Industry Committee on May 17th, 2016

[The Chair, Liberal, Dan Ruimy]

It's time, so we're going to start our next meeting.

Good afternoon, everybody, what a fun day we've had so far. Welcome to meeting 15 of the Standing Committee on Industry, Science and Technology.

Today, I thank our guests for waiting for us. We've had a busy day in the House, and we're going to have to jiggle our time a little bit so we can get in some good questions.

Our three guests for today are Iain Christie, executive vice-president of the Aerospace Industries Association of Canada; Joseph Galimberti, president of the Canadian Steel Producers Association; and Paul Lansbergen, vice-president, regulations and partnerships, of Forest Products Association of Canada.

Mr. Christie, would you like to go first?

[Iain Christie, Executive Vice-President, Aerospace Industries Association of Canada]

Mr. Chair, thank you. I will attempt to follow good advice that I was once given about attending these things, which is to be bright, be brief, and be gone. I will attempt to do that. Maybe I'll just have to speak a little quickly.

I want to start with two statements, which I'll just put out there for the committee to think about while I'm pursuing the rest of my remarks. The first is that innovation is prosperity from creativity. The second is the statement that both product innovation and process innovation are critical for economic development. With those initial thoughts, I'll take you for a brief jog through the aerospace sector, both domestically and globally, to put the rest of my comments in context.

You have, as material we submitted, the state of the industry report. If you want to know the great and gory numerical details of the sector, feel free to refer to it.

The points I want to make about the aerospace sector are, first, that the Canadian aerospace sector is a very R and D intensive sector, spending five times more on R and D than the Canadian manufacturing average; second, that the sector is first in the OECD in productivity, with productivity growth two to two and a half times the Canadian manufacturing average; and third, that the aerospace sector is highly export-oriented—about 80% of our products leave Canada. Those exports are pretty diverse. Whereas the Canadian average is to send about 80% of our products to the United States, aerospace sends less than 60% to the United States. Also, it may surprise some members to learn that more than 60% of those exports are actually supply-chain oriented. In other words, they're not whole airplanes; they're parts of airplanes.

The net result of all of this is that the aerospace sector is, and must remain, a globally competitive sector. We are connected to the global market, and we cannot possibly be disconnected from it. A few words are in order about the nature of the global market dynamics that Canadian companies operate in.

The good news is that the global sector is enjoying very strong demand. This has led to large long-term backlogs at major manufacturers. Something like 10,000 aircraft are currently on order at major OEMs. However, some particular market dynamics, related to the coincident introduction of competing aircraft designs, have led to a lot of cost pressure, because the major OEMs have all been concerned about retaining market share. This means that those major customers of our supply chain suppliers need efficiency in the supply chain. They have effectively sold every airplane they're going to build for the next five, six, seven years, and they've sold them at prices that are very aggressive. Their trend is to rationalize their supply chains, which means fewer, more efficient suppliers. Suppliers are thus under a lot of pressure to reduce price and add capacity so that the good suppliers can replace the less efficient ones.

This generates an atmosphere that is not for the faint of heart. In this atmosphere, suppliers that are very good at what they do enjoy a great deal of opportunities. It's highly competitive, and just because you're a supplier today doesn't mean you will remain one if someone is better than you are tomorrow. It's in this environment that we need to talk about the question of innovation, and the role it plays in keeping those companies part of the global supply chain of this growing global market.

I want to talk about innovation in terms of three kinds of innovation, which is how I break it up. This is very much based not only on the position I occupy now, but on my history of having been first the director of R and D and then the president and CEO of a small aerospace company. This is a dream that I have lived personally.

The first kind of innovation I would refer to is what I would call entrepreneurial innovation. This is probably the kind of innovation that most of us think of when we think of innovative economies. These are small companies that are driven by investment and are developing a new product offering. This is essentially what we think of as an innovative company. At the other end of the scale—and there are many players like this in aerospace—are the large companies with sophisticated R and D divisions that are constantly developing and refining their products to compete in a global market. This is also product innovation. I would also refer to it as balance sheet innovation, because essentially these companies are capitalizing their R and D, and they're doing it on the strength of their balance sheets. That's why they can spend the kind of money they do.

