Industry Committee on Jan. 31st, 2008

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Thank you.

You have made a number of interesting comments, Mr. Blackburn, in particular your comment about a strategic partnership. You said that the Government of Quebec had forged strategic partnerships for development and so forth. Can you tell me a little more about these partnerships and explain to me how, in your opinion, the federal government could get involved more specifically in initiatives? What steps could it take to help businesses such as yours that operate internationally?

[Robert Blackburn]

If I could just add to what Steve said, in my view, in order to ensure the most efficient supply chain, it is important to be able to look either within and outside the country in order to optimize business practices. At present, we have a contract to manage all federal and Government of Ontario buildings. This contract was negotiated with the previous administration. We had to compete to win the contract.

It is cheaper for governments to contract out this service and it allows us to gain some experience. We can handle procurement responsibilities more cost-effectively than the government. Furthermore, we demand a certain level of service. In the process, we acquire all the experience we need to do business with the government and to make our procurement processes more efficient. This experience also stands us in good stead when we carry out private projects.

Consider the case of Canada Line in Vancouver. We put together the funding, working with the BC government, the federal government and the local government. I believe we contributed 25% of the funding. We are constructing the Canada Line and we will manage it for 30 years. Subsequently, we will be able to export the knowledge and experience acquired.

According to the latest figures, I believe we are either the world's leading, or second-ranked, engineering firm in terms of service exports. Therefore, it is important to be able to work in your own market, at home, in order to gain credibility abroad. That is why we work with EDC and with Foreign Affairs. This collaborative effort is important.

Personally, I would like to work a little more closely with our trade officers in the case of supply chains abroad. It is not a matter of substituting Canadian jobs, but rather of preserving and protecting them and ensuring that they remain competitive. Otherwise, if we cannot stay competitive, both here in Canada—because there are increasingly fewer tariff barriers—and abroad, we will lose our industries. Therefore, we are working with the people of India and China to create Canadian jobs...

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Blackburn.

Thank you, Ms. Brunelle.

Now we'll go to Mr. Carrie, please.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much, Mr. Chair.

I just wanted to put on the record that I come from a government that believes in lowering all kinds of taxes, but we should make exceptions for any MP who wants to pay more. I think we should allow that.

[A voice]

[Inaudible--Editor]

[Colin Carrie, Conservative, Oshawa, ON]

Canada depends heavily on the United States for its export market. With the economic slowdown in the United States, have we changed our strategy at all?

[Stephen Poloz]

The short answer is no, we haven't changed our strategy. Our strategy has always been to put most of our emphasis on the markets that are difficult to break into, and the United States isn't usually one of them. It's true that EDC's programs--perhaps half of what we do is in the U.S. market on behalf of Canadian companies, so bear in mind that most of these companies are small and the U.S. is just as scary as another place. In fact, the U.S. is the riskiest market on earth, considering how many companies go bankrupt each year and are created each year. Statistically, it is a very risky place to do business.

We spend most of our resources in the emerging world. You can see that Canada's trade performance is dramatically reflective of that. For example, in 2007, exports to developing markets rose by approximately 24% for Canada, whereas exports to the industrialized countries rose by 2.7%.

The slowdown we see coming, which has been in our forecast for some time, is obviously led by the United States and will be concentrated in the major economies. Even if, say, Europe slows by 1% to 2%, it's still small, positive growth. If China slows by 1% or 2%, it gets all the way down to 9%, so it's still a major demander of our products.

Importantly, infrastructure projects that are concentrated in the emerging world continue. This is a really major opportunity for Canadian exporting companies, both through services and the agglomerations Mr. Blackburn was referring to.

EDC has two people in China, and we're putting someone in Abu Dhabi to take advantage of what's going on in the gulf, and we have people in South America. They're out there, facilitating companies' exploits. When they show up in town, we're there to take them on appointments and help them find their way through the red tape and all those kinds of things, and of course get the financing in place.

[Colin Carrie, Conservative, Oshawa, ON]

How is Canada doing with the diversification of its export markets now as compared with 10 years ago? How much have we grown in terms of diversification?

[Stephen Poloz]

The United States remains a very big destination for us, and always will be. It's the biggest, most dynamic economy on earth.

When we talk about small companies engaging in global supply chains, what we mean is that they find a link in some bigger company's global supply chain and earn that business. Often that would be in a U.S. multinational. So you may end up exporting to the United States, but that component ends up being in something that gets exported all around the world. So the diversification is probably much bigger than it looks, but right now it's still the case that over 80% of our goods exports go to the United States and only about 7% go to the emerging markets.

