Industry Committee on Nov. 1st, 2012

[Martin Lavoie]

You are correct. Of all Canadian industries, our sector is probably the one that has faced the most international competition. The emergence of countries where labour costs are lower has hurt, but the fact that it is combined with a rising dollar has made things even more difficult since that increase has caused a rise in labour costs in our industry.

In the long term, of course, the best way to adjust to that is to increase productivity, but also to focus on less labour-intensive and more R&D-intensive activities. In our industry, that is what we are starting to call the "advanced manufacturing sector". In future, you will be surprised to see that, compared to 20 years ago, the new manufacturing plants will really have fewer employees. However, industry workers will be far more educated. They will be engineers, researchers and so on.

It is hard to say how many jobs will be affected, but we know how this will affect the investments of R&D businesses. In our sector, activities will be focused much more on design than assembly. This kind of tax credit is important when a company in our industry makes investment decisions, but we must not overlook companies elsewhere that are looking for the best environment in which to do business.

In the past, we had an enormous competitive advantage as a result of the fact that our dollar was lower than the currency of many other countries we did business with. We no longer have that advantage, particularly relative to the United States, as you said. Like other countries, the United States is introducing aggressive tax measures to attract this new advanced manufacturing sector. In Montreal, for example, Electrolux and Kruger have moved to places like Memphis, in the United States. Some states are also very aggressive from a tax standpoint.

I do not believe we should play at being the country with the lowest taxes, but we should act on our strengths. As our university sector is quite effective, we must take advantage of that. We also have a quite skilled labour force. There are deficiencies in certain sectors, and that is a problem, but we must implement tax systems that enable industries to take risks in those fields.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

In fact, what you are describing here are good, well-paying value-added jobs.

The Jenkins report, which contained recommendations, stated that it would be important to consult industries before making any changes and to introduce compensatory measures in the event changes were made.

Do you think that compensatory measures have been implemented under the current budget so that the sector can adjust to the significant changes you describe?

[Martin Lavoie]

I believe that the Jenkins report contained two recommendations on this matter. The first really focused on capital expenditures. According to the Jenkins report, it must be considered that the elimination of capital expenditures, which it characterizes as a labour-based approach, will be painful for many highly capital-intensive businesses. According to the report, that measure should be applied in two phases, starting with small businesses, which tend to require much less investment. It recommends that the government take the time to consult the businesses most affected and to apply this measure only if it is possible to offset the losses that this could cause them.

The measures were announced in last April's budget. However, all we have heard to date is that other direct support measures will be implemented. I am not familiar with them. Consequently, I do not know whether that will have a direct effect on capital expenditures, for example.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

I must say that we would have liked to study those measures, which are included in Bill C-45, and to hear testimony on the subject.

Do you think it would have been appropriate for the Standing Committee on Industry, Science and Technology to examine that?

[Martin Lavoie]

In our report, we recommended that the legislative changes included in Bill C-45 be set out in a separate bill. In our opinion, this is a fundamental change to the tax treatment of R&D and it should be treated as such. I imagine that, in a private member's bill, it would have been studied by the appropriate committee.

Having said that, I nevertheless hope we will have the opportunity to discuss this before the Finance Committee, if we are invited to appear there.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

As you mentioned, the measures respecting high value-added jobs and innovation are very important.

Do I have any time left?

[The Chair, Conservative, David Sweet]

You have thirty seconds.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Mr. Gupta, ITAC spends $5.2 billion on research and development.

In SR&ED, what impacts and changes have been announced to the members of your industry?

[Karna Gupta]

Could you repeat that?

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Your members spend an enormous amount on R&D. I questioned Mr. Lavoie about the announced changes, such as the reduction from 20% to 15% and the amendments respecting capital expenditures.

What will consequences of this matter be for your members?

[The Chair, Conservative, David Sweet]

Mr. Gupta, you will have to keep that question in mind, and if you can slip the answer in with another question you're asked, that would be the way to do it.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Will it have an impact on your members, yes or no?

[Karna Gupta]

We did submit specific to SR and ED.

[The Chair, Conservative, David Sweet]

Your time is up. It was way over already.

Now on to Madam Gallant for seven minutes.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Thank you, Mr. Chairman. All my questions will be directed through you.

Mr. Abielmona, would you please outline the different criteria that were found to be necessary to launch a successful product, as you were about to before your time drew to an end?

[Rami Abielmona]

Thank you for the opportunity to continue to outline those criteria.

I did a bit of research. I was general chair of that particular conference I mentioned. A couple of talks were related to this technology transition from R and D to commercialization, and I gathered the following points.

First is vision of need. Obviously there has to be a need to commercialize. There has to be some pain from the customers' perspective that you have to solve.

Second is good technology. We have to produce good technology. The technologists who are driving this innovation have to be very persistent.

Third is good working relationships with partners. There have to be partners: other industrial partners; government partners, obviously; and research partners, maybe in the education sector.