The third kind of innovation actually occurs in the middle of the industry. These are companies that are far less interested in building better mousetraps and more concerned with building mousetraps better. They do this by adopting new techniques for manufacturing, integrating new manufacturing technology, increasingly exploiting big data applications or the Internet of things to find efficiency, including in their business and management practices. This is why I call this “process” innovation. According to the definition that I said at the beginning, this is still very much innovation. This is good ideas. This is creativity that is being used to generate prosperity, being used to generate higher profits, higher margins, and more competitive businesses, but it may not be the kind of innovation that everybody thinks of when they think of innovation. But because of the market dynamics that I described earlier, this is exactly the kind of innovation that we need to be supportive of in Canada if we're going to have the engine, at least, of our aerospace sector be successful. The companies that need to grow to take advantage of the global demand are companies that are going to have to solve the problem of how to be process innovators.

What does this mean in the context of the question that you're trying to answer? I think the reason that it's important is because the companies that are going to consume the government programs that support process innovation have some fundamental characteristics in common, and I think these are common across many sectors, not just aerospace. The first is that they are cash-flow limited and cash-flow focused. To put it bluntly, these are guys who get out of bed every morning wondering how they're going to pay about a hundred different mortgages this month because that's how many people work for them. They're putting two dozen people through university and a half a dozen kids need braces. That's their concern every month: finding the cash to pay for all of that economic development. They don't have a lot of extra money to invest, they don't typically have strong balance sheets, and they do have a very intimate relationship with their banker, probably. They also have relatively very few staff dedicated to R and D or, in fact, any specialized activity, and the resources they do have who do that are extremely precious to them. They're usually their very high-value individuals. There aren't very many of them, and they know exactly what they're doing every day because they have seven jobs they'd like them to do that they can't be doing. These are also very pragmatic people who are not going to apply those resources where they don't think they're going to have a large amount of effect. Activities that would fall under the category of not having a large amount of effect are activities like preparing applications, reporting; meetings or other non-productive work would definitely fall into the category of not the kind of work you want high-value resources to be doing.

When we design programs that support this kind of innovation, it's not even so much important that they be directed at process innovation. They need to be directed at the kinds of companies that are doing process innovation, which means we need to be very careful of the impact that they have on cash flow. We need to be careful that they do not depend on balance sheet strength in order to be able to qualify. We need to make sure they do not require a large commitment of specialized resources, especially those kinds of tasks that are not going to be seen as productive, including a large amount of reporting to the government or to customers. We also need to understand that everybody in this business is going to need to adapt those programs to their business reality on the ground. The programs need to be flexible and need to take into account that, by and large, the people who will be dealing with this program are extremely successful businessmen. In our industry they wouldn't be in business if they were not. They know how to run their business. They need help staying competitive, but they do know what they're doing running their business. It would be better for us to adapt to their reality than to expect them to adapt to ours.

I started with two statements. The first is that innovation is creating prosperity from creativity, and I think that I've explained that. Creativity without the prosperity is not economic development. True innovation means we have to take those great ideas, which Canadians are, frankly, excellent at generating, and we have to find a way to generate profits and prosperity from them, which, frankly, we're not as good at doing. Our industry, I would say, has been a leader in being able to do that, but we are in a very particular time, in a very competitive global environment, and we need to continue to adapt the way we support companies to allow them to continue to do that.

That brings me to the second point I started, which is that both product innovation and process innovation are important. We have ample examples in aerospace of product innovation and how that is taking on the world, keeping Canadians prosperous, and returning value to the country. It is also important not to forget in your deliberations that process innovation, while not as obvious and maybe not as sexy, is just as important to what I consider to be the economic engine of our industry.

