International Trade Committee on April 1st, 2015

[The Chair, Conservative, Randy Hoback]

Pursuant to Standing Order 108(2), we are continuing our study on small and medium-sized enterprises. We have three witnesses here today.

Before I get started, I'll remind colleagues that it looks as if we are going to have votes, so I'm hoping to get through as much as we possibly can before the votes and then we'll see what the time's like after that.

Without further ado, we'll start with the video conference. From LTP Sports Group, we have John Williams, president.

John, the floor is yours for 10 minutes.

[John Williams, President, LTP Sports Group Inc.]

Thank you.

I thought I would give a brief introduction to our company.

We've been in business for 50 years. We are a western-based company, privately owned, with the same two families owning us today as the ones who founded the company. We've been expanding outside Canada for about the last 20 years. We have 150 employees across Canada. We have two facilities in Canada, one in the suburbs of Vancouver in Port Coquitlam, and one in Toronto, right by Woodbine Racetrack. They're both about 90,000 square feet. We're about $100 million in sales and about 60% of this is in Canada. We also own one retail store locally in North Vancouver.

Our business plan is one in which sell exclusively to independent bicycle dealers. We don't sell to big box stores. We have two parts to our business. One is brand management, so we have our own proprietary brands. These are brands that we're responsible for product developing, marketing, communication, and contract manufacturing, and these brands are sold around the world. Probably many of you have heard of Norco bikes; that is the primary brand. Then we have Axiom products as well, and a couple of other minor brands.

In Canada we also distribute third-party brands. We distribute others, about 90 brands, in Canada and those are sold exclusively through independent bicycle channels.

Our competitors within Canada are global. I guess the three primary competitors would be Specialized, Trek, and Giant. But Canada is our primary market, and as I said, about 60% of our sales are in Canada. Our largest export markets are in the U.S., the U.K., Russia, and Australia. We continue to grow in Europe, and we have some presence in Asia today.

That's a brief synopsis of our company.

[The Chair, Conservative, Randy Hoback]

Thank you, Mr. Williams.

We'll move on to our next presenter. We'll do all three witnesses first and then we'll get into questions and answers.

Ms. Martyne Malo.

[Martyne Malo, Chief Executive Officer and Vice-President of Operations, Enzyme Testing Labs]

Thank you, Mr. Chair.

First, I will also give you an overview of our company.

Enzyme is a private Canadian company in the video game industry, founded in 2002. The board of directors is made up of three people and a new CEO, which has been me since 2012. We have about 15 years of experience with quality assurance tests for video games. Enzyme is considered to be the only private quality assurance company of international level based in Canada; we are certified and recognized by the major video game developers and publishers.

At the present time, we have three studios: the head office in St-Jérôme, an office in Montreal and an office in Kawasaki, Japan. Our services include functionality testing, linguistic testing in over 39 languages, and pre-certification testing for Nintendo, Sony, Microsoft, iPad, iPod touch, iPhone and Android. We bring together focus groups for offline and online games. We have a translation service and provide customer service in 18 languages.

Our clients are definitely international and they operate on all platforms: PC, mobile, tablet, console, toys. This applies to big companies, SMEs, indies, AAA games, non-subscription online games and educational games. Our clients are in North America, Europe and Asia.

Our team has about 175 employees in the low season, from November to April, and 350 employees in the high season, from May to October. Fifty-five per cent of the employees work in linguistic testing, 35% in functionality testing, 8% in pre-certification and 2% in accounting. Eighty per cent of the staff is in St-Jérôme. We are careful to keep the jobs local.

Let’s talk about the distribution by region. We have 30 clients in the U.S., 17 in Japan, 11 in Canada, four in France, two in the U.K., two in Germany, one in Italy, one in Sweden, one in Luxembourg and one in Romania.

Because of Quebec’s tax credits, some companies, such as Warner Brothers and Ubisoft, have set up shop in Quebec. That has certainly enabled us to increase our sales in Quebec and our exports have decreased.

