Industry Committee on May 31st, 2016

[The Chair, Liberal, Dan Ruimy]

Welcome to meeting number 17 of the Standing Committee on Industry, Science and Technology.

Today we're going to have a bit of a shortened session because we have to get back to the House. We're going to try to wrap it up by five o'clock. We have 15 minutes at the end to talk about a couple of things in camera.

Our witnesses today are, from the Canadian Manufacturers & Exporters, Mathew Wilson, senior vice-president, and Martin Lavoie, director, policy, innovation and productivity; and from the Canadian Labour Congress, Chris Roberts, national director, social and economic policy.

We were supposed to have Manufacturiers et Exportateurs du Québec; however, they're not coming now.

We're going to get right into it. Let's try to keep it to about eight minutes each.

Who do we have going first?

Mr. Roberts, take it away. The show is all yours.

[Chris Roberts, National Director, Social and Economic Policy, Canadian Labour Congress]

Thank you so much, Chair, and thank you to all the committee members. Good afternoon.

I'd like to convey my appreciation on behalf of the CLC president, Hassan Yussuff, for the opportunity to appear before you today and present the views of the Canadian Labour Congress.

The CLC is the voice on national issues for 3.3 million working men and women in Canada. The Congress brings together Canada's national and international unions, along with the provincial and territorial federations of labour and 130 district labour councils across the country. The members of CLC affiliated unions work in virtually all occupations, industries, and sectors of the Canadian economy, including over 400,000 employed in manufacturing.

I don't believe I need to spend a lot of time explaining to this committee about why the state of manufacturing is of importance to all Canadians. I'm going to quickly get to some of the challenges facing manufacturing in Canada as we see them.

Manufacturing jobs historically have been an important source of relatively well-paid jobs and decent incomes for working class Canadians, including newcomers to Canada.

Today, relatively well-paid working class jobs in manufacturing are at risk. The manufacturing sector has lost half a million jobs since the sustained appreciation of the Canadian dollar, beginning in 2002, and 25% of total manufacturing employment. Job levels have remained depressed since the recession. From its recent 1999 peak of more than 15% of total employment, manufacturing's share of all employment has fallen to below 10%. Unionization rates have also fallen in manufacturing, and the wage premium that manufacturing jobs historically enjoyed has narrowed. Until 2008, hourly employees in manufacturing were paid about 10% more per hour on average than in the economy as a whole. Since the recession, that gap has largely disappeared, and manufacturing wages risk falling below the average for the total economy. In the United States, manufacturing jobs have already fallen below the median wages for the economy as a whole.

With respect to manufacturing strategy, between 2002 and 2014, the manufacturing sector broadly suffered from the combined consequences of the over-valued dollar, associated with the commodity price boom in Canada, and intensified competition from Chinese and other exports in the U.S. market.

With the commodity boom now over, economists expect that the lower dollar and rising U.S. demand for homes and cars will revive Canadian manufacturing, but most indicators of manufacturing's performance have not yet reached pre-recession levels, or have only recently begun to do so.

In our view, manufacturing, innovation, and productivity-generating growth will not occur spontaneously, but rather require encouragement and nurturing by coordinated policy measures.

We urge the federal government to work with provincial governments, industry, labour, universities, and colleges to establish manufacturing sector development councils. These councils would identify opportunities to promote investment and employment in Canada, adopt technologies developed in educational institutions like community colleges, invest in sustainable products and practices and technologies, and expand value-added exports. The suite of measures available could include such policies as domestic procurement policies, active industrial strategies to foster high-tech industry, targeted subsidies, and even public ownership in strategic industries.

In our view, the federal government should begin by convening stakeholders to develop a national automotive strategy for attracting and retaining automotive investment and product allocation in Canada. Aerospace and telecommunications are also logical candidates for sector strategies.

Manufacturing strategy also has an important role to play in helping meet Canada's ambitious greenhouse gas reduction targets agreed to in Paris in December. The federal government should actively develop Canada's manufacturing capacity to support an expansion of low and zero emission transportation, such as a national program of public transit expansion. There are also opportunities to foster the green manufacturing necessary to supply energy efficient equipment and materials used in the construction of high efficiency homes and offices.