Fourth is jointly supported programs. These programs are very important. They are what we're talking about to bridge this technology value. It's not just to support the R and D side; it's also to support the commercialization side, especially for SMEs. We're not talking about the major companies with over 500 employees. We're talking about the majority of members who belong to ITAC, for example. I heard 65% with fewer than 500 employees belong.

Fifth is strong user support.

The last one is transition planning through IRAP. The company, the corporation, obviously has to have a plan in place to transition from R and D to commercialization.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

You mentioned substantial funds are available through IRAP for the research and development phase. The so-called technological valley of death, where we fall short, is in taking the prototype to commercialization. We have the Canadian innovation commercialization program, and it awards funding to entrepreneurs and pre-commercialization inventions to get to that commercialization point. It provides funding to the entrepreneurs for testing and feedback on the performance of their goods and services, and it provides the innovators with the opportunity to enter the marketplace with a successful application of their new goods and services.

I understand from the budget we're going to increase that by $95 million over three years, with an extra $40 million to make it permanent, and a military procurement component is going to be added to this. Would you please describe how this program needs to be tweaked to better serve your needs?

[Rami Abielmona]

This is a very good question.

CICP is something we've obviously looked at, as have all the other SMEs we've been in touch with, as well as the bigger players. We work in the military and public security market, so the major defence contractors are also at play here. I'll just speak from our experience.

As an SME it's very tough to currently compete on the CICP program. It is intended for pre-commercialized and tested applications. The problem we run into is that in order to get to the pre-commercialization stage, you will have performed your R and D, you may have submitted a patent application if you feel there is a need to do so, and you may have gone all the way up to pre-commercialization. But there isn't yet a user grab; there isn't a client pull.

It's very tough for us, as an SME, to be a solution to everyone's problem, so we try to attract a niche market, a subset of clients. The larger players have the ability—because they have already-existing contracts, already-existing deliverables, already-existing services and products that are selling to the majority of their clients—to bring in their R and D innovations and test them out at those clients' sites, whereas we're running up against a wall, unable to bridge that gap as well.

If we can't get our products and services tested at the client base, then there is no real chance for a CICP application—CICP really requires you to have your stuff already tested out—and obviously no real chance for further testing by particular client bases.

As to the tweaks, I just look to our neighbours in the U.S. and at certain programs they've set up, which aren't tailored and geared towards SMEs. Maybe CICP could have a particular tweak such that SMEs might have a base that they could apply against each other across Canada, instead of applying against every single company that exists in Canada.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Are you telling me, then, that there is not a government agency that needs your particular type of product directly, if your product is a component of a larger procurement?

[Rami Abielmona]

Yes, that is exactly it. Most of our products are OEM'd into these pipelines, and if we don't go to these defence contractors and sell them on our own products, we don't really have a chance to bid on CICP RFPs.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

What about the industrial regional benefits? Let's say we're buying a piece of military equipment—you mentioned that—and that for a number of items we don't have the manufacturing capability in Canada, so in return we would have to incorporate Canadian technology.

Is that system of any benefit to your type of company?

[Rami Abielmona]

That's an excellent question as well, because we've run up against IRBs a couple of times in the past. We have participated in whole-day seminars for IRBs in which OCE, at the time, brought American defence contractors into Ottawa for one-day sessions. We had a kind of meet and greet for 30 minutes, in which you would express what your product base lines were, what your services base lines were, to see whether there was a match.

What we noticed from those two long-day seminars was that if it's less than $10 million, the U.S. guys aren't interested. Our products don't sell for that much, by way of licensing costs.

That was our take out of this. Obviously this is our own opinion.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Abielmona.

Madam Gallant, your time is up.

Now we go on to Mr. Regan for seven minutes.

[Geoff Regan, Liberal, Halifax West, NS]

Thank you very much, Mr. Chair.

Mr. Lavoie, I would like to ask you a few questions.

As you are no doubt aware, your organization, Canadian Manufacturers and Exporters, released a report last Tuesday, emphasizing in it that a change has occurred in the past 15 years in that labour-intensive activities have been transferred to developing countries, especially China and India, and that developed countries have increased their research capability.

Does research follow production, or is it the reverse, and what does that mean for Canada?

[Martin Lavoie]

There is a kind of trend. Many companies may not be multinationals, like Magna International Inc., with 80 R&D centres in 18 countries. Many Canadian companies are of medium size. They will open production plants in other countries and then see whether they can try to establish R&D there.

In the past, developing countries had strategies based mainly on low costs. They created industrial areas and invited companies to move there, offering low taxes and cheap labour. They understood quite quickly that this was a race to the bottom and that, if they focused solely on labour costs, sooner or later another country would charge less in that area and develop in certain sectors.

As you said, some countries, such as Turkey, China and Brazil, are no longer content merely to provide low-cost labour to industrialized countries. They want university and industrial research. Consequently, they will definitely play on that and say that, from now on, if you move to their countries, you will have not only skilled labour, but also skilled labour at lower cost than in the industrialized countries, hence the importance of productivity.