Industry Committee on Sept. 21st, 2016

[The Chair, Liberal, Dan Ruimy]

Good afternoon, everybody.

Welcome back to another lovely season we have here. This is meeting number 22, and it looks to be an interesting one, with the great witnesses we have here today. I apologize for being a bit late; the House got out a bit late today.

We have two witnesses, and then we are going to get into our questioning. In the last 15 minutes, we will do some committee business.

Without any further ado, we are going to go with Ms. Sullivan, dean of the faculty of engineering at the University of Waterloo. You have 10 minutes. Give us your best shot.

[Dr. Pearl Sullivan, Dean, Faculty of Engineering, University of Waterloo]

Thank you very much, Mr. Chair. Thank you, everyone, for the invitation to speak to you today.

Canada needs manufacturing as a strategic economic sector because, as an advanced country, we need to create and produce things. The ability to create new value is a key indicator of the technological progress of a country. More important, manufacturing has an enormous ripple effect on the other industries, especially transportation, finance, trade, and services, which employ large proportions of our society.

As we have also seen in the United States, Canada's manufacturing sector has dropped in the last 20 years from 25% of the nation's GDP to 10% today, mainly due to external forces, and most significantly because of globalization. We did not anticipate how quickly global competitors would be able to build up the infrastructure to compete on pricing and delivery. In the mix, business is facing growing challenges, including electricity pricing, pension programs, and environmental policies such as cap and trade.

Regardless of the source of challenges, it is no longer enough to develop new products; we need to also develop new markets.

The future lies in high-value production, embedding cutting-edge technology in our products. In an era of clean energy technologies, self-driving cars, and digital infrastructure, Canada can define its place in the global marketplace through quality, safety, and dependability. Above all, we need a continuum of resources and infrastructure to enable Canadians to design, make, and market new products. This will require a coordinated effort, a national effort across education, infrastructure, procurement, and trade policy. What can Canada's universities do to help?

First, education's impact is direct. We need to develop a real talent pipeline for high-level skills and creativity, so our students are equipped to impact the world from the day they graduate, or sooner.

At Waterloo, for example, all 12 of our engineering programs are co-op, so every student graduates with at least 20 months of hands-on work experience. In 2015, our students earned $120 million, working with 1,700 employers. Where our students work also indicates the dynamism of the sector. Every year about one-quarter of the 8,200 positions are in manufacturing, providing continual injection of new ideas and energy. Meanwhile, our students become experienced, job-ready engineers. Their employment rate post-graduation is over 95%.

Skills and education must reach further than just students and entry-level workers, however. The pace of technology innovation and adoption is ever accelerating. Existing workers and management in both SMEs and major industry need opportunities to explore new ideas and retool for new skills. We need an initiative that would allow industries into our education and research programs so that they can get hands-on experience of new technologies for themselves—a reverse co-op model, of a sort.

As Harvard business professor Michael Porter has stated, “innovation is the central issue in economic prosperity”, and the competitiveness of a country is directly tied to the ability of its industrial complex to “innovate and upgrade”.

To make this a reality, academia needs to engage more effectively with the manufacturing sector. Universities have already begun to do so. Half of Waterloo engineering research, for example, is funded via partnership programs. We have over 1,000 private sector partners, and we have translated hundreds of new technologies to industry.

While successful and important, however, these projects cannot transform private sector R and D by themselves. Many are funded for a limited duration, for work with a single partner toward a particular objective. Opportunities for networking and wider collaboration are restricted. On the other hand, funding for more ambitious programs can take years to assemble, making partners reluctant to invest and leading to missed opportunities.

In contrast, some of the most successful initiatives are much broader and more inclusive. We have a number of research centres, but I will use the automotive area as an example, since it is the most organized in the field of manufacturing.

The Waterloo Centre for Automotive Research, or WatCAR, has grown to become Canada's largest automotive academic enterprise. It acts as a magnet not just for car manufacturers like GM, Magna, Ford, Toyota, and Honda, but also for assemblers, parts suppliers, and regulators. With programs in connected and autonomous vehicles, lightweight materials, vehicle safety, green energy, and more, it allows all partners, big and small, to access a spectrum of expertise and know-how to help them adapt for tomorrow's automotive sector.

