Industry Committee on May 30th, 2013

[The Chair, Conservative, David Sweet]

Good afternoon, ladies and gentlemen. Bonjour à tous.

Welcome to meeting number 73 of the Standing Committee on Industry, Science and Technology.

We are actually having two one-hour meetings, because although we know technology is moving at a rapid pace, there's still a complication with having multiple languages by teleconference. That's why we're separating the two meetings into one-hour meetings.

In our first meeting we'll have Martin Lavoie with us here live. He's the director of policy, manufacturing competitiveness and innovation with the Canadian Manufacturers and Exporters. By video conference, from the Fédération des chambres de commerce du Québec, we have Françoise Bertrand, president and chief executive officer, as well as François Morin, chair of the information technology committee.

We'll begin right now, and we'll start with our live witness first.

Mr. Lavoie, I believe you've been told you have about six minutes for your opening statement, so please go ahead.

[Martin Lavoie, Director of Policy, Manufacturing Competitiveness and Innovation, Canadian Manufacturers and Exporters]

That's what I was told. Thank you.

I'm live and I'm not a robot. Thanks for inviting me.

Mr. Chair and members of the committee, thanks for the opportunity to discuss the importance of the adoption of digital technologies among SMEs.

For many SMEs, the adoption of digital technologies in the business context is often referred to as electronic commerce. In manufacturing, however, electronic commerce goes beyond the traditional activities of buying goods or services through the Internet. We estimate that business-to-business transactions represent between 80% and 90% of all e-commerce activities. Those business-to-business transactions happen in two major fields of business activity in our membership: supply chain management, where suppliers are integrated in the manufacturing process and parts and components can be ordered and delivered just in time; and research and development, where digital solutions are used to share and analyze large data and to perform simulations jointly with research partners.

In addition to business-to-business platforms, digital technologies are also used in the manufacturing factories in areas such as R and D, rapid prototyping, and assembly lines. The adoption of digital technologies has already had a huge impact on the productivity of companies. Today, companies are able to develop, design, test, market, and sell complex consumer products using e-commerce tools and by tying various global suppliers together virtually. For example, cars and trucks in the automotive sector, which a decade ago took about five to seven years to get from concept to the local showroom, are now brought to market in two to three years, on average. Corporate research and development, while still centrally controlled, is now conducted throughout various portals globally.

In Canada, about 50% of all investments in machine equipment are in equipment related to information and communication technology. If you compare it to 20 years ago, almost 100% of machinery and equipment investments were in non-ICT equipment, so we've made a lot of progress. However, a lot of work still remains to be done. One of the challenges we have in Canada is to accelerate the adoption of digital technologies by companies so we can catch up with the rest of the world, particularly with the United States. According to the latest “State of the Nation” report published last week by the Science, Technology and Innovation Council, in 2009, Canada ranked 9th out of 20 countries with respect to business investment in ICT equipment. Although Canada ranks higher than some of the key advanced economies, such as France, Japan, Finland, and Germany, it still trails the top five performers: the U.S., Sweden, Denmark, the United Kingdom, and New Zealand. Compared to the U.S. alone, Canadian companies invest about 42% as much in ICT equipment as their U.S. counterparts.

Let me talk a little bit about what we think governments could do to accelerate the adoption of ICT equipment among SMEs.

The first way would be to look at the tax treatment of ICT equipment. This would be capital expenditure related to information communication technology. Although Canada has made some progress in recent years to allow companies to depreciate a larger share of their investment in ICT machinery and equipment, most other countries have taken a much more aggressive approach to accelerate the adoption of digital equipment. As an example, the elimination of capital expenditure under the scientific research and experimental development tax credit, to be implemented fully next year, is going to make Canada one of the few countries in the world that does not offer a significant tax credit or an accelerated depreciation rate for the adoption of ICT equipment for R and D purposes. I would strongly encourage the government to revisit its decision to completely eliminate capital expenditures under the SR and ED program.

In terms of machinery and equipment used for actual production, so no R and D purpose, again, there are no specific tax incentives in Canada to accelerate the adoption of ICT equipment. The accelerated capital cost allowance for machinery and equipment used for manufacturing and processing does not cover computers, data processing systems, and software, which are in a different class of assets under the CRA rules. However, the federal government did provide an accelerated capital cost allowance specifically for ICT equipment between 2009 and 2011, but that lasted only two years.

The second way to accelerate the adoption of ICT equipment would be to explore other forms of support, such as direct funding or innovation voucher programs. Because accelerated depreciation might not be enough, especially for SMEs that are not yet profitable, the accelerated depreciation is not fully useful for them. This is why other countries have used technology voucher programs to accelerate the acquisition of digital equipment. Countries such as Austria, Belgium, Denmark, Finland, the Netherlands, and the United Kingdom have all implemented voucher systems, with more countries attempting to follow this path. A program can be set that offers vouchers for the purchase of advisory services in e-commerce, systems integration software, or digital content. This is another area the government could look for in the Canadian context.

