Industry Committee on May 10th, 2016

[The Chair, Liberal, Dan Ruimy]

All right, we will get going on this very first day of our manufacturing study. This is exciting.

Welcome, everybody, to meeting number 13 of the Standing Committee on Industry, Science and Technology.

Today, we are graced with the presence of Scott Smith, the director of intellectual property and innovation policy at the Canadian Chamber of Commerce; and from the Conference Board of Canada, Michael Burt, director, industrial economic trends.

Again, as we normally do, you will have 10 minutes for your presentations, and then we'll begin our rounds of questioning.

We're going to get right to it. Go ahead, Mr. Smith.

[Scott Smith, Director, Intellectual Property and Innovation Policy, Canadian Chamber of Commerce]

Thank you very much, Mr. Chair, and members of the committee, for inviting me here to appear before you.

I'm pleased to be representing the Canadian Chamber of Commerce. We are the largest business organization in Canada, with a network of over 450 local and provincial chambers and boards of trade, representing over 200,000 businesses in all regions and in all sectors in this country. My comments to you today are based on and informed by a regular dialogue with all of those members.

There is an important relationship between innovation and manufacturing. I'd like to start by saying that the minister's mandate letter and the name change of the department to Innovation, Science and Economic Development has given the chamber and its members a reason to be cautiously optimistic about Canada's innovation prospects. Competitiveness is the driving focus for the Canadian Chamber, and innovation is the key to competitiveness. I say “cautiously optimistic” because, as of 2014, Canada was ranked 15th in the world in competitiveness, and 22nd in the world in innovation by the World Economic Forum. The Conference Board recently gave Canada a C grade on innovation, which is up from a D grade. I have kids in high school, and bringing home a C is not such a great thing. Clearly we need to better.

I think that need to do better was recognized in budget 2016, which focuses on new science and improving facilities, the industrial research assistance program, and addressing climate change.

The chamber certainly encourages continued spending on science discovery. Our national reputation as a place to do business in part depends on the reputation of our educational institutions, but we need to balance that and encourage businesses to invest. While our educational system and labour market efficiency perform well on global indexes, our innovation and competitiveness rankings are less stellar.

One explanation for why this might be is that our innovation incentive programs are fragmented. They're fragmented among departments and not consistently aligned with Canadian business structures. Ninety-nine per cent of Canadian businesses are small to medium-sized enterprises, and 75% have fewer than 10 employees, yet the bulk of private enterprise spending on research and development comes from large business. Just 12 companies account for roughly half of business enterprise spending in Canada. In 2013, the top 10 businesses for R and D spending accounted for $7.2 billion, or 46% of Canada's $15.5-billion total business expenditure on research and development. In fact, the top three R and D spenders in Canada were Bombardier, BlackBerry, and Magna, together accounting for more than a quarter of all business expenditures.

Keep in mind that some of those business expenditures have actually suggested the multiplier for that kind of spending is up to 56%, yet most of our incentives are now designed for small business. Accelerating spending to match the leading global jurisdictions would have a significant impact on corresponding business expenditures. Part of the decline in Canada can be attributed to the relative decline of the manufacturing sector as a whole. In 2008, manufacturing represented 11.9% of the economy. During the recession, manufacturing sales dropped 17.6%. In 2014, manufacturing recovered to pre-recession levels in terms of constant dollars, but remained at only 10.6% of GDP. In contrast, U.S. manufacturing recovered to pre-recession levels by 2011.

Worse still, when asked about upgrading manufacturing technologies, the Canadian manufacturing community revealed a hesitancy to make investments that could help Canada climb back towards the front of the pack. Manufacturers, especially smaller ones, cite a need to prioritize where and how to leverage innovation in ways that will drive efficiencies without consuming vast resources.

One issue is the inefficiencies in the incentive program structure. Programs like IRAP, for example, are designed for small business start-ups. By nature, this is a diverse group. It is not possible for government program managers to acquire sufficient expertise in the diversity of research that these programs cover. Consequently, technical experts are hired by government to audit companies and decide whether the work they've done is innovative enough. Similarly, start-up companies are populated by experts in a specific technology, with little or no experience in navigating government programs. To meet those requirements, they hire consultants to prepare their claims. All of this costs money, and none of it adds any value.

Finally, the programs have the unintended consequence of misaligning resources. The programs focus on engineering, science, and technology and make it tempting to just throw more engineers at a problem. As a result, Canadian start-ups have world-class engineering teams, but often fall short on the product and user side—in other words, sales and marketing.