Shifting to trade agreements, the international rules governing trade and foreign investment in Canada are critically important for manufacturing. Trade and investment deals that remove policy space necessary to develop sector strategies will constrain the revitalization of manufacturing, in our view. International trade and investment agreements that Canada enters into must preserve the right to implement performance requirements for foreign investors, negotiate community benefit agreements, foster local procurement, and include training requirements and other so-called offsets to stimulate local manufacturing.

We urge the government to replace the Investment Canada Act and its current opaque and seemingly ineffective “net benefit” test for foreign investments in Canada and create a more transparent and clear cost-benefit test. This would require a foreign investor to make binding commitments to production and job levels, commit to new investments in fixed capital and technology, and pledge to expand Canadian content in supply contracts and other inputs.

Finally, finishing with the issue of labour adjustment, higher rates of productivity growth entail that even when manufacturing output is growing, workers will need to be protected in the process of ongoing restructuring. Companies have responsibilities when laying off workers. Reasonable advance notice must be given, adjustment committees should be required in the workplace, and minimum levels of severance pay entitlement must be increased. Employment insurance regular benefits should also be improved, in our view. Governments must find ways to guarantee the pension benefits of workers against windup in the event of solvency deficiencies in the plan, so that the sorts of tragedies we've seen all too frequently in recent years cease. More federal support is needed for labour adjustment programs, especially for older workers, and EI funds should support retraining prior to layoff.

I want to end with an example of the sort of labour adjustment initiative that the CLC believes the federal government can promote and encourage. That is a joint initiative undertaken by the CLC and the Canadian Manufacturers & Exporters. It's entitled CertWORK+, and it's a workplace training and certification program in the manufacturing sector. It's been successful in assisting displaced production workers in manufacturing with adjustment. The program has already allowed assemblers, material handlers, and machine operators to have their skills recognized and certified according to national standards in order to help with mobility and job opportunities. There have been several instances of plant closures in which CertWORK+ has already come into play as one useful tool available to displaced workers in the adjustment process.

I'd be happy to answer any questions the committee might have in that regard.

Thank you very much.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

Now we will move to Mr. Wilson.

[Mathew Wilson, Senior Vice-President, Canadian Manufacturers & Exporters]

Good afternoon, members.

We are pleased to be here on behalf of Canada's 60,000 Canadian manufacturers and exporters, and our association's 2,000 direct members, to discuss Canada's manufacturing sector and its future.

My name is Mathew Wilson, and I am joined by my colleague Martin Lavoie. As mentioned, Éric Tétrault, our vice-president from our Quebec division, or MEQ, was supposed to be here as well. However, he was unable to participate. Martin and I are more than able to speak to the issues. We’re all part of the same organization, and so there should be no issues whatsoever from our perspective on that, and hopefully you can understand.

Canadian Manufacturers & Exporters is Canada's largest industry and trade association with offices in every province, and is chair of the Canadian Manufacturing Coalition, which represents roughly 55 sectoral manufacturing associations, many of which have appeared or will appear before this committee during this study. Of our members, 85% are small and medium-sized enterprises representing every industrial sector, every export sector, and all regions of the country.

Before we outline our vision and priorities for action to support the growth of Canada's manufacturing sector, we would like to acknowledge and thank the committee on this critically important study, and in particular Mr. Masse and Mr. Longfield, who have worked very closely with CME to make this study happen and get as far as it has.

Despite the negative press, manufacturing remains the single largest business sector in Canada. Canadian manufacturing sales surpassed $600 billion in 2015, representing about 11% of Canada's total economy. Manufacturers directly also employed 1.7 million Canadians in highly productive, value-added, high-paying jobs. Their contribution is critical to the wealth generation. It sustains the standard of living that each and every Canadian enjoys.