The upfront costs of development in producing a new product or manufacturing processes are large. Equipment can be highly specialized, and validation and certification expensive. This is a huge barrier for small business and it's why large corporations like BlackBerry, Bombardier, and Magna dominate R and D in Canada. Nevertheless, more than 95% of Canada's manufacturing firms are SMEs. They will need to adapt and innovate. We need to create innovation anchors, and also hubs like WatCAR, for world-class product development and validation where research infrastructure and expertise are open to all Canadian companies. These centres can be test beds for developing new platform technologies that are adapted for partners' needs. They welcome established technicians, engineers, regulators, and managers looking to explore and practice state-of-the-art technologies.

Innovation hubs should bring everyone to the table for networking, exchanging ideas, and seizing opportunities for integration and collaboration for large corporations that can invest strategically in Canada, SMEs that need to innovate and secure new customers, startups and entrepreneurs looking to scale up, regulators and the public sector seeking insight into tomorrow's industries and products, and researchers and students looking for new challenges with a real-world impact. Government can play a crucial role by seeding this kind of innovation.

We, as a country, cannot excel in everything, but some platform technologies will be vital for protecting Canadian companies and jobs in the global marketplace. Examples include advanced sensing and digital manufacturing, sustainable materials, flexible electronics, and the visualization and computational modelling of manufacturing processes. Autonomous vehicles and connected cars will revolutionize our established automotive and transportation sectors.

I'd like to quickly highlight two newcomers.

Mobile and autonomous robotics are expanding rapidly. McKinsey estimates the market will be worth $200 billion within 10 years. In Waterloo, mechatronics research has spawned some of the country’s most promising new robotics companies. Clearpath Robotics and Aeryon Labs, for example, have created hundreds of jobs in just a few years of operation. Aeryon drones helped firefighters scout the recent forest fires in Alberta, and Clearpath is expanding into industrial markets with their autonomous warehouse robots. They are investing in research to build a new generation of products, and they're being joined by many start-up companies in an emerging robotics innovation cluster.

Additive manufacturing and 3D printing meanwhile are just approaching the mainstream. International companies like EOS, GE Aviation, Rio Tinto, and Rockwell are lining up to partner with Waterloo engineering on research and development. At least five other Canadian universities are developing this capability. In the years to come, hundreds, if not thousands, of SMEs will need to incorporate 3D printing into their workflow.

The innovation index of the World Intellectual Property Organization, or WIPO, shows Canada slipping from 11th place in 2013 to 16th place in 2015. Germany, and now the United States, is leading the way in merging information technologies on the Internet of things and manufacturing process technologies that drive the next generation manufacturing enterprises.

While there are pockets of strength within Canadian industry and academia, we need a big “I” consolidated national initiative. We need a strategy for developing, demonstrating, and deploying select platform technologies, so they can be accessible to SMEs and large Canadian companies for commercialization. This is a vision that the manufacturing sector has been seeking and one that universities like Waterloo are eager to embrace.

Thank you very much.

[The Chair, Liberal, Dan Ruimy]

Thank you very much. That was excellent and still under 10 minutes.

We're going to move to Leah Olson, president of the Agricultural Manufacturers of Canada. You have 10 minutes.

[Leah Olson, President, Agricultural Manufacturers of Canada]

Thank you.

Good afternoon, Mr. Chair and committee members. As you identified, I'm Leah Olson. I'm president of the Agricultural Manufacturers of Canada. Our board chair, Geof Gray, sends his regrets for not being able to attend.

I'd like to provide a few remarks before the floor is opened for questions.

I'm pleased to be here as you continue your study on manufacturing in Canada. It's an important one, and I want to share with you the critical role that agriculture equipment manufacturers play in today's economy.

The Agricultural Manufacturers of Canada is a national member-driven industry association with just under 300 members. Our mission is to foster and promote the growth and development of the industry in Canada.

Canadian-made agriculture equipment is among the highest quality in the world. Just over 50% of our manufacturing members are located in communities of fewer than 10,000 people. Some of our members are located on the family farm or in communities where the people they employ outnumber the community they're in.