To make this work, we have to ensure that we have a more competitive and innovative aerospace industry that will lead to a more prosperous Canada and more jobs for Canadians. These are questions that we, at the Aerospace Industries Association, are considering very carefully. We are encouraged that you are as well, because they are important.

Finding the right answers will be critical to ensuring that Canada has an economy that is not only dynamic and creative, but also prosperous and innovative.

Thank you.

[The Chair, Liberal, Dan Ruimy]

Thank you.

Mr. Galimberti, go ahead.

[Joseph Galimberti, President, Canadian Steel Producers Association]

Thank you, honourable members, for the opportunity to present to the committee today on behalf of the Canadian Steel Producers Association. I appreciate the chance to be here.

Our association represents 10 primary steel producers and steel product manufacturers in Canada. We have member facilities located in Quebec, Ontario, Manitoba, Saskatchewan, and Alberta. These operations directly employ over 22,000 Canadians, with an additional 100,000 Canadians supported by the indirect economic impact of our operations.

Steel in Canada is a true linchpin industry. Our presence in a given community generates significant economic impact for several reasons. Our operating expenses associated with steelmaking facilities are considerable. Transport of raw material, transport of finished product, development of support technology, service of equipment, and supply and maintenance of the facilities themselves, are all capital- and labour-intensive ongoing activities.

The availability of locally sourced steel in a given community also attracts secondary value-added economic activity, like steel fabrication operations, auto parts manufacturing, and specialized production of steel products. Steel production is a critical link in manufacturing and resource exploitation and construction supply chains from coast to coast to coast, and has the net effect of diversifying the benefits to Canada associated with ongoing economic activity, large-scale commercial developments, and public sector investment in Canada's infrastructure needs.

I think it's important to see steel production in Canada as a value-add activity. Raw materials for production are sourced quite nearby, whether that's iron ore from mining operations in Quebec, Newfoundland or Nunavut, or Canadian scrap metal materials sourced from local scrap and salvage operations. These are refined or recycled in Canada by Canadian employees into the high-quality and increasingly sophisticated products our consumers demand.

Steel production in Canada is also truly an advanced manufacturing process. Our members are technology companies that happen to produce steel. As an excellent example of this, I would highlight a long-standing partnership between one of our members, Rio Tinto, and the National Research Council that developed binder-treated powders, bonding small additive particles to larger iron powder particles. This increases the productivity of compacting presses, part-to-part consistency for use in automotive appliances, electrical tool, and lawn and garden industries. It's quite complex and I understand very little of it, frankly, but it was featured in a National Research Council innovation success story released on May 6 of this year.

I would also note the commitment of another one of our members, ArcelorMittal Dofasco, to the development of a manufacturing policy in Canada through the introduction of and support for the chair of advanced manufacturing policy at McMaster University. The chair, which is a cross appointment between the Department of Economics and the Walter G. Booth School of Engineering Practice, is intended to enhance the profile of manufacturing in Canada, as well as be a strong contributor to the manufacturing public policy dialogue with all levels of government. The goal of the chair is to ensure that Canadian manufacturers are well positioned to improve their competitiveness and boost productivity, and are positioned globally to attract foreign direct investment.

We think this emphasis on global positioning is vital. Our members are in a constant competition to secure investments required to fund capital expenditures and ongoing process modernization and technology implementation. Government should understand and appreciate that Canadian facilities compete globally for investment funds, and the continued direct investment of foreign capital is vital to the maintenance and growth of our competitive position.

With particular regard to steel, we would suggest the Government of Canada consider policy options on two distinct but complementary tracks. The first of these is the fortification of Canada's domestic market against unfairly traded goods, an area in which steel as a commodity is particularly exposed.

Global steel is at present facing an unprecedented overcapacity phenomenon, driven largely by China where demand has declined while state-supported production has increased significantly. This reality has negatively affected price and resulted in increased instances of market-distorting dumping and circumvention, both from China and from a host of other global producers whose home markets have in many cases suffered as a result of Chinese competition.