In 2013, 26% of our revenue came from Quebec and 74% came from exports. In 2014, those percentages were 56% for Quebec and 44% for exports. This year, from January to March, 68% of sales came from Quebec and 32% from exports. Our main challenge is to triple the expenses to obtain 70% for our exports.

Mr. Chair, that is the end of our presentation.

[The Chair, Conservative, Randy Hoback]

Thank you very much.

We are now going to go to teleconference to Solar Global Solutions, Mr. Charles Cartmill.

Charles, you have the phone, or the mike. You have 10 minutes for your presentation.

[Charles Cartmill, Chief Executive Officer, Solar Global Solutions Ltd.]

Thank you very much.

I'm Chuck Cartmill, the CEO of Solar Global Solutions, which is a company that focuses on micro grid solutions, solar systems, storage, and combined heat and power units. The main markets are the Middle East, the Caribbean, and the U.S., with some business in Canada. It's about 80% export based.

I'm also the owner and founder of C-Therm out of Fredericton, a thermal conductivity analysis firm. It exports about 90% of what it makes, that being high-tech thermal conductivity equipment.

I founded LED Roadway Lighting in 2007. It exports to about 45 countries and is strong in the U.K., South America, and the Caribbean. There are very little sales in the U.S. because of Buy American. Overall, we run somewhere between 300 and 400 employees.

That's it.

[The Chair, Conservative, Randy Hoback]

Thank you, Mr. Cartmill.

We have speedy witnesses here this afternoon.

We'll go on to our questions and answers.

Mr. Davies, you have seven minutes.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you, Mr. Chair, and thank you to all the witnesses for being with us here today.

Mr. Williams, I'll start with you. I'm a Vancouver-based member of Parliament. I know that Norco has a presence in the Lower Mainland and is a well-respected member of our community, so I'm going to direct some questions to you if I can.

You have testified that you have been building and selling bikes for over 50 years. Over those years, I'm wondering if there have been any major impediments to breaking into new international markets, and if so, could you would tell us what those challenges were.

[John Williams]

We face a number of challenges. One that we're currently facing is managing our supply chain. Our supply chain is optimized for selling into Canada, but this means that we often have challenges selling into our other markets, particularly with differing rates of duty on the product.

For example, we can import product produced in China into Canada at about a 13% duty rate, but into the EU the duty is almost 48%. When we're choosing our vendors, we often have to choose the vendors based on where we want the product to end up. Because of the limited scale of the Canadian market, it's often difficult for us to double-source a particular product in multiple factories, and so we have optimization for Canada and for other markets.

Concerning marketing dollars, in the Canadian market, based on its scale, it's hard to generate significant profits and revenues to market on a global basis. In Canada we compete against global brands. In everything we do to build products, we are competing with companies that have much larger domestic markets to support their scale.

Another impediment we have is banking. Often the Canadian banks are great at supporting us in Canada, but as soon as our working capital needs for international expansion go beyond a certain comfort zone, it's difficult for them to provide financing. We use EDC to insure our foreign receivables, but that doesn't really help with working capital, particularly for inventory.

Certainly languages and cultural issues are always an issue when you go to foreign markets.

Those are probably the three things: product development, competing against larger brands with bigger resources; the marketing; and the financing.

[Don Davies, NDP, Vancouver Kingsway, BC]

On the import side, you mentioned that you're a distributor for some 90 brands. Have you had any challenges with Canadian customs on the imports side?

[John Williams]

Usually it flows pretty smoothly, although we have some challenges, such as the recent slowdown on the docks here on the west coast, from L.A. right up to Prince Rupert. It caused us some challenges, but also for all businesses in North America.

I would say that what hurts us the most or makes life most challenging is the different rates of duties that each country has based on country of origin. Having a harmonization of duties, not just with the United States but also with the EU and Australia would make it much easier to select factories in Asia for our contract manufacturing.

