Industry Committee on Aug. 7th, 2009

[The Chair, Conservative, Michael Chong]

Thank you very much.

We'll now move to Mr. Rota.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you, Mr. Chair.

Thank you for coming out this morning.

One thing this whole thing has brought to my attention is the number of pensioners of Nortel who live in my riding . There's quite a number, and I'm surprised at how many called and were concerned. When I heard this, I looked around and I called one of my colleagues, David McGuinty, who is the MP here in the area. I thought if there's anybody who has an understanding of this, it would be him, because he does have quite a number of employees as well as pensioners in his riding.

Issues came up, such as long-term disability, the people who are on this. There are 400 people who are again uncertain, and I guess that's where my question is leading. When we look at what's going on, I'm not clear on where we're going or what the end game is. I understand that Nortel is selling a large part of the patents; 2,000. That leaves about 3,000, and I'm not clear about where they'll go or what's going to be done with them. Is Nortel going to continue to exist after this exercise is over? Does it remain as a research company that only sells its technology? Does it patent and then resell technology for use? Is it a shell company? Will it remain in Canada?

These are all questions that are coming to me from people who really aren't sure what's going to happen. Will it remain as simply an R and D company that will maintain what it has done and maintain its excellence? So the questions I have are very simple. After this is over, will Nortel continue to exist in any way?

There's an income strain from royalties, whether through sales or leases. Where will that go? Who will use them? Who will benefit from them? Is it shareholders? Is it pensioners? Is it a third party that will take over a shell company? Will it be a one-time expenditure; boom, it's done, it's over with, Nortel disappears?

If you can clarify any of those questions, I think there are a lot of people out there who would appreciate it.

[George Riedel]

Let me take it in three pieces.

The principal businesses of Nortel will be sold. We are in the process of having stalking horse bids for the remaining principal businesses by the end of Q3, and therefore, depending on transaction closing, it could be Q4 2009 or Q1 2010, but the principal businesses will be sold.

With regard to the question about remaining patents, no process has been put forward yet to deal with those. We basically had to sell the assets first, because every time you sell those assets you create a complicated equation about what patents need to go, what field-of-use licence needs to exist and the like, so the goal is to sell the assets first and then turn to maximizing value for the remaining patents. At this stage we're reviewing a number of options, but no process has been put forward yet for the remaining patents.

We will, as required by law, have to get the monitor, the courts, and the creditors to approve whatever process we go forward with. I understand the uncertainty question and its timing as to when we can give you a more fulsome answer as to what will be the ultimate disposition of those patents.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

So what you're telling me is that we don't know where those patents are going to go or what value they're going to have, and then they'll just be divvied up by whoever is in line with a precedent.

[George Riedel]

What I'm saying is that there are a number of options we're looking forward to analyzing on how to maximize the value of those patents. What that implies in terms of structure and ownership and value is a piece of analysis we haven't finished. When we do finish that work and we have sold the assets, we will then come back to the monitor and the courts and say, here's the process we would like to go forward with to maximize the value of that intellectual property and then be able to give you a more fulsome answer.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

When you went to the government requesting some help, there were four points you made. They didn't agree with the proposed plan you had come up with, which was the main objection. They mentioned there was no overarching threat, which I think is a concern. Nortel is a major Canadian company. That whole industry was under threat, politically tarnished. That's just picking winners and losers and saying we don't want to associate with a certain company; that seems to be the impression I've got from what the government told you.

You mentioned about the auto industry. The industry that Nortel is in is not in the same predicament as the auto industry; that is what we were told. Those sound like almost inflammatory words, but I was wondering if you could give us an overview of what was asked of this Conservative government and what reasons were given why you were turned down, a little bit more specifically, because these seem like words that are not specific; they're not going into detail. I wonder if you can give us more detail on why you were turned down.

[The Chair, Conservative, Michael Chong]

Briefly, Mr. Riedel.

[George Riedel]

Let me focus on the sustainability question. I think it all turns on the point that we weren't interested in seeing a business that we couldn't get adequate returns on—i.e., not a bailout. So if we looked at the plan and looked down the track and asked if this is a business we can sustain if we do invest, I think there was significant concern given the industry structure, given the scale, the migration, and some new technologies. It really turned on sustainability.

[The Chair, Conservative, Michael Chong]

Thank you very much.

Mr. Van Kesteren.

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

Thank you, Mr. Chair.

Thank you for appearing before us.

I don't think I've had a really good explanation yet. I think a lot of people might want to have that same explanation. Could you explain to us quickly in layman's terms what CDMA and the LTE mean?

[Richard Lowe]

I'll do my best.