Left with no choice but to export, these nations begin doing so aggressively, dumping yet more product onto global markets, further degrading global prices. While the CSPA supports trade, we believe with our efficient facilities and innovative workforces we can thrive in a free-trade environment. But we also believe that free trade has to be fair.

In order to preserve a level playing field in steel and respond to increasingly creative acts of circumvention and dumping, we have worked closely with government to develop a series of legislative and regulatory proposals for action on trade-remedy modernization.

We are very encouraged by the inclusion in the Budget Implementation Act of two of these provisions, and we are optimistic about additional legislative changes resulting from the government's current consultation on the Special Import Measures Act. We believe it is in Canada's best interests to ensure that the trade remedy system continues to provide adequate remedies for domestic producers and to operate in a transparent and accessible manner.

Sending a strong signal that the principles of fair market competition will be defended in Canada against unfair trade also signals that investments in Canada will be protected against market distortions and anti-competitive behaviours from other jurisdictions.

Along with trade remedy modernization, we would encourage the continued enforcement of legislative and regulatory provisions related to China's non-market economy status beyond 2016. This is another opportunity to send a critical message regarding the security of investment in Canada.

China's established pattern of non-market behaviour in steel has had significant negative consequences globally. They maintain more than 425 million metric tonnes of surplus production capacity. That is roughly 30 times the totality of the Canadian market. Their state-owned and state-supported steel sector has disrupted global trade patterns and forced more reductions in prices.

Canada's current Special Import Measures Act allows the Canada Border Services Agency to investigate whether certain countries, including China, are operating as non-market economies. The ability to initiate these investigations, which allow for evidence-based determinations of fair and “market-based” dumping margins, is critical to the efficiency of Canada's trade remedy system.

Through changes in 2013, the government strongly endorsed this practice. These addressed policy and business uncertainties for the Canadian steel industry, and maintained a policy balance between us and our NAFTA partners. This facilitated investment in Canada. In our view, the policy approach should continue into the future without compromise.

The second track that I mentioned is the concerted pursuit of economic growth in Canada through the development of a manufacturing policy framework that maximizes our domestic advantages and encourages investment and production in Canada.

In that context, the CSPA welcomes the Government of Canada's budget 2016 commitment of $120 billion over 10 years for infrastructure development. Our members look forward to having the ability to contribute to the needed modernization and rehabilitation of Canada's public infrastructure. We share the government's view of long-term investment in infrastructure as an opportunity for contributions to national economic growth. We believe that our steel producers will play a substantial role in supplying the critical inputs required by projects associated with infrastructure challenges of a national significance.

Similarly, we were encouraged by the budget 2016 extension of the automotive innovation fund through to the end of 2020-21. We believe this type of partnership between the federal government, the Government of Ontario, and the Canadian automotive industry for the purposes of attracting strategic, large-scale research and development projects is an important component of what we hope is a collaborative effort to raise the profile of Canada's strong manufacturing capabilities and to better influence the investment location decisions crucial to the long-term competitiveness of the Canadian automotive sector.

We're also encouraged by commitments to move forward with the development of Canadian energy infrastructure, including addressing access to market challenges. We believe that pipeline development represents the most responsible and sustainable way to deliver Canada's energy products to market, which we feel will in turn encourage greater investment, long-term growth, and job creation associated with that sector.

While we appreciate the need for a fulsome consultation of affected communities and robust environmental assessments, we are also hopeful of a near-term project approval or approvals and optimistic that Canadian steel will play a vital role in associated infrastructure development.

In closing, I would like to take the opportunity again to thank the members of the committee for undertaking this study, and for continuing your important work on the future of Canadian manufacturing industries. As crucial middle-class employers in Canada who hope to strengthen and grow our operations, we appreciate the dialogue your efforts have initiated and we look forward to the outcome of your work. I am happy to take any questions.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

Finally we'll move to Mr. Lansbergen, vice-president, regulations and partnerships, of Forest Products Association of Canada.

