International Trade Committee on March 23rd, 2015

[Parm Gill, Conservative, Brampton—Springdale, ON]

How does one find out about your organization? Who makes the first contact? Does your organization go looking for possible clients, or is it businesses that are looking for you and reaching out to you for your service and the certification you provide?

[Jared Walker]

It's a bit of both. We do our homework. We do our own bits of headhunting to find corporations that we think would be good corporate ambassadors that already do good work. BDC is an excellent example of this because it has already baked into their mission the task of helping entrepreneurs across Canada. As a crown corporation they already do a considerable amount of things that are aligned with—

[The Chair, Conservative, Randy Hoback]

You're going to have to wrap this up. I'm sorry your time is up, Mr. Gill.

Witnesses, I would like to thank you for being here in the first panel. I will now excuse you as we suspend for three or four minutes while we go through the process of changing the room over for the next panel.

Thank you very much.

[The Chair, Conservative, Randy Hoback]

We'll get on to round two this afternoon, colleagues. In front of us we have from Padre Software, Mr. Jim Reynolds, and joining us via teleconference from Corvus Energy, Mr. Neil Lang. We'll start off with Mr. Reynolds and then we'll move on to Mr. Lang. You will both have 10 minutes to present and then we'll get on to our questions and answers.

Mr. Reynolds, I give you the floor.

[Jim Reynolds, President and Chief Executive Officer, Padre Software Inc.]

Thank you very much.

It's a pleasure to be here.

I was here on February 18 before the Senate committee. I'm glad that you've asked me back to be able to talk today.

I was going to start off by referencing where the chair of the Senate committee, Senator Andrychuk, left off with her last question to us at that time. I'm paraphrasing this: are there capital hurdles holding Canadian SMEs back from exporting and are Canadian companies basically more risk adverse than U.S ones?

This question doesn't appear to be unique to Canada. I'm not sure if your committee is familiar with an article in The Wall Street Journal dating back earlier in March, which talks about Germany, “The Tiny Giant Hole in Germany's Economy”.

It went on to say that the number of small businesses starting up there was down about 25% over the last 10 years and by almost 47% over the last 20 years. Canada is not the only one that's competing in this market. We're not the only one that has these challenges.

In terms of getting the SMEs focused, our government, the Prime Minister, announced on March 18 that there would be two new funding programs over the next five years aimed at SMEs, one with $50 million for direct, non-repayble costs matched by recipient SMEs for trade fairs, etc. That is certainly welcome. The other is for the TCS. There's also $42 million over five years to help them add more commissioners and services.

I'd like to talk about a higher level of some of the structural and organizational imperatives that we're going to need if we are to reach the SMEs. I also chair and report to Minister Ed Fast for the SME advisory board that he has, so we have a bit more background on some of these things. First, the challenge of getting an additional 10,000 SMEs exporting in five years seems reasonable given that there are a million SMEs in Canada. When you start to reduce the million for people who are incorporated in their house, small store-fronts, and things of that nature, that base starts to shrink and the challenge becomes even larger.

Second, if you look at it a little differently, there are 40,000 SMEs that export today, and that's about 4%. Only 10,000 of those, or 1%, export beyond the U.S. If we're going to have an additional 10,000 exporting SMEs, that's equal to the sum of all the past efforts. When you start to look at the challenge it becomes quite large and you have to get at least 2,000 SMEs per year. That boils down to eight or nine per day exporting if you're going to meet this goal.

One thing I believe is that we need reach out to SMEs. There's has to be a two-way street to communicate. Most SMEs aren't aware of what's going on in Canada right now. In the minister's office, they talk about the TCS as being one of the better kept secrets. People don't understand the TCS and what it does. I'm not so sure we know where the SMEs are that are going to be export ready, or are already exporting to the U.S. and may take the next step and go to emerging markets.

The other part is the organizational structure that's in place today through the EDC, the BDC, the CCC, and the TCS. Those organizations are well aligned to support the previous model of free trade agreements and business as usual. In the last six or seven years, we've had an increase in the number of free trade agreements from four to over 30, and we now have an objective of increasing 10,000 SMEs over the next five years. That goal of moving up for an extra 10,000 SMEs is a tremendous objective, but it's one that's not going to come without our refocusing, in my opinion, on how these organizations are put together.