[Don Davies, NDP, Vancouver Kingsway, BC]

The impetus for this study was that Canada has identified the SME sector as being a very pivotal part of our economic profile going forward. We found that only about 10% of Canadian SMEs export now, yet they make up about 99.8% of the Canadian business environment. I'm wondering what advice, if any, you would give this committee. What federal government programs would be beneficial to help your company, or others that you're aware of, to better penetrate export markets?

[John Williams]

I think it would be assistance in marketing. Our identity is tied around being a Canadian-based company, and we Canadians have a very good reputation in general around the world for quality and innovation. Some help on that would be useful.

We could use some help, possibly, with product development, because it costs us as much to develop a new bike platform as it costs any other competitor. I know I'm repeating myself, but because of the scale of the Canadian market we have fewer people among whom to amortize those costs; to survive, we have to be successful outside Canada. There could be some help on that.

With banking we've been very fortunate over the years because of the banking regulations we have in Canada. But that regime hurts Canadian businesses expanding abroad, because our banks are uncomfortable with providing financing on inventory outside of Canada. As for working capital, our needs go up quite a bit as we expand outside of Canada. Concerning foreign exchange, we have ways to manage it.

On the question of personnel, the minds of management are in Canada, and all the knowledge-based jobs are in Canada, but often we need local knowledge for the markets we're selling into. We don't really have any challenges today bringing in people from abroad to help us, but sometimes it takes awhile, if we identify an individual we want to hire abroad to bring over to Canada.

I think those are the main areas.

[Don Davies, NDP, Vancouver Kingsway, BC]

I'm going to finish by saying that you mentioned you are beginning to get some market presence in China. What has been your experience in building your footprint in the Asia-Pacific, particularly China?

[John Williams]

In China, it's very slow. We all hear that it's a 1.3 billion-person market. That may be the population, but there are really maybe 50 million to 100 million people who have the means to buy our product.

It's a slow process over there. It's just a question of patience. The market is emerging for our product in Asia, but it reminds me of the way Russia was about 15 years ago. It will take time, and we just have to be patient.

[The Chair, Conservative, Randy Hoback]

You're pretty well done there, Mr. Davies.

I'll move on to Mr. Gill.

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

Thank you, Mr. Chair. I also want to take this opportunity to thank our witnesses for helping us with this important study.

My question to all three of you, if you can help us understand, is whether any of you have had dealings with federal agencies such as the trade commissioner service, and if so, would you be able to share your experience with the committee?

[Charles Cartmill]

It's Chuck Cartmill here, I've had experience with most of them. May I comment?

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

Sure.

[Charles Cartmill]

I think the trade commissioner services are doing a wonderful job.

Maybe I should just step back. You all have the document that I sent in, I take it. I'm just going to confirm some of the things, because this was one of the areas that I covered. I do serve on Minister Fast's SME advisory board, and I've spent a lot of time looking at this. I can tell you that, having travelled the world and used trade commissioners services, they do a fabulous job of helping us enter markets and identify clients, helping us in some cases set up appointments and even accompanying us. I think they're doing a wonderful job.

I'm going to focus my comments based on what I've learned at LED over the last 10 years or so—it's really just about that old—and at Solar Global Solutions, because they're both in enormous markets with tremendous opportunity for growth, and I think they're the kind of businesses we need to support.

When I started LED I had a pretty simple rule for the employees: if EDC won't approve an account or a municipality or a country, we don't sell to it. I didn't even need a credit department and we've never lost money with that approach. So EDC is a phenomenal group offering a great service. I see in The Globe and Mail this morning that it made $1.1 million in profit and paid a dividend of equal amount. It's amazing that it can do that, giving the support. So it just needs to be encouraged to do more work with smaller companies. I think one of the things is that it's been very responsive. We managed to get it to set up a unique deal in Maldonado, Uruguay, late last year that allowed us to book about a $5 million order. So it can be creative.