For example, Westfield, founded in 1951 by Abraham Plett, a farmer turned manufacturer, is a leading producer of grain augers. Westfield, acquired by Ag Growth International in 2000, continues to have its manufacturing facility of approximately 175,000 square feet in Rosenort, Manitoba, a community of fewer than 600. Their products are exported to over 30 countries worldwide, and they employ approximately 250 people at their plant in Rosenort.

Seed Hawk, a manufacturer of seeders, was established in the early 1990s when Pat Beaujot, a professional agronomist with a passion for precision seed and fertilizer placement, wanted to avoid tilling his farmland but did not have the equipment on the farm to fit his needs. As such, he and two partners developed and began manufacturing equipment to enable them to employ no-till technology. Today, Seed Hawk is majority owned by a privately held Swedish company, Väderstad. Despite the ownership change, Seed Hawk continues to be located in Langbank, Saskatchewan, a hamlet with a population of fewer than 100, and they employ more than 200.

These are not isolated examples; rather, they are the norm within our industry. We provide unique employment in all realms associated with being a quality manufacturer: finance, marketing, IT, engineering, procurement, etc.

All across Canada, agriculture equipment manufacturers are making a positive economic impact, but they are not immune to global market downturns and job losses. While there have been some employment reductions, it is not consistent across our industry. In fact, with a global downturn, most of our members, small and medium-sized, have turned to increased R and D and made efforts to reduce their input costs rather than seek out government subsidies.

The key role the government can pursue for agriculture equipment manufacturers is to enable further innovation by providing tax rebates supporting R and D and the commercialization of our products in Canada and globally.

Machinery has been at the heart of Canadian agriculture for many years. It shaped agricultural practices and, in many respects, created the opportunity for rapid European settlement in the late 1800s. The agriculture equipment manufacturing industry has progressively developed as an entity separate from commercial or industrial manufacturing.

Central to this evolution was the need to develop agricultural machinery capable of meeting the challenges of our Canadian climate. This drive for innovation was critical to farmers who struggled with foreign equipment designed for smaller farms and less arid conditions. These same challenges have enabled Canadian agriculture equipment manufacturers to be global leaders in the development and production of high-quality, durable, and innovative machinery.

Innovation is crucial if we want to address global issues such as overpopulation, limited resources, and the need for food. The agriculture industry will need to produce more with less, and Canadian farmers are at the forefront of meeting this challenge. AMC's members continuously develop innovative technologies and manufacture products that enable us to be leaders throughout the world. This puts us in a good position to align with and inform the government's innovation agenda.

Our industry is unique, not only in that it's developed in Canada, but also because it impacts food sources globally. Our products help feed the world. Our environmental footprint is better today than 30 years ago because of the equipment that we have built and that we are using.

Our members lead the world on intellectual property of agriculture equipment. Innovation happens every day because our members are talking directly to farmers and responding to their needs by further refining and enhancing their products.

For us, innovation is not just a way of being or something that happens in an isolated facility. It is how we manufacture and manage our day-to-day operations. It is what drives us to develop some of the best agriculture equipment in the world.

Although our sector innovates regularly, there are some areas that could be improved, which I'd like to discuss with you.

First, I'd like to speak about the industrial research assistance program. The $50 million in additional support allocated to IRAP in the 2016 budget is an important investment in moving the innovation agenda forward, and we applaud this. It has helped our members tremendously.

For example, as one of our members highlighted: “We were given an IRAP grant last year that allowed us to do some testing with the Prairie Agricultural Machinery Institute (PAMI) on a new product destined for the European Union. That product testing identified a fatal flaw in one of our components and allowed us to stop installation and adjust our product development direction into something that worked.” They continued: “Without the IRAP funding, we would not have been able to afford the testing. The test was expensive and we had put [all of] our money and energy into the design and development of the prototypes. While the testing year wasn't pleasant due to the identified failure, the results could have been disastrous for us if the product had made it to the [European] market without this test and instead of costing us a few hundred thousand dollars to right the problem it could have easily cost us millions.”

Small and medium-sized enterprises benefit greatly from the IRAP program. Often, it is the difference between launching an innovation, leaving it on the research floor, or launching it without due testing. However, we'd like to see IRAP expanded to cover production and marketing costs of projects, which would help grow our industry even further and contribute to an innovative economy.

