Thank you for having us here in the lovely town of Windsor. I have a connection with this place. My father went to Assumption University, so it's near and dear to my heart.

I know that we're here not only to deal with a very serious issue, but we're also here because we have a member of Parliament in the House of Commons who harangues us day in and day out on this committee on an auto policy. So we're here because Brian Masse forced us here. I know he's probably having a bit of a chuckle over that, but I can tell you that if automotive policy is something we have been looking at, it's certainly in concert with his initiatives. I guess his dedication to the issue can't be gainsaid.

I want to ask you this. In a world environment where products can be traded very quickly, where customers expect the lowest price and the highest quality, how much effort is given or can be given to recognizing the need to focus more on niche marketing?

Mr. Bernard, I take your point about your plant in fact closing, and it's extremely disheartening to hear. Only nine or ten months ago, things were doing extremely well, as some of the witnesses have just pointed out.

Mr. Persichilli, you suggested a possible angle with respect to subsidies. Can you expand on that?

[Patrick Persichilli]

Absolutely. Unfortunately, because of time constraints, I wasn't able to finish the address, but one of the things at Valiant that we recommend and are an advocate of is a shared-risk philosophy.

If you walk into any bank today or go to a bank manager or a CEO or VP of a bank and say you'd like $100 million because you have a business plan and you're developing a new product, they're going to ask what industry you're from, and you're going to say manufacturing, that you support the auto industry. They're going to say, “Have a great day. Thanks for coming in.”

One of the challenges that many companies—and it's not necessarily based on size—face today is the ability to generate the cashflow and the funding required to invest in innovation. We're not going to be able to outwork a country of a billion people, but we can outsmart them. By leveraging our strengths in research and development and in developments in innovation with the proper and required funding and infrastructure to support those initiatives, I think we'll be able to transform not only the MTDM sector but the manufacturing sector in general into a vehicle to make Canadian companies more competitive again.

When you're looking at labour- and capital-intensive industries like the MTDM sector, without backing or some type of security, perhaps run through a credit facility type of environment with the federal government.... We're not asking for subsidies or handouts. This isn't corporate welfare; this is the shared risk concept of the government helping us to develop innovation, new products, so that you can get a return on your investment and so can we.

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

As an example of that, would you concur with others who have suggested that the innovation tax credit be strengthened and made more amenable?

[Patrick Persichilli]

Absolutely.

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

Okay, and would you also look at...? There may be much discussion this afternoon about potential tax cuts. Do they help your industry? Do they hurt your industry? Is it something you're looking for?

[Patrick Persichilli]

Tax cuts are great, but we'd rather develop and have a level of profitability. We don't have a level of profitability today.

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

Let me ask you, then, about training. Several people have suggested the need to have more flexible training at HRSDC. And this question is for all of you; I should open this up as well. This would require short-term involvement. What is it that HRSDC is doing that it could do better, in providing more flexible training to ensure that you have employees who are able to make the transitions in communities like this?

Perhaps that's for you, Mr. Parent.

[Gary Parent]

I think first of all you have to understand and get the people to the table to find out what their needs are, and I don't think there's been that push. I can remember years ago that at the time it was Herb Gray who was a sitting member in this community and he pulled together labour and also all the business heads with the chamber's involvement on trying to push forward what are the needs, what are the future needs, looking five years down the road even, what are your needs going to be. I don't think there's enough of that happening at this particular point in time, particularly in the Windsor and Essex County area.

I agree wholeheartedly that training is the aspect of the future. If we do not have the skilled workforce.... I think we pride ourselves in this community as having the skilled workforce, but it's always something that we have to challenge ourselves for in looking into the future and do more training to attack the future as it comes down our way, and to diversify if we have to in relationship, but never losing sight of what our base is, which is the auto industry.

[Patrick Persichilli]

I echo Mr. Parent's comments. One of the interesting things is, if you look at the 2005 APMA report, they identified not a lack of workers but a lack of workers with the right skills set and tools necessary to help us compete globally.

Valiant has just entered into an agreement with Sinclair Community College where we are looking at graduates right across the board in some of their technology-based disciplines, whether it's their mechanical, robotics, or mechatronics programs. We are willing to take on a number of these graduates, calling it a graduate studies or graduate experience-type program. What we're willing to do as an industry is hire these students on full-time, and full-time after they've completed an extra 600 or 800 hours of additional hands-on practical learning on our shop floors, plus an additional 20% to 30% instructional component as a shared cost between the college and Valiant. The goal at the end of the day is to turn out a graduate who can hit the ground running, has the skills set that we need, as I said earlier, to outsmart the emerging market countries we're competing against.

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

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McTeague.

We'll go now to Mr. Crête.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you.

[The Chair, Conservative, James Rajotte]

Use channel one for English.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I would like each of you to imagine that you are the Minister of Industry Canada and tell me how you would qualify the current state of the manufacturing industry, more particularly in your region. Are we talking about a crisis or moderate turbulence? Is the Canadian economy healthy enough to get us through this difficult phase? If you were the Minister, what measure would you apply first and foremost?