I have a couple of recommendations in that area. First, we have to create a better awareness, communication, and engagement strategy with SMEs. We're not sure if there's a database out there today that can segment our SMEs, the million that are in the base, and line those out to SMEs that are large enough to start exporting.

Second, there is a growing awareness about SMEs in the marketplace outside of Ottawa or government circles. SMEs are becoming very popular. There are major accounting and consulting firms engaged in SME practices. There are universities that are setting up SME chairs. A women's group in B.C. recently recruited 20 SMEs to go on the trade mission to South Korea. There is a major bank working with a Canadian digital media network and an entrepreneur who happens to be from Waterloo trying to run forums and educational institutions for SMEs to make them export-ready. This group is only reaching five to ten SMEs per session, and if you compare the uptake in new SMEs, there is a heck of a challenge to get to the 2,000 a year that we need.

The committee needs to be aware that the challenge is significant. It's a challenge that we haven't had before, and it comes about because of the very rapid change in the environment, going from four free trade agreements to over 30, and it comes with a goal set by government to increase the number of SMEs by 10,000. Those have disrupted the model that's out there.

When we look at how we're going to create this awareness and engage SMEs, I haven't heard a real strategy being articulated at this point. There are all kinds of initiatives from government, private, and institutional efforts, but we need to ramp those up and recognize that we've had some significant changes in this area.

One thing that would be great to have is a kind of a feeder network for synergies, where you take the initiatives from Ottawa and couple those with the initiatives outside of Ottawa, such as the private corporations, some of which are very large. Our biggest banks are funding SME initiatives, down to smaller, private enterprises that are getting involved in trying to make SMEs export-ready. If they are not export-ready, it's hard to export and do it successfully.

The second thing is to segment the appropriate markets and target them, just like you would if you were an automotive business or a retailer selling clothes. You need to understand what the base of a million is. You have to be able to target the ones that are most likely to be successful, where you get the best return on the money that's invested, whether it's through programs from the government or through programs that private enterprise is putting together.

The third thing is to recognize that the way the EDC, the BDC, the CCC, and the TCS are structured today, they are doing an excellent job of supporting businesses. They are in the export market, but what has changed for them is the fact that we're no longer working with 4 or 5 trade agreements—NAFTA being the most significant, and that's well in the past. We are now asking them to deal with 28 trade agreements, so there's a bit of what we call in the technology business a “disruptive change” that's taking place. When that is coupled with the new goal of doubling the number of companies that export to emerging markets, a significant challenge has been thrown in front of these organizations.

For example, about 80% of TCS resources are deployed in countries outside Canada and 20% at home. That is a great deployment. It's working very well, and I don't want there to be any sense of negativity in the statement I am making. However, when you have 80% offshore and 20% here, if you're going to try to create 10,000 new SMEs that are going to export, and you're going to create them here in Canada, somebody has to add the resources to get out and develop them. Whether it's government or the private sector, or a combination of both, you have to recognize that is needed. So perhaps the TCS needs to be given funding. If they're the organization that's recommended—and I think they are very well positioned to do this—they need to have some additional opportunities there.

Those are my opening comments, Mr. Chair.

[The Chair, Conservative, Randy Hoback]

Thank you, Mr. Reynolds.

We'll move on to Mr. Lang.

[Neil Lang, Chief Operating Officer, Corvus Energy]

Thank you for inviting me here today. I really appreciate the opportunity to speak to the committee

Corvus Energy is a young clean technology company of approximately 50 people focused on providing energy storage systems, or large batteries, to the marine market. If you think of cars such as a hybrid Prius, or a fully electric Tesla, then that's what we do for ships by providing large, rugged batteries for ferries, tugs, offshore supply vessels, and other coastal vessels.

We have about 80% market share at the moment, and 95% of our product is sold outside of North America. With Europe having the most stringent marine environmental controls, and also being the decision-making centre for the global marine business, selling only in Canada was never an option for Corvus. I hope that sharing some of the challenges, and also the great support that we've had along our road so far, will be helpful.