Another program that is beneficial to approximately 60% of agriculture equipment manufacturers is the scientific research and experimental development tax credit, SR and ED. However, administrative costs associated with it are increasingly burdensome, resulting in research and development becoming more challenging. The process to make a submission to the program needs to be streamlined if the objectives of the program remain to reward innovation.

Of our members who use the SR and ED program, many are frustrated with the submission process, indicating that it is confusing and often requires professional outside help to do the applications. Often, members will pay anywhere from $30,000 to $100,000 to get the application done. If you assume that 10 of our members hire external consultants for their submission, the combined amount is upwards of $1 million going into administration costs rather than innovation itself. Perhaps it is the cost of doing business, but these are dollars that we would rather see invested in R and D.

Innovation in our industry is incremental, and it's these small steps that allow for the leaps and bounds to occur. We encourage the government to not only streamline the process, but to also have auditors who understand the agriculture equipment industry.

Finally, I'd like to speak about market access.

Export Development Canada is a key player for many of our members, and we thank them for their support.

In 2015 agriculture equipment manufacturers exported 1.8 billion dollars' worth of products to 154 countries; the U.S. was 82% of this. This is why we're keen to see the trans-Pacific partnership agreement ratified, and we want to work with the government on communicating to the public the importance of stronger and more open trade relations.

Innovation minister the Honourable Navdeep Bains recently said in a speech, “As a country made up primarily of small businesses, I'd like to see more than 10% of them exporting, and to places other than the U.S.”

Mr. Chair, we agree. Australia and eastern Europe are key markets for Canadian agriculture equipment manufacturers. Our equipment performs very well there, but there are also great opportunities in South America and Asia. The government could do more to support our efforts at international farm shows and in working with us on challenges that have been overlooked, for example, visas and getting entry into a country more easily to market our industry's products. Continued investments, promoting international trade, and bringing international buyers to Canada are key to our continued growth.

In conclusion, Mr. Chair, Minister Bains has said that innovation is “the path to growth” and the path “to a stronger middle class and higher quality jobs for all Canadians.”

Mr. Chair and committee members, we could not agree more. AMC members help drive the Canadian economy, are global leaders in innovation, and are entrepreneurs who are feeding the world. That's why changes to IRAP and SR and ED, as well as opening up international markets, are integral to Canada's innovation future.

Thank you. I appreciate the time you have given us.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

We're going to go right into questioning.

We're starting off with Mr. Arya. You have seven minutes.

[Chandra Arya, Liberal, Nepean, ON]

Ms. Olson, it's very nice meeting you again.

I recall that when you and a couple of your members came to meet me, we discussed various programs. As you said, we do have excellent programs for innovation and research and development, the SR and ED, IRAP, etc. If I recall, we did mention the problems in funding of commercialization, as you mentioned here, the production and marketing costs of new innovation products.

Could you quickly elaborate on that?

[Leah Olson]

Yes, thank you for your question.

In terms of the production costs, when our members are working with farmers, they will often go back to the shop and make some tweaks.

I took over as AMC's president in March 2015 and I went out to over 60% of our members, and some of them really are on the family farm. Each of those members who I visited has an R and D facility, so while we're small and medium-sized, the R and D is very targeted.

What ends up happening is there is so much of the energy that will go into the production, the prototyping, but as the one member who took advantage of IRAP and was able to do the proper testing identified, they're in a race against other manufacturers, and often we're leading the technology in what's happening. When you pour all of those dollars into the R and D and you're not taking the dollars into the actual production, that's where I think there is a bit of a gap.

[Chandra Arya, Liberal, Nepean, ON]

Thank you.

Dr. Sullivan, of course Waterloo is a great university creating engineering graduates. I'm glad to know there are 2,000 engineering students working in manufacturing.

On the advanced manufacturing side, do you think we have enough talent in Canada for the advanced manufacturing companies? Do you think the universities are supplying enough trained graduates?

[Dr. Pearl Sullivan]

Before I prepared my presentation, I spoke with a number of CEOs who we have relationships with to ask their views, because I think it's important that we provide a view that also includes the business community.

I think what they're saying is that we do have undergraduate-level process engineers. We do need more graduate level, highly skilled people on that side because the manufacturing world is becoming very sophisticated, and to be competitive, the automation side is real.