Although we do have in Canada a program called the digital technology adoption pilot program, referred to as DTAPP, I believe their funding is ending this year. It was a three-year pilot program. I'm not sure if it has been renewed or if it will be renewed.

The program was a good starting point, although the acquisition of computers, hardware, and off-the-shelf software is not eligible for funding under this program. A bit more than 600 companies will have received funding at the end of the three-year program. It's a good program, but you will agree with me that more could be done to reach out to more SMEs across the country.

The third point I would like to raise is about the open access policies, which are crucial to Canada's digital competitiveness. We often hear that Canada usually ranks poorly in terms of Internet prices and speed.

It's essential that the government implement open access rules that would force Internet network owners to share their infrastructure with smaller competitors. The choice is still very limited, and a lot of barriers are in place, so conversion to fibre networks in large commercial and institutional buildings is still very limited. I think you heard about this lack of choice from the CFIB when they appeared here. I won't spend too much time on it, except to say that we very much share the same concerns.

In conclusion, I remind you about the importance of the digital economy for productivity in manufacturing and in other sectors of the economy. I think looking at current programs and what is being done in other countries would be a good way to see how government can accelerate the adoption of ICT equipment.

Thank you very much.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Lavoie.

Mrs. Bertrand, you now have six minutes for your presentation.

[Françoise Bertrand, President and Chief Executive Officer, Fédération des chambres de commerce du Québec]

Thank you, Mr. Chair.

I would like to talk to you some more during the question period. So I have invited the chair of our committee on information technology, François Morin. He is the expert on that topic within our membership. He can discuss issues, barriers and obstacles faced by our members, and put forward solutions for improving productivity in information technology.

[François Morin, Chair, Information Technology Committee, Fédération des chambres de commerce du Québec]

Mr. Chair, thank you very much for the opportunity to speak to the committee today.

As you know, technological innovation has always affected the way we do things and has directly contributed to global economic growth. Historically, Canada and Quebec have always been symbols in technological innovation. It's very important to point that out.

There are endless examples of technologies' positive impacts, and businesses from all sectors are constantly benefiting from the advancement in information and communications technologies. All too often, people forget that the first ATMs were designed and installed in Quebec, and that Montreal was the birthplace of word processing. The telephone was also invented in that city. Canada and Quebec have many world-class technology companies, global centres of expertise and multinationals. As a society, we must find innovative solutions to new challenges at all times.

Currently, we are seeing a slow-down in R & D, a shortage of specialized resources, training gaps and lack of advancement for young people. We are also seeing a drop in the support provided by governments, which have the ability to create conditions that foster innovation as a factor of competitiveness and productivity.

In order to ensure their future and distinguish themselves on the global stage, Canada and Quebec have to ask themselves the right questions. Reduced investments in information technology constitute a short-term solution. Of course, such a downturn helps strengthen a company's balance sheet, but only for a few quarters. Eventually, the company will lose not only its capacity for lower-cost production, but also its intelligence. It sacrifices its capacity to create new products and destroys its ability to manufacture them more efficiently.

Every significant study carried out in Canada and the United States has come to the same conclusions. We must encourage and invest in sources of long-term growth. Clearly, the technological sector will provide the foundations of that growth to improve productivity and provide our Canadian and Quebec companies with all the production flexibility the new world order calls for. The Fédération des chambres de commerce du Québec has a few relevant recommendations.

As governments, companies and organizations, we must promote a culture of innovation by raising awareness of the challenges involved and recommending actions that will position Canada and Quebec at the forefront. We must establish or enhance government programs targeting technological investment in businesses. We must develop a Canadian digital economy policy that fosters the development of innovation and productivity. We should also help Canadian leaders better understand the increasingly important role technologies play in the development of our economy, and encourage them to show commitment to that cause. We must also encourage Canadian companies to show leadership and mobilize in order to help us prosper as a country.

Finally, we must show that technological progress remains the best and the most effective catalyst for stimulating business innovation.

Thank you very much.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Morin.

Now we'll move on to our rounds of questions.

Mr. Lake, for seven minutes.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair.

Martin, perhaps I'll start with you. You talked about ICT and investment, and ICT with members of your organization. I believe you said it went from pretty much 0%, at one point, to 50% of investment in.... Was it just in machinery and equipment?

[Martin Lavoie]

It's not only in our membership but in general. In the Canadian economy 20 years ago, pretty much all the machinery and equipment that was bought was not necessarily related to ICT. Today about 50% of the machinery and equipment is actually related to ICT.