[Paul Lansbergen, Vice-President, Regulations and Partnerships, Forest Products Association of Canada]

Thank you, Mr. Chair. Thank you for the invitation to appear before the committee as part of this study.

FPAC is the national trade association for the industry. I want to give you three quick messages as part of a narrative. I won't take the full time, because I do want to get into more of a dialogue with your questions and answers.

You're looking at the manufacturing industry as a strategic sector, and certainly the forest products industry is a strategic sector. We operate across the country, coast to coast. We use an abundant natural resource that Canada has and for which Canada is a leader in certification. We're transforming beyond our traditional suite of products into new bioproducts, which I'll explain in a bit.

We've had prosperity for the last 200 years, which the industry has helped to generate. We can do that for another 200 years, but not for just lumber and pulp and paper products.

We also have a great story to tell on climate change. We can do more, and we think that's another reason why you should give good consideration to how the forest products industry fits in your overall study.

I have some quick, simple facts about the industry. As I said, we operate across the country. We sell $65 billion worth of products at home and abroad to 180 different countries around the world. We employ 230,000 Canadians in largely rural and remote areas of the country, but also some in urban areas. They're good, well-paying jobs and certainly above the average.

In terms of our environmental performance, quite admittedly we were not always good stewards, but we've cleaned up our act. In fact, we are now leading the world in third-party certification of sustainable forest management practices.

We have cleaned up our act in terms of air emissions, water emissions, and landfill, and we're very proud of our green credentials. We have a market study that indicates we have the best reputation in the world. We want to maintain that not only for our brand in the marketplace, but also because we operate largely on public forest land, and that social licence to operate is important to us and part of our raison d'être.

I gave you folders; feel free to take a look at them as I'm talking. One of our new initiatives on the environment is on climate change. We have made rather significant reductions in our own emissions, but we think we can do a little more. We think we can store more carbon in the forests, and we think that the products we sell can store more carbon as they're used. There's a brochure in there that talks more about that, and I'm happy to answer questions later.

In terms of the transformation I talked about, we went through a dark period. Necessity is the mother of all invention, and we figured out we can do a lot of new and interesting things with wood fibre beyond lumber, wood panels, pulp and paper, tissue, and packaging.

Essentially, anything you refine petroleum into, you can refine wood into. If you want green power, we can do that by burning bark and pulping liquor. We do that for our own power. We do that for our own heat, but we export to the grid. It could also supply district heating systems, particularly for remote communities.

If we want biofuels, we can be a feedstock provider and help convert the wood biomass into biofuels, whether it be ethanol or biodiesel.

If you want biochemicals, you can get sugar from trees. You can get carbon black for tires from trees and also carbon fibre for high-end bicycles and automotive applications.

We are leading the world in the production of nanocrystalline cellulose, where we break the cellulose down to the nano level. It can be used as a strengthening additive for our traditional products, but we can also use it as a coating for metal alloys to make our planes, trains, and automobiles lighter and more fuel efficient.

Cellulose filaments, which are a slightly larger size, can be used, again, as a strengthening additive for our traditional products, or they can be used to strengthen cement, for concrete-making, to make our buildings and other infrastructure lighter and less carbon-intensive.

Flat-screen TVs could have acetates from wood fibre in the screens. There are paints that could have polymers from wood fibre. There are cosmetics that could have ingredients from wood fibre. Pharmaceuticals have fillers and coatings made from cellulose, either to slow the body's absorption of the medicinal ingredients, or as a coating to make it easier on our tummies.

There are a lot of things we can do with wood fibre, some of which we are doing now and a lot more of which we can do in the future.

Now, not all of these technologies are commercial, so one area that Natural Resources Canada has been very helpful with over the last number of years is helping to de-risk the commercialization of some of these technologies. We would like to see the government continue that.