Until 2012, tax incentives for research and development spending by business were among the most attractive in the world. Public spending on higher education and post-secondary institutions remains the highest in the world, but changes to the incentive programs have hindered the abilities of Canada's branch plant companies to attract R and D investment. Some estimates indicate that the lack of competitiveness of current tax incentives to innovation could result in a reduction of overall R and D activities by as much as 70% in Canadian manufacturers, while 18% would shift their activities to other jurisdictions.

We need to consider alternatives to our tax structures that not only encourage innovation, but have the potential to attract new foreign investment and generate new untapped revenues. This government has signalled an extension to flow-through shares in the mining sector through 2017. We should consider the idea of the benefits of such measures in things like the high-tech community and life sciences sector to attract investment to start-ups that don't have sufficient revenues to benefit from existing tax credits. We should also consider measures such as an innovation box that provides preferential tax treatment for intellectual property that resides in Canada.

Finally, we seem to be challenged by our ability to commercialize ideas. There's no easy answer, but part of the problem is market driven. Most start-up companies seek priority patent filing in the U.S. first. It's the larger market. As a consequence, much of the wealth flows south. Part of the problem is our policy framework. We have a disincentive to growth in the form of our business tax structure that penalizes companies that grow beyond a certain level. The same is true for R and D direct incentives, which are geared towards small companies.

We also struggle with rising energy costs. Electricity rates have doubled in Ontario since 2005. Our response to climate change is piecemeal, and we continue to struggle with a sticky border, all adding a strain on manufacturing.

We've seen a structural shift in employment into services, resulting in skills gaps and mismatches. By investing in better labour market information, we can connect businesses to skilled workers. The new manufacturing GPS initiative, for example, funded by the federal government, aims to address this and should be promoted to the sector.

Incentives to create more work-integrated learning opportunities through a wage subsidy would help overcome the largest barrier to offering student placements, and we need to align our education systems with employment markets, bringing technology, manufacturing expertise, and practical education together in a collaborative environment.

In budget 2016, the federal government committed to increase the transfer of EI funds to the provinces and territories from $2 billion to $2.5 billion annually. Now is the time to see if those programs should address the manufacturing sector and ensure their relevance and accountability.

With respect to IP structures, some of those are misaligned with the incentives that offer we to post-secondary institutions. The research dollars flow to the post-secondary institutions where projects are designed to satisfy academic curiosity instead of market demand. The incentives for advancement in our post-secondary system focus on publications in prestigious journals and the citations generated through those publications. The wealth generated by patent filings of a research project is not considered in the career path of a researcher.

Invention is exciting. It's sexy. It attracts attention. However, invention alone does not create wealth, and innovation is more than just an invention. Innovation is the art of using inventions in new ways. Wealth is created by owning the intellectual property and by making things. Instead of always thinking about how to make better things, we should probably consider sometimes thinking about a better way to make things.

Okay, I'm done with the doom and gloom.

Here are some bright spots: Canadian pharmaceutical production is up 100% from 2011 levels to $10.9 billion from $5.5 billion; production of passenger cars and light trucks is up nearly 50% from 2011; exports of aircraft, parts, and engines grew to $21.9 billion in the last year from $13.2 billion in 2011; food and beverage manufacturing had a 42% increase in exports since 2011; and furniture and fixture manufacturing rose to $6 billion from $4 billion 2011.

Most importantly we have a huge opportunity in front of us with technology. As computers, data science, and broadband internet coverage merge with manufacturing, new technologies are emerging such as 3D printing, advanced robotics, and artificial intelligence. Existing technologies, such as computer-controlled cutting, or CNC, are finding new relevance and uses within modern supply chains. These changes are leading to new approaches to the way that things are made. For example, in Canada's auto sector, there is an opportunity to attract more high-end technology work here, with all the seismic shifts due to the connected and autonomous driving cars. Many people are no longer choosing their cars on performance factors and horsepower. Instead, they are looking at how their cars make their lives easier.

There is no single easy answer in the path toward manufacturing success. We have some of the fundamentals right. In some areas, we need to reinvent ourselves.

I will conclude by saying that we need to take a balanced, coordinated, and collaborative approach to public investments and public policy-making in order to attract and retain investment in this country.

Thank you so much for your attention.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

I need to point out that copies of your remarks were given, but they were only given in English, so we can't pass them out. We'll have to make sure in the future that the instructions are very clear that they are to be given in both official languages.

[Chandra Arya, Liberal, Nepean, ON]

Mr. Chair, should we insist that the witnesses also give them in both languages?

[The Chair, Liberal, Dan Ruimy]

I just said that we're going to have to make sure that the witnesses, if they are bringing material, bring it in bilingual form.