More and more of the machinery that a manufacturer will buy will probably include a sensor or some sort of system that can be tied into an Internet system. The reason is that manufacturers want to know in real time, for example, the data on whether a machine is actually performing or not. It's used for maintenance, for breakouts, and stuff like that.

I think it's just a reflection of the evolution of the ICT nature of manufacturing processes in general.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

When you're talking about investment in ICT, and you're talking about machinery and equipment, it could be confusing for people to understand what the definition of ICT is in that context, in terms of the equipment.

[Martin Lavoie]

Yes. ICT in general refers to information and communication technology. In a business context, most of the time you would be referring to computers, the hardware and the data processing, and to telecommunications, the phones and other kinds of telecommunications devices.

What you see a lot of in manufacturing is advanced manufacturing, where you're trying to tie in machinery and equipment to a mobile computing system or the Internet. For example, I heard about one of our members who asked this company to develop an application on their iPhone, their smart phone, so that they could actually know in real time the production of certain types of machinery—the speed, how much time it took to repair, stuff like that. So instead of losing maybe an hour and half when a machine breaks, perhaps he'll lose only half an hour.

That also is productivity. Sometimes people refer to productivity as replacing three workers with a machine. But productivity is also about repairs, maintenance, and how you actually maximize the performance of the machine.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

You talked at the start of your presentation about supply chain management. Maybe you could elaborate a little bit on how technology is changing supply chain management.

[Martin Lavoie]

In terms of the supply chain, you're talking more about web portals, about Internet services used in supply chain management. I guess 30 years ago you were managing your supply chain by taking the phone, sending a fax, making three carbon copies, or something like that. There was some time required between how many products you had in your inventory, ording your products through your supplier, and getting products to your customers. Using business-to-business Internet services, of course you can do that in real time.

This is not just in manufacturing. When you walk into Walmart and buy something, they automatically know how much is left in the inventory. There may be a message being sent to the supplier already to say, okay, we need to order 100 of these units. It will come automatically.

This is a huge productivity increase, when you think of it in these terms, but it's not referring to machinery and equipment; it's more referring to using Internet services to maximize the relationship with your stakeholders, with your suppliers, or with your research partners.

You now see a lot of use of high-performance computers to do simulation, for example. In certain sectors, such as aerospace, they will simulate a certain type of environment to how it affects a certain material. A high-performance computer can tie all of your research partners into the same virtual system.

That requires very advanced machinery, but I think the important thing to keep in mind is that this advanced software requires advanced computers, and these advanced computers require a rapid network. If you have old copper infrastructure in your building, you're not going to be able to acquire a high-performance computer and conduct your R and D.

That's why I also want to point out—the CFIB pointed this out as well, I think, when they came here—that there's conversion to be done, in certain types of buildings, from copper to fibre, for example, so that you can have all these great things that technology can give us.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Right.

Changing gears a little bit, you mentioned the SR and ED tax credit. I had a meeting in Edmonton a couple of years ago with some manufacturers praising the SR and ED tax credit. But it was interesting, because as we had the conversation, there seemed to be a common theme in terms of the discussion: this tax credit is fantastic; it's really helped our company; we hired a consultant who went back several years and helped us to recoup money through the tax credit.

The story seemed to me, as I was listening to it, to be something that.... You know, while it's an important tax credit, the story I heard over and over again was that these were investments that we were making already; we were able to receive tax credits for investments that we'd already chosen to make when we didn't know there was a tax credit to be had.

[Martin Lavoie]

There is certainly...and I'm not sure if it's just about R and D tax credits. I guess if you were entitled to this tax credit, you would claim it. I'm sure certain consultants would go though your files and maximize your return. Does that mean that...?

Yes; probably, if they did these investments in the past, you're right, they would be doing it anyway. If they now get an additional $2 million, let's say, because of previous activities, are they going to increase their R and D spending in the future, or are they going to put that $2 million in their pocket?

I would argue that most companies would re-spend it on R and D and try to raise their ratio of R and D the next year, right? I hope so.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Certainly, we have to find that balance, I guess. As a government, of course, one of the other things we want to do is make sure that we maintain the strength of the Canadian economy, because the Canadian economy is very strong relative to other industrialized countries. We want to make sure that we maintain that strength. So there's a trade-off. For example, we've lowered taxes significantly; there is a 15% corporate income tax right now. Much of what has been proposed by others would require more government expenditure, maybe higher taxes.

I guess it's probably not so much a question, because my time is up, but more of a comment that there's always a trade-off to those proposals that could cost a lot of money.

[The Chair, Conservative, David Sweet]

That's exactly what it will have to be, a comment.

Thank you, Mr. Lake.

Now to Madam LeBlanc.

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

Thank you. We're very happy about that.

I want to thank our guests for joining us today. It will be a pleasure for me to speak to them in French.