Besides all the technology, we are also innovating our business models. We are diversifying our geographic markets to expand beyond our heavy reliance on the U.S. industry and U.S. marketplace, so China and India are huge markets and growth opportunities for us. We are expanding into new uses of some of our traditional products. We have been using lumber, wood panels, and engineered wood products in our homes for a long time, but we can build with wood in non-residential buildings, whether it be commercial or industrial, and certainly taller wood buildings.

The other area that some of my colleagues also mentioned is competition globally. We are not alone in this effort to do new things with wood fibre. Our competitors in Scandinavian countries, Brazil, and elsewhere are chasing the same dreams and opportunities. Where we are first in line, we can perhaps get an advantage through being the first mover, so that is important as well.

I think I will leave it at that and perhaps leave more time for questions and answers.

Thank you.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

If we keep on track, we should be able to do a complete round, regular time, all around—at least one round for sure.

We are going to start with Mr. Baylis. You have seven minutes.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

I am going to be looking for commonalities among your three different industries, and I am going to keep you guys tightly leashed to one minute per answer, just so I can get through what I want to do.

First of all, productivity.... I noticed that the aerospace and the steel have shown great productivity. I don't know much about the forest industry, whether there has been productivity or not. Maybe you could explain quickly, in 60 seconds, what the main driver for productivity has been in each of your industries.

[Iain Christie]

Global competition, because only the companies that manage to figure out a way to do it can compete globally, so being unproductive just isn't an option.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

What are they doing to be productive?

[Iain Christie]

That is harder to quantify, and it would certainly take more than a minute to answer. It varies, depending on which company you are talking about.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

Your company has been exposed to a tremendous amount of global pressure. It is survival of the fittest. Is that it?

[Iain Christie]

Basically.

[Joseph Galimberti]

Technology and training.

Technology is crucial in terms of process modernization, increased productivity, increasingly sophisticated product, and increasingly complex demands from the customer.

Training—better equipping folks on the floor to undertake those processes—has been critical.

Underlying it all is that all of our members compete within their organizations for foreign investment in Canada. How those organizations individually are demonstrating performance, or a go-forward potential for the industry in Canada, is crucial to both of those things. Without a business case, you are not going to see new technology in Canada, and you are not going to see a new workforce.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

Okay.

[Paul Lansbergen]

Very similar drivers.... We are largely a commodity business. We are global in nature, so the competition is pretty fierce. We went through a dark decade, and we actually have a great productivity record. We have studies to prove it, and I am happy to share that with you.

How we have done it is largely through technology. A lot of our processes are computerized. You can run a pulp mill with six engineers in a control room doing most of it.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

To remain competitive, specifically in something like lumber, which is commoditized to a large degree, you have to get the human part of that equation down as much as possible. You're saying that you can run a mill with six people. Is that it?

[Paul Lansbergen]

You need others around for maintenance and other things in case something goes wrong, but if everything goes nice and smoothly, it's all computerized. It's a suite of monitors in front of someone largely sitting at a desk.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

Is that the same thing for steel?

[Joseph Galimberti]

Certainly, there is increasing technology, no question. Workforces at a steel facility are not what they used to be.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

The workforces have shrunk and technology has taken over. Has that kept the labour costs sufficiently low that we can compete with low-cost areas like China?

[Joseph Galimberti]

Well, no. To be clear, labour costs in Canada are not ever going to be low enough that they are going to compete with China. The differential is enormous.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

I didn't mean per unit labour costs. I meant the number of people doing—

[Joseph Galimberti]

No. We're competitive with China. We operate within the North American market. It's an integrated market between ourselves and the United States. A lot of our value chain efficiencies are crucial there and provide a lot of our operational advantage. Frankly, for the high-quality product we put out, on-time delivery, supply chains, and access to market are key. Labour is not a consideration there; it's just a lose-lose proposition.

[Frank Baylis, Liberal, Pierrefonds—Dollard, QC]

I'm going to look at another set of questions.

Can government procurement help drive innovation? I know about aerospace and steel; I don't know about lumber. Could you talk about that?