At the same time, manufacturing in Canada and around the world is going through tremendous changes including major shifts in economic and market conditions, acceleration in the creation and adoption of new technologies, and changing political and policy priorities of governments. In addition to these shifts, manufacturing itself has become much more globalized for production and customer bases, and the lines among manufacturing, services, and technologies are rapidly blurring. This is a challenge for manufacturers as the production processes they use, the goods they produce, and the skills of their workforce are undergoing constant change.

These changes are not unique to Canada. Around the world, manufacturers and governments are struggling to manage the changes that the fourth industrial revolution is bringing upon us. Germany launched Industrie 4.0 several years ago to deal with these changes. The U.S. has established the National Network for Manufacturing Innovation. China has just launched “Made in China 2025”, which aims to move their manufacturing to higher quality and higher value. All of these strategies are helping to drive major changes to their economies and manufacturing sectors.

However, Canada has no strategy at this time, and we need one. Globally we might be the best positioned to capitalize on the opportunities of the fourth industrial revolution based on the strength of our natural resource sector and our access to raw materials, our excellent education system, the expertise in our technology clusters, and the strong existing base in advanced manufacturing and its workforce.

In order to develop that strategy, CME recently launched an initiative led by the private sector to help shape the future of manufacturing in Canada called Industrie2030. Our objective through Industrie2030 is to create an actionable road map that would double manufacturing activity in Canada by 2030. We are also working with officials from ISED to align our consultations with those of the national innovation strategy. We have provided the committee members today with the background documents on 2030 for your review. I apologize in advance that they are only in English. They will be translated, and we'll submit those when available.

Over the past several weeks, we have begun those consultations on Industrie2030 with manufacturing executives from across Canada. The consultations are fairly simple. We want to understand what the barriers are to growth and how we can help companies accelerate that growth. In particular, we are focused on four core pillars: investing in plant capacity, developing and commercializing new products, adoption of new technologies, and finding new customers.

We would like to provide you with some of the initial feedback we have received during the initial stages of our consultations on these core areas.

First, on investing in plant capacity, one of the most common concerns raised is the availability and effectiveness of current investment supports. Simply put, they are out of date. They must be modernized, nationally consistent, and be more relevant to advanced manufacturing. The government should implement national policies and programs, not only for regions but also in support of support manufacturing across the country. For example, all regional economic development agencies should financially support the adoption of advanced manufacturing technologies, and regional tax credits such as the Atlantic investment tax credit should be made available across the country. Further, many of today's support programs are complicated, take months to secure funding, and involve loans, which are then taxed back by CRA, drastically reducing their positive impact for the company. Manufacturers are looking to partner with government to help de-risk investment in new technologies, not to to deal with a more complicated bank.

On product development, scale-up, and commercialization, which is a key area in whether or not we're going to grow Canada's manufacturing sector, many of the current programs for product development are limited and ineffective.

Much of the value and innovation actually occurs in turning primary research and ideas into commercial products. Programs like SR and ED are excellent at supporting primary research; however, they need to support a wider range of company programs and product development and commercialization. The government should also look at other examples around the world from countries that are excelling in product commercialization and in innovations such as the patent box tax regime, which provides direct financial support towards the commercialization of new products and services.

The adoption of new technologies is going to be critical as we enter the fourth industrial revolution. Companies understand how critical it is to have the latest technologies if they are going to be world-class. Right now, however, changes and the range of technologies, such as 3-D printing, advanced automation, and the Industrial Internet, to name a few, are overwhelming many companies, especially SMEs. Most companies don't invest in the technologies because they don't know how to use them, which I guess in some ways is better than other companies that invest in the technologies only to let them collect dust in the corner because they actually don't know what to do with them.

The government should look at the creation of national manufacturing hubs, similar to what's been created in the U.S., which can demonstrate these technologies and help companies understand effective integration. The government should also be looking at programs to help financially support the adoption and creation of those technologies in Canada so that Canadian companies can get access to the best technologies globally, which today they often can't.