Mr. Burt, go ahead.

[Michael Burt, Director, Industrial Economic Trends, Conference Board of Canada]

My name is Michael Burt. I'm with the Conference Board of Canada. For anyone who is unaware, we're a non-profit, non-partisan research institute based here in Ottawa. We do research in a variety of areas, including public policy and economic forecasting and analysis.

You invited me here today to talk about manufacturing.

Manufacturing is still a very important part of the Canadian economy. It accounts for about 10% of GDP, 10% of employment and, even more importantly, for about half of our exports and half of the R and D activity that takes place here in Canada.

However, its role in the economy has been shrinking. I'm sure you're already well aware of that. If you look back at the turn of the century, for example, instead of being 10% of GDP, it was about 16% of GDP. So we've had a pretty big shift in a fairly short period of time. Some of that has been absolute. If you look at employment, we have 500,000 fewer people employed in manufacturing today than we did 15 years ago.

On the production story, things a little bit more positive. Production is not much different today than it was 15 years ago and a lot of that is due to what's happened during the dip, during the recession. We've had a pretty healthy recovery from the dip that occurred in 2008-09.

The other thing I want to say is that it's very important to note that the decline in manufacturing that we're seeing in Canada is not unusual. In every single developed country around the world, we're seeing manufacturing shrinking as a share of production and as a share of employment. Canada has probably seen a larger than average decline over the last few years, but this is not unique to Canada. In fact, even in China, employment in manufacturing is flat. It's not rising, but because the rest of the economy is growing, manufacturing is shrinking as part of China's economy, believe it or not.

What I'm trying to say is that this is a normal thing that's going on.

I will say, just because one the questions you asked in the invitation letter to me was about the strategic importance of manufacturing, that we as a country likely put too much emphasis on it. Services are 80% of our economy. They account for a lot of the growth in jobs, GDP, and trade in the last decade or so. We probably need to look a little more at that, but, of course, you've asked me to talk about manufacturing today, so that's where I'll focus my comments.

What caused this big drop in manufacturing activity in Canada, or at least its share of GDP in Canada?

There are a few key things. First, a lot of it has been due to declining demand for some of the key products that we make here in Canada. The paper industry is a very clear example of this. The industry is 30% smaller today than it was 10 to 15 years ago, and that's just tied to the fact that demand for paper products has shrunk dramatically over that period of time, due to what's been going on with the digitization of media. That's one thing that's been happening.

Another big thing is that the competitive environment internationally has fundamentally changed. China came onto the world stage in the early 2000s. It has dramatically changed the manufacturing world. We've seen a big change in the North American supply chains, in North American expertise and strengths. To list just a few things in which we've lost very large market share, both domestically and in the U.S., these include apparel, furniture, and electronics, all of which are tied up with what's been going on with China. Mexico is also a part of this story. It's not just China, but there are other emerging markets. For example, Mexico has been a big competitor for Canadian auto manufacturers and parts manufacturers in the United States, and so we've lost market share, as well.

Therefore, it's first partly about what we make and, second, it's about the competitive environment we're facing.

Then, finally, another big factor is that for most products we have a very narrow focus on the U.S., which means that the impacts of the strong Canadian dollar during much of the 2000s were amplified. We really had a limited ability to take advantage of opportunities outside of the U.S. market because we were so geared to that north-south trade relationship.

I will echo what you said: this is not necessarily all a bad news story. There are many success stories in our manufacturing sector, and I think it's really important to start learning from those success stories in trying to see how we can grow other parts of the manufacturing sector.

Food manufacturing is one that I often talk about. It's actually the biggest part of our manufacturing sector. Many people don't realize that it's bigger than autos and parts. It has been a stellar growth engine over the last 10-15 years. It's been slow but steady growth, and it's expanded tremendously. It's been led by a variety of products, things like red meat, canola oil, snack foods, ready-to-eat products. This is an industry that has been very successful in Canada over the years.

Another more micro example is things like cosmetics and beauty products. Most people don't realize that. We are quite successful. We have a very large market share relative to our size in those products, and it's really down to a few key companies. Some of them target basically private label brands, in things like retailers and hotel chains, those sorts of things. They have developed very strong relationships with partners for marketing their products, selling their products.

The other group falls into things like companies that have targeted emerging markets, key markets. They have a specialty product that has certain features that are very desirable in key emerging markets, and they've said they are going after that emerging market. Those are examples of success.

Beyond that, if you look at other areas of growth in manufacturing, prior to the drop in oil prices, we had very strong growth in things like—

[Brian Masse, NDP, Windsor West, ON]

On a point of order, Mr. Chair, we've had the documents distributed in English only. According to our routine proceedings, it has to be in both official languages, so this is a problem.