I have read the evidence from our meeting last Tuesday. One witness said that Canada currently did not have a long-term digital strategy, and that this had repercussions on our economy. Mr. Lavoie, I think you mentioned that in your presentation, as did Mrs. Bertrand and Mr. Morin.

I would like to put my first questions to the representatives of the Fédération des chambres de commerce du Québec.

In Canada, we have no digital strategies or long-term visions, and harmonization is lacking among federal and provincial programs, and small and medium-sized companies. Do you have anything to say about that?

[Françoise Bertrand]

Mr. Morin will probably be able to add something to my comments.

Yes, we think that a digital policy would be key for sending a message. The main issue is network accessibility. We have to ensuring accessibility to those networks by making information technologies sufficiently affordable. A strong dollar makes that possible.

In addition, we must have a consistent thought in order to support small businesses. My colleague, Mr. Lavoie, has talked about companies, but it's certainly a matter of medium-sized businesses and not small companies. They must be told that they need training.

Nowadays, having a good idea of accountability or legal conditions is no longer enough to manage a company properly. Companies now need to include in their team young people who are familiar with technologies in order to incorporate 21st century methods into their marketing and their business networks. A digital policy could certainly provide the required financial incentives, but it would, above all, clearly announce that companies must keep pace with various digital trends. Fibre optics are not the only area of focus, as the industry is increasingly turning toward mobile platforms.

Would my colleague like to add something to this?

[François Morin]

I think that companies in general should follow the federal government's leadership when it comes to the implementation of a digital economy policy.

The Conservative government has already made announcements about the implementation of those modules, but there's still a lot of work to be done—be it in the area of telecommunications deregulation or government programs that foster technological investments. Overall, we must develop a digital economy policy that will enable Canada to show its leadership and that will help companies clearly see that our country has an important vision and strategy in digital economy.

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

As you said so well, Mr. Morin, it's a matter of creating favourable conditions. Thank you.

Mr. Lavoie, I think you talked a bit about what Mr. Morin pointed out—the fact that we have piecemeal programs. Certain programs are in place for a year, and then things change. That creates a great deal of uncertainty and a lack of predictability for companies that may want to implement technologies adapted to the needs of small businesses—as Mrs. Bertrand said—but also to the needs of larger companies.

Do you agree with our previous witnesses, who said that we should implement a long-term digital strategy?

[Martin Lavoie]

Absolutely. I agree with you that those programs were somewhat piecemeal.

The adoption of digital technologies is a means to an end. I think that the end we are trying to attain is greater productivity. The adoption of digital technologies is not the only way to get there, but it is part of a broader set of tools. Mrs. Bertrand was talking about workforce training. Of course, that is another option. The treatment of expenditures in the tax system is another very important way to achieve that. We cannot, on the one hand, want companies to purchase more equipment and, on the other hand, eliminate the tax treatment that makes it possible to buy that equipment. That is contradictory.

Between 2009 and 2011, accelerated depreciation occurred in the case of certain telecommunications pieces of equipment, such as computers, but that only lasted for two days. The objective was to stimulate the economy during a period of global recession. I think that the long-term objective is not only to stimulate the economy, but also to really improve productivity. I think that's a long-term objective, and we could apply that objective over the next 50 years, if we wanted to.

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

The broadband spectrum auction we hear so much about is set to take place in the fall, and rules have been established.

What does the Federation des chambres de commerce du Québec think about that? Are you following this issue, especially when it comes to the accessibility for small businesses you talked about?

[Françoise Bertrand]

I will let my colleague answer the question.

I am both the President and Chief Executive Officer of the Fédération des chambres de commerce du Québec. I also chair the Quebecor board of directors. So I think this is an extremely important issue, and I hope you will move forward in that area.

However, I will let Mr. Morin talk about that.

[François Morin]

Mrs. Bertrand, I would have liked to hear your opinion.

I think there is a great deal to be done when it comes to the upcoming spectrum auctions. It is important to make broadband spectrum available in telecommunications.

That brings me to another very important debate in telecommunications—the deregulation of foreign investments in digital economy planning.

Overall, some thought should be given to the spectrum allocation process. That is what we are calling for in the area of digital economy. As our colleague Mr. Lavoie said, we want this to be given due consideration. We want questions to be asked and answers to be provided. We also want Canada to adopt a digital economy strategy that would include telecommunications, information technologies, applications, and software and equipment development.

I think that all those factors should be taken into consideration in the development of a digital economy strategy. Those factors include all the technologies in our society that would enable Canada to reclaim its position as a global leader. That is what we are currently missing.

[The Chair, Conservative, David Sweet]

That's all the time there is.

Thank you, Mr. Morin.

Now on to Mr. Braid for seven minutes.