As well, companies obviously need to find new customers if they're going to grow. They want new customer bases and they want new markets, but reciprocity in trade access is often very difficult to come by. Canada is a small market and Canadian companies must work beyond our borders to grow. However, we must ensure that Canadian companies actually do have access to foreign markets in a manner similar to how foreign competition has access in Canada. Restrictive government procurement policies in foreign markets and foreign companies unfairly dumping products in Canada are two of the most frequent concerns that must be addressed in moving forward.

I would like to sum up these high-level comments by raising one last critical element, which often goes overlooked in study of manufacturing in Canada, but from our perspective, it's critical for our success. We must begin to once again celebrate and promote the goods that are actually made in Canada. For too long, the sector was thought of as dying or dead, so it didn't get much attention. That's changed over the last several years, but much more needs to be done. As a result, we actually have a fairly limited knowledge about what is made in Canada. Worse yet, the rules around branding something made in Canada are based on a 1970s understanding of manufacturing. Many products that are actually made here can't be labelled as such and celebrated as such. We need to reverse these trends. We need to celebrate what we make as Canadians. We need to promote these goods to Canadians and to the world.

Thank you again for your time this morning, and thank you for taking on this important study. I look forward to the discussion.

[The Chair, Liberal, Dan Ruimy]

Thank you very much, and thanks for keeping it under eight minutes.

If we all keep it tight, we can have rounds one and two with a full slate.

We're going to start right away with you, Mr. Arya. You have seven minutes.

[Chandra Arya, Liberal, Nepean, ON]

I thank the witnesses for their excellent presentations.

My first question goes to you, Mr. Roberts. You mentioned the manufacturing sector development councils. What are they? Could you quickly, in about 45 seconds, expand on them?

[Chris Roberts]

In a nutshell, this is simply the idea of sectoral strategy tables that would bring together all of the stakeholders that have an immediate interest in manufacturing in strategic industries.

[Chandra Arya, Liberal, Nepean, ON]

Are you talking in terms of sector-wise or region-wise? What does it mean?

[Chris Roberts]

It's at the subsector level, such as transportation equipment manufacturing, say, or aerospace, or even food manufacturing. Whatever it is, it's an opportunity to bring together all of the important stakeholders in question to identify opportunities to promote investment in and development of the sector.

[Chandra Arya, Liberal, Nepean, ON]

Okay. You mentioned auto investment, aerospace, and telecommunications as some of the leading ones. Are you limiting yourself to these sectors where organized labour is quite strong and leaving out others?

[Chris Roberts]

No, that wasn't the purpose. It was simply posing the opportunity to identify high-value-added or high-tech sectors that are strategically important for Canada's manufacturing presence globally and starting there.

[Chandra Arya, Liberal, Nepean, ON]

Okay. My next question is for Mr. Wilson.

I am quite interested in your Industrie2030. One of the questions I want to ask is, what sectors within manufacturing do you see as being more important to Canada in five to ten years' time?

[Mathew Wilson]

That is a bit of a loaded question. I think you have to look at some of the bigger sectors we have today and the value they bring, kind of what Chris was talking about. Aerospace and automotive are critically important. The size of their supply chains and the technology they create within those supply chains are massive. If we start losing those over the next five to ten years, we are going to be in real trouble. Those clearly are top of the list.

The next one, I would say, is most likely the food sector, which often gets overlooked in Canada. Food is really important, obviously, as we all eat it, but from an export perspective and a growth perspective, we actually underperform quite substantially in that sector. There is tremendous room for growth. The world wants the maple leaf on Canadian food products, in particular. It is safe and high quality, and we do not export very much of it whatsoever. From a growth perspective—

[Chandra Arya, Liberal, Nepean, ON]

I did see that food processing is among the top manufacturing sector industries in sales, but not in exports.

[Mathew Wilson]

That is correct. They represent about 18% of all manufacturing output, but only about 8% of all manufacturing exports. That is a big gap to make up. Automotive has about the same percentage of output, but their exports are probably somewhere around 25% of the value.