[The Chair, Liberal, Dan Ruimy]

Those are just Mr. Smith's speaking notes.

[Brian Masse, NDP, Windsor West, ON]

I know, and as much as I'd like to hear from Mr. Smith, the documents, following routine proceedings and what we've set up in the House of Commons, which we are supposed to follow, require that they be in both official languages.

[Chandra Arya, Liberal, Nepean, ON]

Excuse me, but in the other committee, documents, including the Auditor General's speaking notes, were only in English and were distributed.

[The Chair, Liberal, Dan Ruimy]

Okay. How about we have a discussion afterwards and we'll follow the procedure.

It's because Mr. Dreeshen had asked for the notes.

[Brian Masse, NDP, Windsor West, ON]

I know, Mr. Chair, but we do have to respect both official languages here, and we do have this in our routine proceedings.

[The Chair, Liberal, Dan Ruimy]

That's fine.

Mr. Dreeshen.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

On that point of order, I'd asked if the notes were available. I do know that the rules are that they have to be both in French and English.

[The Chair, Liberal, Dan Ruimy]

I was just trying to be accommodative.

[Brian Masse, NDP, Windsor West, ON]

I don't take it as any ill will. I'm just raising it.

[Michael Burt]

To continue what I was saying about our other success stories, we have a variety of industries where production may now be lower today than it was at its peak, but we've seen strong growth coming out of the recession in things like wood products, chemicals, plastics, electronics, autos, and parts. So there are a lot of good news stories out there when you talk about our manufacturing sector.

We've done a variety of research trying to identify the success factors of Canadian businesses, particularly when they go overseas. I did share this with the clerk earlier today. It's available in English and French. I don't know if it was made available to the committee ahead of time.

The four key things we've identified include skilled executives. Your business leaders need to have entrepreneurial spirit, they need to have a commitment to growth, and it's also helpful if they to have an international exposure, so that they don't just know about Canada or even a particular region in Canada, but have a global view.

The second thing is international networks. This is around taking advantage of helping hands, if you will, to get out into global markets. This might be leveraging the networks that come with your existing customers. It might be government contacts, or things like our trade commissioners overseas and the variety of professional services firms out there that specialize in helping businesses make that leap into international markets.

The third thing is market knowledge. This means, first of all, knowing your customers. Too many businesses are making products for their own benefit rather than their customers' benefit. Know your customers, and know what they want. Have a local presence. You need to be there somehow. It's hard to serve a market remotely. Choose your markets wisely. Don't just say, “I'm going to go into China”. It's a big market. Try to identify what your key target market is there, and adapt your products to your clients' needs.

The fourth thing was innovation capabilities. To echo what Matt was saying earlier, it's not just about product development and not just about new whiz-bang products, but it's also about process improvement and doing things better. It's about adopting existing technologies that are out there and available, but which we just haven't implemented yet. Finally, invest in R and D. That's part of knowing your customer, knowing your market, and these sorts of things.

If we want our manufacturing sector to succeed and to continue to grow going forward, what can we do? There are a few things we've identified in our research. First is how Canadian companies become part of global value chains. Too often we're organized around serving just the U.S. market. How do we become globally successful number one companies, particularly in niche products, so that if If you want this particular thing, you go to this company in Canada? Countries like Germany and Israel have followed this sort of strategy in developing global champions. It's around creating world-class products, but not necessarily an Apple-type product. Maybe it's something a little more modest and being successful at that.

Second, pull, don't push. We have lots of programs in place trying to help Canadian businesses do different things, like incubator programs or those sorts of things. There are lots of them out there. It's about making them more effective. How do we do this? Make Canadian manufacturers hungry to make use of them. It's that old analogy that you can lead a horse to water, but you can't make it drink. They have to want to make use of those helping hands.

When we look at all of these different programs that we have out there, we want to make sure that the purpose of them is to solve the needs of industry rather than trying to push out a new idea onto the industry. If we look at where we see the most successful things, like business incubators and that, it's about strong, good relationships between business and our post-secondary institutions around solving the day-to-day problems that our businesses are facing.

Third, invest. I don't think it's any surprise that Canada's productivity performance has not been stellar for a long period of time now, going on 20 years, so we need to invest more in equipment and ICT, and those sorts of things. If you look at our manufacturing sector right now, we're capacity constrained. We are running flat out with our existing capital. If we're going to grow more, we need to invest more—and don't forget about investing in people. It's not just about machinery. For example, we've seen growing use of certain types of technicians and technologist jobs in manufacturing. We want to make sure that the people are there to meet the needs of manufacturers.