We talk about Shenzhen all the time in China, which seems to be taking all the jobs and producing 90 million iPhones and so on. But in reality, if you look at what has happened in the last 10 years in Shenzhen, it is highly automated now. They're using less than one-third of the people they used a few years ago. In fact, there are 36,000 injection moulding machines right there in Shenzhen, and robotics are pretty much running the lines now.

I do think we need a different skill set. It's not so much whether we have enough. I think it's not so much the numbers anymore, it's the type of skill sets. We really have to be very targeted in our development of skill sets that would be able to develop new technologies, not just buying things off the shelves and running them. I think we do need that technology.

[Chandra Arya, Liberal, Nepean, ON]

I'm glad that you mentioned we need different, targeted skill sets for the emerging manufacturing industries.

Of course we can't excel in everything, as you rightly said. You talked about advanced sensing and digital manufacturing, mobile autonomous robotics, and additive manufacturing. For these advanced manufacturing segments, do you think a cluster approach would be better?

[Dr. Pearl Sullivan]

I think we have to use the fact that there are some strengths in some areas in some places. For instance, if you asked me what we should do in Waterloo, we are extremely strong in ICT. Manufacturing is going to the technology side, so what we like to do is—and our plans are—to strengthen mobile robotics and strengthen the digital manufacturing side, which is additive manufacturing and 3D printing. That's where we are going to invest our efforts and our innovation agenda.

I do think every university and every NRC has specific agendas and strengths to work with.

[Chandra Arya, Liberal, Nepean, ON]

I'm sure. You're thinking about one cluster's approach is appropriate. Are you seeing any clusters developing in any part of Canada in any of these advanced manufacturing segments?

[Dr. Pearl Sullivan]

I think in southern Ontario, the Mississauga area, Hamilton area, the Waterloo region, and so on, there are business clusters. I think the universities have their strengths. I think we do need to talk about clusters, again, based on targets and strengths. That's very important. For the sake of developing a cluster is not the answer, I think. We have to very clear about that.

[Chandra Arya, Liberal, Nepean, ON]

You correctly mentioned that the huge barrier for small businesses investing in research and development is the capital cost involved, but at the same time 95% of Canadian manufacturing firms are SMEs. As I mentioned earlier, there's a good supply of funds towards innovation and research and development in general, though the particular competence of SR and ED sometimes makes it a big problem for SMEs to be enrolled in that.

Do you find enough funding is available for the commercialization?

[Dr. Pearl Sullivan]

I will answer you in two parts.

Funding is important. More importantly, we need translators. What do I mean by that? I do think that when SMEs have an idea and they want to either improve their product or introduce a new product line, they need some form of prototyping capability, because they have to test things out. Probably, over time...increase the market share to get acceptance, but the prototyping capability is very expensive in terms of capital.

[Chandra Arya, Liberal, Nepean, ON]

Absolutely.

[Dr. Pearl Sullivan]

It's very sophisticated equipment.

I think what we need for every region in this country is to have a prototyping capability where there is expertise.

[Chandra Arya, Liberal, Nepean, ON]

Accessible to all SMEs....

[Dr. Pearl Sullivan]

Absolutely. In my view, I think we can have a prototype facility right on the Waterloo campus. We can even help more companies, not just the start-ups that we have—

[Chandra Arya, Liberal, Nepean, ON]

That is a problem currently.

[Dr. Pearl Sullivan]

Absolutely. This is a barrier; this is really the stopping point. How do we get companies to come in and have integration? Integration is very important, because you can't sell a product piecemeal. You have to integrate it so it can be sold and ready.

[Chandra Arya, Liberal, Nepean, ON]

Thank you, Dr. Sullivan.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

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

[Ben Lobb, Conservative, Huron—Bruce, ON]

Thanks very much, Mr. Chair. It's a pleasure to be back here.

A surprising conclusion to the summer in one regard, certainly for this committee, was the resignation of the Stats Canada chief, who was at this committee not too many months ago.

I have a motion that I would read into the record at this time, and the committee can deal with it as they see fit when the time comes. The motion reads, “That the Committee on Industry, Science and Technology suspends its study of the manufacturing sector and commence a study on the independence of Stats Canada.”

[The Chair, Liberal, Dan Ruimy]

It's your notice of motion.