Exports to the U.S. last year went up by 1% and to emerging economies by 24%. So the race is not even close to being even. We know that the diversification will be an automatic process through time, but even after 20 years of this, we'll still be 60% dependent on the United States.

[Colin Carrie, Conservative, Oshawa, ON]

Mr. Blackburn, you did mention nuclear energy, which has certain challenges. Could you describe the challenges your company faces with nuclear energy in Canada?

[Robert Blackburn]

I spoke before about the need to have a reliable regulatory structure and strong government support for AECL, which has developed CANDU technology and employs over 20,000 Canadians. Without strong government support and commitment from the provincial and federal governments, and regulatory support, that technology probably won't survive.

The other technologies that CANDU competes with internationally, and in Canada, are strongly supported by their governments, politically as well as economically, and in every other way. We need to have that commitment from the Canadian government and all of its agencies. AECL is a crown corporation; CNSC is a regulatory agency; and the federal fisc have supported AECL for years. So that all needs to come together.

The other question, I suppose, is provincial government attitudes. Is Alberta going to want a nuclear reactor in the tar sands, which would cut down carbon emissions heavily? New Brunswick is talking about a new advanced CANDU at Point Lepreau.

Things have to come together here and all the pieces need to be there. It's an industry that for the first time in many years, not just in Canada but also around the world, is talking about building new nuclear reactors, and that's particularly vital for Ontario. So we need to get on with it; you don't build these things overnight.

If I could just make a point about your question on the U.S., we do 4% of our business in the United States. We did 13%, or $650 million, in Africa last year. We did twice as much in Europe as in the United States. We did more in the Middle East than in the United States. As Steve was saying earlier, probably at least 50% of our services exports go outside North America, and that's certainly true for us.

[Colin Carrie, Conservative, Oshawa, ON]

Why is that? Why are you not really in the States?

[Robert Blackburn]

If you look at Africa, I must say the EDC is getting more and more helpful in higher-risk markets there. The returns are best. They need us there; we've been the number one engineering company in Africa for many years because they need us.

In the United States they have lots of engineering companies. So when we go there it's for specialized things, such as gold mining. We build gold mines. So we've built gold mines for Barrick in the United States.

[The Chair, Conservative, James Rajotte]

Sorry, Mr. Blackburn, we have to move on.

Thank you, Mr. Carrie.

We'll go to Ms. Nash please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you.

Hello to the witnesses. You've made very interesting presentations.

I'd like to understand a little more about our exports to the U.S. You have just said, Mr. Poloz, that 80% of our goods are exported to the U.S. Is that our total amount of exports to the U.S.? Does that include services, commodities, manufactured products? Or is it just manufactured products?

[Stephen Poloz]

What I was referring to was goods, and a much, much lower percentage of our services exports go to the United States. So it allows me to kind of answer two questions at once. Our integration with the U.S. is so deep and complete on trade that our numbers of goods going back and forth across the border are in a sense exaggerating the lack of diversification. For example, 25% or so of our goods exports are cars. Well, with the car thing, the pieces are going back and forth several times before the car is complete, so you have a lot of trade generated by one car. That sort of thing skews those numbers.

[Peggy Nash, NDP, Parkdale—High Park, ON]

So 80% is goods, and out of those goods, 25% of that would be autos, which is, as you said, a very integrated industry.

[Stephen Poloz]

Very integrated. It's as if there's no border whatsoever in that fundamental production sense. So it wouldn't be a fair comparison to look at that--Canada's relationship with the United States--and then ask, well, how come we're so much more dependent on the United States than, let's say, Italy is dependent on France, or something like that, because they don't have that same kind of degree of integration.

That's all to say that services are more diverse, and that's just by the nature of the business. They don't cost anything to move. Often you have to be in place to deliver. Often services are delivered by investing in a foreign country. SNC-Lavalin is located all around the world. It's not just showing up in a suitcase.

[Peggy Nash, NDP, Parkdale—High Park, ON]

I know we're mostly talking about services and goods, but what would the percentage of our total trade to the U.S. be if you include raw materials? What does that look like?

[Stephen Poloz]

If we include services in the full bucket, then our share of trade going to the United States is a few percentage points lower. It's seventy-something--

[Peggy Nash, NDP, Parkdale—High Park, ON]

So when you say “goods”, that would include wood, fish, metals--

[Stephen Poloz]

Yes, all material things.

[A voice]

Anything you can drop on your foot.

[Stephen Poloz]

Yes, anything you can drop on your foot.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Okay. I'm just trying to get a sense--in recognizing your point about the integration of auto, and there are probably other sectors like that, what is, in your view, the impact right now of the slowdown in the U.S. and the rise of the Canadian dollar? What are you hearing from the member companies you represent?