The transaction involves the CDMA business. CDMA is a particular type of technology for cellphone usage. It's predominantly used in North America. It was actually originally developed by Qualcomm in the United States and adopted by a number of the major operators in North America—in Canada that included Bell Canada and Telus, and in the United States Verizon, Sprint, U.S. Cellular, and a number of others. So that technology is what you use on your cellphone. The actual business we're selling is a combination of the assets, the employees—about 2,500 employees—and the customer contracts that go with those customers we have predominantly in North America. That business is pretty much the whole thing that will go with that transaction.

When we talk about LTE, it is really not a business, because there are no contracts going with the transaction. They are assets associated with development of next generation technology. So with any of these technologies as your CDMA—if any of you have a BlackBerry, you're using it for voice and for data transmission—the next generation technology, called LTE, will offer much broader bandwidth on those same devices, and over time it will replace the capabilities of the CDMA networks and people will overlay them.

So in layman's terms, that's what we're dealing with here.

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

Is CDMA somewhat redundant? Is it going the way of the dodo bird, or is it still current? Or are all these patents you're talking about improvements to CDMA?

[Richard Lowe]

It is a maturing technology. The overall market capex is declining at around 10% to 15% per year over time. I still expect that the CDMA technology will exist in the world as a dominant voice technology out through the middle of 2015 to 2020. So it's not going to go away any time soon, but most of the work that's going on now is really enhancement to the existing technology as opposed to fundamental development.

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

I'm right to assume, then, that LTE is rather current. And if that is the case—and you've testified there really were no research grants given your company since 2001—were most of the technologies that surround LTE, at least the ones that you use, developed by your company since 2001?

[Richard Lowe]

The development of LTE technology began in around 2006 and 2007. Some of the underlying patents supporting the technology dated back probably to 1998 and 1999, but the development work by and large has occurred in the last two to three years. We're spending about $140 million this year on that technology.

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

So the demise of Nortel was not due to the fact that it lagged in technology or anything of that nature, because it sounds to me this company is very current and that the technology it's developing is at the leading edge.

[Richard Lowe]

As Mr. Riedel said, the question was not around the capability of our technology; it was the sustainability of our entity that was brought into question by our customers. You can have the greatest technology in the world, but if your customer is unwilling to purchase the technology as a commercial product from you, then you're left with an investment without any return.

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

Mr. Kramp, did you have a question at this point? Maybe I can hand it over to you.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Well, I have a number of questions with time.

I would like to touch on the pension issue before I slip over to another point. Regrettably, our provincial government, which bears the responsibility for the pension liability, is underfunded. I think we all recognize that. We as a government are going to have to take a very, very serious look into prospective legislation as we move forward. In the past, we lived under the impression that the companies were too big to fail, whether it was U.S. steel, auto companies, or Nortel. Well, that reality and bubble has been burst. As such, we definitely have to look not just at what is there now but also at where we're going to go in the future.

I say that personally because I have over 3,000 retirees in my riding alone, and the impact has been very, very, very severe.

However, what I'm really concerned about right now, given that we have other witnesses coming in today—obviously RIM included—is that I'm somewhat confused by some of the statements made by both of the other parties. Following the stalking horse offer put in by Siemens, how many Canadian bidders were actually there at that particular time for Nortel assets?

[George Riedel]

You go through a qualified bidding process. There's a set of requirements—signing an NDA, providing public financials—to get a qualified bid. There were three qualified bids or bidders in the process: Ericsson, MatlinPatterson, and Nokia Siemens.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

So specifically at that point, RIM was not a bidder. Am I correct?

[George Riedel]

That is correct.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Kramp.

We'll go to Monsieur Laframboise.

[Mario Laframboise, Bloc, Argenteuil—Papineau—Mirabel, QC]

Thank you, Mr. Chairman.

You said you had spoken with the federal government and held 13 meetings concerning a restructuring plan. I'm more interested in the Investment Canada Act component. What's important to us, as my colleague Mr. Bouchard said, is to protect Quebec's interests. Ericsson has a research centre in Montreal and Nortel has one in Ottawa. We don't want to undress Peter to dress Paul, that is to say to transfer jobs from Montreal to Ottawa or those from Ottawa to Montreal. All we're hoping for is that Ericsson will retain what it has.

You said that one of your objectives was to protect 2,500 jobs at Nortel, but that there's no obligation. Under the act, the minister could require that the jobs in both Ottawa and Montreal be protected under this transaction.

Have you discussed the Investment Canada Act with the federal government?

[George Riedel]

We have had discussions to present the analysis of the value of the assets being transferred. Yes, we have.