The other sector—if I could just add one last one—is the manufacturing equipment processing sector. If we are going to move manufacturing into the next stage, the digital stage, we need to facilitate Canadian companies in getting their hands on it. There is no better way to do that than to actually create the technologies here in Canada in the first place. Other countries around the world do an excellent job of facilitating that. It is a very big sector. It is often an ignored sector in Canada, and something that we should be looking at more because it not only helps them, but it enables the entire manufacturing sector.

[Chandra Arya, Liberal, Nepean, ON]

Mr. Wilson, in your opinion, do you think we need a well-defined industrial policy?

[Mathew Wilson]

Yes, we need something that looks long term at where manufacturing is going in Canada and can shape that long-term agenda. It doesn't mean that we don't need policies and changes today, but if we are looking only at the next two to three years, we are probably going to miss the boat on a lot of the bigger trends. We think we need a broad-based, sweeping manufacturing policy. We are fully supportive of the sectoral policies that have been created—aerospace and automotive, for example—but if you start lining that up with the food one, the equipment processing one, and all the other sectors that are out there, you will find that 90% of the issues are the same. Rather than create a whole bunch of individual sector ones, we think it is better to start at the big picture, define a national strategy, and see how the sectors fit within that afterwards.

[Chandra Arya, Liberal, Nepean, ON]

You have rightly identified that innovation is quite good, but the commercialization is a bit of a problem here. In my opinion, we are good at funding innovation in Canada, but not so good at commercializing it.

You mentioned the patent box. In about 30 seconds, can you explain what that is?

[Mathew Wilson]

I will let my colleague do that. He is much more familiar with that. That's why I brought him.

[Martin Lavoie, Director, Policy, Innovation and Productivity, Canadian Manufacturers & Exporters]

Patent box is a tax regime that is in place in some countries, such as the United Kingdom, Belgium, and the Netherlands. What it does is decrease the corporate income tax rate for products that are the result of commercialization of an IP in the country. It is trying to link the patents with the products.

For example, in the U.K., it would be something like 5% of the revenues associated with that particular product for a certain length of time, say five years. It gives an incentive to the manufacturers to license or develop IPs in the country, and commercialize them in the country, meaning production in that country.

[Chandra Arya, Liberal, Nepean, ON]

Mr. Wilson, you mentioned the creation of national manufacturing hubs. Are you speaking in terms of clusters? What do you mean by that?

[Mathew Wilson]

We put a proposal for the federal government a while ago on the creation of one manufacturing hub that would allow companies to do a couple of things: one, understand the technologies and two, commercialize technologies and products through it. I think you probably need to do it on a sector basis or a regional cluster basis to some degree, and maybe in the upcoming cluster strategy you could fit the two together.

If you look at the U.S., they have 12 national manufacturing innovation clusters. They break down by region, by sector, and even by technology. For example, there are some on 3D printing and advanced technologies. They bring together the companies that are interested in that and allow other companies in, so it is a type of [Inaudible--Editor] network.

[Chandra Arya, Liberal, Nepean, ON]

My last question is about the availability of capital for new manufacturing companies or small and medium-sized manufacturing companies. Coupled with that, we see the shrinking size of the medium-sized manufacturing companies. What are your comments, please?

[Mathew Wilson]

Capital is mostly hard to come by, for a lot of companies. More established companies have easy access to capital. The smaller ones, the start-up ones, have a lot harder time getting access to any capital, whether it is through government funding or through traditional commercial areas.

I think CME has been pretty clear, and maybe I will restate it here on the record. I think one of the biggest challenges we have in Canada is how to help small companies become medium companies, and medium companies become large companies. We simply don't have enough large domestic companies to drive global innovation. We have Bombardier and BlackBerry, and over the course of history we've had a whole bunch that have largely been sold out. Having large companies drives a tremendous amount of innovation in Canada in and of itself, but our companies tend to stop when they get just past start-up phase. There are structural reasons, including the tax regime in Canada, which actually punishes companies for growing—which makes no sense whatsoever.

We need to look at some of those imperatives or barriers to growth to get companies to become larger, so they are on a global scale.

[The Chair, Liberal, Dan Ruimy]

We're going to move onto Mr. Godin. You have seven minutes.