Typically, if they can, it's much easier for a customer to purchase from a local supplier. If we look at ourselves, and our own supply chain, we always look to local vendors wherever possible. So to overcome these barriers and become a successful exporter, we focused on three things: firstly, having world-class products in terms of functionality, quality, and value; secondly, developing brand visibility in our export market so that potential customers know who we are and can find us easily; and thirdly, minimizing transaction risk, so that when they do sign a contract with us, customers are not concerned about dealing with a supplier from overseas.

So I'll try to focus on each of these three areas in turn, starting with the world-class products. SR and ED has certainly been invaluable in stretching the initial funding during the research phase of our company. However, our challenge now is in commercialization, and taking fuel data from generation one of the product and using this to develop generations two and three. I know that will ultimately be the base of our long-term success.

Being more and more focused on research, SR and ED doesn't really support this phase of development, but we've been very fortunate to be eligible for the Western innovation initiative funding that provides long-term, low-interest loans for commercialization activities. That's now a vital part of our ongoing success. And I think replicating this program across Canada, and targeting a higher portion of overall funding on the commercialization stage, versus research, would support many businesses surviving what is a very difficult phase in the growth of any young company.

Many of our overseas suppliers and competitors also have the benefit of core technology development and joint initiatives between national research institutions and industry, for example, ITRI, the Industrial Technology Research Institute in Taiwan; KITECH, the Korea Institute of Industrial Technology; or the Fraunhofer Institute in Germany. This foundational research is then released for either no, or minimal, licence fees for multiple companies to commercialize, and thereby magnifies the benefit. We found that due to the level of industrial relevance of research, working with universities in Canada has been less successful for us, and a focus on a similar model of industrial relevance in Canada might be helpful in enabling more successful technology commercialization.

Moving on to the second area, brand visibility, Corvus has received only a small amount of support in this area. Most of what we've done was achieved through our own funding and initiatives on the ground, and through contacts and supports provided by our financial investors. Supporting companies to attend relevant trade shows and find speaking opportunities in target markets would likely be very helpful. Reducing costs by having a Canadian pavilion the SMEs can be a small part of would seem like a very feasible first step, and it's also a model practised by one of our key investors.

To date, overseas trade missions have also had little benefit for Corvus due to the cost to participate, and their broad focus, and they may be more useful for larger companies. Bringing groups of buyers back to Canada targeted on specific industries and introducing them to SMEs may be more effective. Trade commissioners, on the other hand, have been invaluable in facilitating the next steps in finding partners, and the activities to embed commissioners within groups such as the CME have been very effective in providing a route to access this resource.

Finally, on the question of minimizing transaction risk, this can be split into two parts: technology risk and financial risk. Establishing reference projects for export customers and partners has been a key to overcoming technology risk. STDC provided Corvus significant support by funding a joint project with the Norwegian government. This left Corvus with an overseas demonstration project, a new export customer, and a core partnership with one of the largest marine engine manufacturers in the world.

This type of overseas collaboration seems to be unusual for STDC, which normally focuses on projects within Canada, but I think it would be effective, if driving export is one of the aims, if this type of overseas collaboration could be repeated for other export-focused companies.

Financial risk to the customer also has to be minimized. This can be achieved by providing foreign exchange hedging, letter of credit facilities, and creditor insurance to smaller companies. EDC has supported Corvus very well in this regard by underwriting the risks, which enables us to work directly with tier one Canadian commercial banks. This is critical. Without this support, it's unlikely we would have been successful in growing our export business. I would strongly encourage continuing these activities for other companies.

For export-focused companies, finding venture capital funding locally within Canada can also be hard, as exporters are perceived as a higher risk than companies focused on local markets. STDC has been very helpful in making introductions to North American funds. It would be good if they could extend their reach to Asian and European funds, who maybe have a better understanding of the export markets we're trying to reach.

Overall, there are an impressive number of resources available within Canada. However, it's daunting for SMEs to find and navigate them all. If access to these facilities were consolidated and a single point of contact provided to act as a guide so that all the resources could be made more quickly and efficiently available, the benefit would be significant.