The one that we have been extremely frustrated with is Canadian Commercial Corporation, and I am meeting the president and CEO on Tuesday afternoon, Martin Zablocki. Canadian Commercial Corporation only deals with SMEs that are referred to it through the IRB program, the industrial regional benefits program, that are associated with the U.S. Department of Defense. There's next to no risk. I don't know if it's a shortage of people, but I'm hoping to learn more about that when I'm there. But I've met with its representative in the Caribbean, in Cuba. I've met with him in different countries, in Panama. It adds, or it could add, a unique and most important reference to SMEs, I would say.

When we go with these companies to export to foreign governments—which are a lot of our clients, including municipalities and governments, and utilities—if it's a government, Canadian Commercial Corporation gets in the middle and would act as the contractor. So it would buy the product, and we're sure of getting paid. It charges between 1% and 5%, and it sells it to the foreign government or company. If it's a government, most of the time there is no need to go to tender.

What's so important about this is that SMEs like ourselves, in a lot of cases, are competing with GE and Phillips, large global companies. We're nothing compared to them. There's always a concern about how long the company is going to be around and that kind of thing. To me, CCC represents the biggest opportunity for growth-oriented SMEs and the biggest challenge as well. I think if you can help CCC get into the SME business, it will be one of the best things you could do.

With BDC, the Business Development Bank of Canada, I have had limited success, and most business people I've talked to have had limited success with them. They have an extensive network of offices across the country and they do consulting work. But they're known as the lender of last resort, and they do a good job of earning that reputation. You have to be pretty well desperate to deal with them and to get a deal out of them.

I own a 55,000 square foot building in Amherst, which we're in. When we did this deal in Maldonado, it required us to finance the entire deal out of our line of credit. For an SME to try to manage $4 million to $5 million out of a line of credit is exceptional. We were lucky that EDC managed to come up with a deal and guarantee the bank 90% because the deal is going to see us get into a balloon payment at the end of the contract, which is roughly 10 or 12 months.

Without EDC doing that, we would never have been able to participate in this business. I think CCC could have played a very big role in there, and BDC also.

[The Chair, Conservative, Randy Hoback]

The time has expired for the member's question period. Sorry there, Charles.

We'll move on to Ms. Freeland, please.

[Chrystia Freeland, Liberal, Toronto Centre, ON]

Thank you very much, Mr. Chairman.

I want to start with Mr. Williams.

I was interested in your comment about the harmonization of duties. That's a very big task. Are there any sort of pieces to it, first steps, that would be helpful for you and that you could see as feasible?

[John Williams]

Thank you.

We're working right now with the federal government. There are really two initiatives. There is one from the World Trade Organization, the green goods initiative, and I think 14 or 15 countries have signed onto this initiative. Any products that are considered good for the environment would have duties eliminated on them. If tariffs were eliminated on products coming into Canada in our sector, that would certainly be helpful.

The other initiative that the federal government has is what they provided a couple of years ago to the sporting goods industry for hockey, and I think golf, where they eliminated tariffs. They reduced tariffs to zero for these goods, and I think that was to increase participation within those sporting sectors.

Those would be two areas right now. One is the WTO, and that initiative is making its rounds. The second one is a program that's already available, I think for hockey, and I believe golf.

[Chrystia Freeland, Liberal, Toronto Centre, ON]

Okay, thank you very much.

I have a question, again for you, Mr. Williams, and also for Mr. Cartmill. I think it probably doesn't apply to Ms. Malo so much.

This is on your comments about credit for your export work and how hard it is to get from Canadian banks and also Canadian government institutions. Based on your practical experience, what could we do to make that a little easier?

Mr. Williams, you could maybe go first.

[John Williams]

I echo what Charles said about EDC when it comes to financing trade receivables, as they do a very good job. Like his company, we do not make any sales outside of Canada unless we have insurance through EDC or the funds are wired to us before we release the product.

On the financing of inventory, if programs could be established to provide some sort of financing on inventory to support the growth outside of Canada.... Again, Canadian banks don't like using inventory that's not held in Canada as margin.