Finally, don't forget about services. What I mean by that is services are becoming an increasingly important part of the value proposition for manufacturers.

A really interesting study I saw quite recently talked about the aerospace industry, for example. They looked at various aerospace manufacturers. Basically, the higher the share of their revenues that came from services, the higher their profits. They were more profitable if they were using services to make their products more valuable to their customers. All that is to say that if you're looking at manufacturing, it's important to understand the linkage between the services, whether in transportation, engineering, all these sorts of things—all the things that enable our manufacturers to be world-class.

Thank you.

[The Chair, Liberal, Dan Ruimy]

Thank you, Mr. Burt.

We're going to go right to Mr. Arya. You have seven minutes.

[Chandra Arya, Liberal, Nepean, ON]

Thank you, Mr. Burt, and Mr. Smith, for the excellent presentations you both gave.

First, Mr. Burt, do you see potential for advanced manufacturing in Canada? Where do you see this advanced manufacturing five years down the road or 10 years down the road?

[Michael Burt]

It's very hard to pick winners, but we certainly have core strengths—photonics, and pharmaceuticals was mentioned by Scott. There is a variety of areas in which we have key strengths. Even in less technology-driven industries, it's still possible to have success by thinking about where our value propositions are.

I mentioned food manufacturing as being a key success story. It's not a really technology-driven industry, but it has very strong linkages to our clear strengths in agriculture in Canada. We're a large global maker and grower and exporter of agricultural products, and so it's leveraging that strength in agriculture and using it to make higher value-added products.

There are a great many potential areas for growth. It's very hard to pick winners, but I would say we're probably better off to focus on globally oriented things, because the Canadian market is fairly small. We've seen the most success with Canadian businesses in areas that are usually able to...some of them are even born global—their first customers are outside of Canada.

[Scott Smith]

If you look at some of the industries we have in this country, pharmaceutical and agrifood were both mentioned, but we also could look at auto or aerospace—any number of industries. One thing we need to keep in mind is that basically all companies now need to be technology-driven, and one of the most important things to consider is investment in that technology.

We have advanced manufacturing now, and if you look down the road, what's going to be the impact of something such as 3-D printing or new materials? Using 3-D printing as an example, there are not very many companies currently using it in their manufacturing processes; they're using it for things such as prototyping. But one thing we could see down the road with the advent of consumer demand for 3-D printers is a change in replacement parts, as an example, whereby people start to print their own. Some of the things we need to be considering are around what we do with our intellectual property laws to make sure that this gets looked after.

[Chandra Arya, Liberal, Nepean, ON]

For several years I lived and worked in the oil-rich Arab countries. I was there promoting industrial investment, investing in manufacturing companies. Every single day a new manufacturing company is being set up there. Name any sector, name any product, they're setting it up. They're not waiting for the most advanced innovative product; they're using commercially available technologies. As long as there's a market somewhere in the world, they go after it. One of the main reasons for them to set up so many manufacturing companies is that they have a very clear industrial policy that is backed by the industrial development banks, which are there to support new manufacturing companies.

Mr. Burt, you mentioned the need for more investments. I know that in Canada we have a lot of support for innovation. We have great programs such as STRIDE, IRAP, SADI, and many other programs for innovation and research and development, but personally I feel that the availability of funds to set up, say, a new small manufacturing company are quite limited.

What is your take on that?

[Michael Burt]

Scott mentioned our innovation measures earlier. Canada scores very well globally in terms of the ability to start up a new business; it's one of the best in the world. There are many, literally thousands, of new manufacturers who start a business in Canada every year.

It's not so much about start-ups; it's about how we turn those into high-growth firms that become globally successful. That, I think, is where some of our challenges are. According to our research, much of it boils down to developing the management skills to be successful, to have the knowledge around getting access to markets, to have knowledge around marketing—all these sorts of things. It's about having our entrepreneurs possess the full set of skills.

That's one reason I talked about global value chains. It's a way to leverage the knowledge that existing multinationals have.

[Chandra Arya, Liberal, Nepean, ON]

Mr. Smith.

[Scott Smith]

There are three things. One advantage we have in this country is a skilled workforce that is actually certified, which gives them a nimbleness that doesn't occur in some other jurisdictions. For instance, if you look at Mexico or India, you find they don't have the same certification processes as those that allow our people to be more flexible and to adapt.

The second thing is that we are so close to the U.S. market that it tends to be a crutch that we rely on. To your point about setting up in other countries, we tend to go to the U.S. first because it's the behemoth that we all know.

I forget what my final point was. My apologies.