I hope these thoughts have been helpful. I look forward to answering any questions.

[The Chair, Conservative, Randy Hoback]

Thank you, Mr. Lang.

Mr. Davies, you have seven minutes.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you, Mr. Chairman.

Thank you, Mr. Lang, and thank you, Mr. Reynolds.

Mr. Lang, I was in Vancouver yesterday, and I have to ask: what's the temperature there?

[Neil Lang]

It's still pretty good. It's about 10 or 11 degrees today.

[Don Davies, NDP, Vancouver Kingsway, BC]

It was minus 28 degrees here last night.

I'll start with you, Mr. Lang, if I could. What percentage of your exports go to Asia?

[Neil Lang]

About 15% goes to Asia at the moment.

[Don Davies, NDP, Vancouver Kingsway, BC]

What are your target markets if you're looking five or ten years out? Do you have certain areas of the world where you'd like to expand your business?

[Neil Lang]

I think the marine market is global. We're really focused on where the majority of coastal trade and shipping is taking place. Certainly around northern Europe, the west coast of North America, and the east Asian seaboard are the key focuses for us.

[Don Davies, NDP, Vancouver Kingsway, BC]

I think you've done an excellent job of indicating some of the policies or programs that could be of help to expand SMEs' exports. I'm going to turn that around and ask if there are any challenges your business has on the import side in procuring the inputs you need for your manufacturing. For instance, where do you source most of them, including the lithium that you use?

[Neil Lang]

Our cells actually come out of Korea. The cell is the base of our battery. We have managed to get a trade agreement, or a trade tariff recognition, where we're allowed to import and then directly export without duty because our product is for marine purposes. Certainly we watch pretty closely the free trade agreements. The South Korean one would have been key for us in that regard.

In terms of the other components, for metal components we have a dual-sourcing program, really. We have about 20% coming out of North America, from Washington State and B.C., and about 80% coming from Asia—from China, Singapore, Korea, and places like that. That's been our focus.

[Don Davies, NDP, Vancouver Kingsway, BC]

As a successful SME start-up—I want to congratulate you on your excellent growth, and in a clean technology area, which I think is really important to note—what's the one thing that you would suggest the federal government could do to assist SMEs to improve their export potential?

[Neil Lang]

I think the hardest thing for us was getting trade finance sorted out. It was a long road to getting the banking that EDC eventually provided and in getting letters of credit support and foreign exchange support. When you're pre-cashflow-positive, even if you have a good pipeline and you can demonstrate a path forward, no tier one commercial bank really is willing to work with you. Without that support from EDC, we wouldn't have gotten to where we are today.

For us, our requirements in that area will expand as we grow. We're just looking to make sure that this facility expands along with our business.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

Mr. Reynolds, what percentage of your business is done with Asia?

[Jim Reynolds]

Zero. We export into the U.S.

By way of background, we produce advance manufacturing systems where the technology...and the large U.S.-based Japanese and German manufacturers use the technology.

[Don Davies, NDP, Vancouver Kingsway, BC]

Are there markets other than the United States that you're seeking to export to?

[Jim Reynolds]

Yes, we've proven ourselves in the U.S. market with these top-level companies that demand the quality, and now we're looking to move offshore.

[Don Davies, NDP, Vancouver Kingsway, BC]

I have the same question for you, Mr. Reynolds. Do you face any particular barriers exporting or importing your software development? I don't know if the inputs would be applicable to you, but...?

[Jim Reynolds]

I could answer that perhaps in two ways. From a software business, no, we don't. That's pretty simple going.

But from the vantage point I have on the SME advisory board, a number of other board members do have difficulty. They have difficulty getting people into other countries. Even though there are agreements, they still get hung up on some of them. They have difficulty in getting import-export permits.

So those are two of the areas required, and we may face it too if we go to other countries. We're going to need to get our staff in, and I hope we don't run into hurdles that way.

[Don Davies, NDP, Vancouver Kingsway, BC]

What would be the single most important piece of advice that you could give the federal government in terms of a policy or program that would help SMEs like yours expand their export footprint?