[Recorded by Electronic Apparatus]
Wednesday, February 19, 1996
.1807 
[English]
The Chairman: Order.
In accordance with the order of reference adopted by the Standing Committee on Industry on Wednesday, October 2, 1996, we are considering the conversion of military industries to civilian purposes.
I would like to advise the group that there's a possibility of a vote at 6:45. Therefore I would ask the witnesses if they could be to the point, and also the questioners, so we could get in as much as possible.
[Translation]
Mr. Ménard (Hochelaga - Maisonneuve): Mr. Chairman, today or at a subsequent meeting, I would like us to set aside some time to look at the witness list together. We have not discussed it since we began our work. Certain people are calling me to find out when they are supposed to appear. So I think that we should take the time at some point to discuss the witness list, if not tonight, perhaps at the next meeting.
[English]
The Chairman: We can discuss those items at the end of the meeting. I'll try to keep ten or fifteen minutes for that.
I would like to welcome the witnesses from Industry Canada, John Banigan and Catherine Kerr.
Mr. Banigan, I understand you're going to begin.
Mr. John Banigan (Assistant Deputy Minister, Industry Sector, Industry Canada): Yes, sir, thank you. I have a statement I would like to read, with your permission.
Mr. Chairman, in his presentation last December my colleague the assistant deputy minister of matériel from the Department of National Defence gave an overview of defence conversion both in Canada and around the world. Mr. Lagueux situated Canada's policies in the global environment that has evolved since the end of the Cold War. He spoke about the expertise Canadian companies have developed in crucial niche markets. He referred to the changing needs of his department, the importance of maintaining a defence industrial structure, and Canada's decision to purchase off-the-shelf products wherever possible.
[Translation]
The recurring message of his presentation was that Canada is well-positioned for the transition from the Cold War environment to the new global economy, driven by innovation and technological excellence.
I do not want to cover the same ground today, except to reiterate that, compared to other leading industrialized countries, Canada began down the road to defence conversion much earlier than most countries. As a consequence, our industry is much better positioned for the challenge of reduced defence spending.
[English]
Today I would like to look at defence conversion from Industry Canada's perspective, the nature of the aerospace and defence-related industries themselves.
Canada's aerospace and defence-related industries consist of about 500 companies. They had sales of approximately $12 billion last year, an increase since 1985 of over 150%.
.1810
These companies export 70% of what they produce. They run one of the very rare surpluses in Canada's trade in high-technology goods. They spend some $1 billion annually on research and development and account for about 20% of the total research and development in Canada's manufacturing industry.
Some 59,000 Canadians work in aerospace and defence-related companies. They hold well-paid, high-skill jobs in research and development and in production.
The aerospace and defence-related industries are amongst Canada's top contributors to gross domestic product amongst high-technology sectors. They are world leaders in high-technology products such as regional and commuter aircraft, business jets, civil helicopters, small turbine engines, landing gear, satellite electronic subsystems, and flight simulators.
The Canadian industry is now in sixth place amongst the world's aerospace and defence-related industries. We are vying for fourth place in the world in aerospace output and market share.
[Translation]
I can sum this up by saying that the aerospace and defence- related industry is one of the leaders that drives the Canadian economy - the knowledge-based economy that will provide jobs and growth into the 21st century.
Is this industry dependent upon military applications for its growth? No, Mr. Chairman, it is not. Canada has been converting from military to civilian and dual-use applications in its aerospace and defence industry for more than 35 years.
[English]
In the 1960s about 70% of aerospace and defence production was intended for military applications, 30% for civilian. Today the proportions are reversed: 24% for military and 76% for civilian. The military proportion is expected to continue to decline. Mr. Lagueux told this committee that by 1999 military applications are expected to account for only about 15% of industry output.
So the Canadian aerospace and defence-related industry has been positioning itself in the civil market for many years and we expect this trend to continue. When we speak of ``defence conversion'' in Canada, we refer to a market adjustment process that has been under way for some three decades. The industry has responded to the challenges of changing demands within their markets. We refer to a process that is more advanced in our country than in most industrialized countries.
[Translation]
This does not mean that we can afford to be complacent. The global aerospace and defence-related industry is highly competitive. The nations that foster domestic industries are very aggressive in helping to make the transition to civilian applications, and securing markets both at home and abroad.
Moreover, not every company in Canada that wishes to make the conversion from military to civilian and dual-use has done so. When we look more closely at the structure of the industry, we find that companies can be grouped into four categories.
The first group consists of firms that are highly diversified companies whose dependence on the military market has been moderate and is declining. The majority of the 500 companies fit into this category.
The second group is a small number of companies that are capable of further diversification when the market requires it be undertaken. They have the technology, skills and manufacturing base to achieve long-term growth in non-defence markets. They may need government in determining the most advantageous areas for diversification.
The third group consists of companies that are strong niche players in the global defence market. They fully expect to continue to grow and prosper in this market.
.1815
And the fourth group includes firms that are heavily dependent on defence sales and which appear to have more limited opportunities for diversification into commercial markets.
[English]
The current government has placed a strong emphasis on defence conversion. The 1995 budget indicated that the defence industry productivity program would be redesigned to focus more on defence conversion and help firms reduce their dependence on defence sales.
The government responded to these commitments in March 1996 when it established TPC, the Technology Partnerships Canada program. TPC targets aerospace and defence as well as environmental technologies and enabling technologies for assistance in the form of government investments. From these investments, the government shares in the upside return on success through royalty payments on successful projects.
For the aerospace and defence sectors, Technology Partnerships Canada supports projects designed to reduce dependency on defence sales by developing products or processes for commercial markets. It contains a defence conversion element that provides funding for feasibility studies and development or commercialization of products and processes for civilian or dual-use markets.
Industry Canada recently commissioned an independent review of the industry's response to defence conversion in general and to the TPC defence conversion initiative in particular. We wanted to ensure that key companies in Canada were aware of TPC, and to get an indication of defence conversion opportunities and potential projects for consideration. Preliminary findings from this initiative confirmed our view that defence conversion was case-specific and not a major issue. We are confident that Technology Partnerships Canada can work effectively with the industry to foster defence conversion.
We also learned that many aerospace and defence companies in Canada feel that they do not need funded government support. They will stick to their current business plans. Some companies that sell defence products intend to remain in the market because they are successful and see continuing opportunities. Others intend to apply to TPC to test the feasibility of developing or commercializing products and processes for civilian markets. Others rely upon business and trade development opportunities from government contracts, such as helicopter purchases and the space program.
To date TPC has received a number of inquiries in regard to defence conversion and has receive three proposals. One has been approved, one has been withdrawn and one is still being considered.
TPC is, however, only one element of Industry Canada's tool kit in terms of addressing the challenges of defence conversion. The department has a number of other initiatives to support the competitiveness of the aerospace and defence-related industries. Our initiatives include a broad range of activities designed to help companies obtain information and advice they require to compete effectively in a global economy.
Our work, Mr. Chairman, falls into four general categories: technology and knowledge development; international business development; industrial and regional benefits from major government contracts; and strategic information products.
Our initiatives to facilitate management technologies include promoting Canadian participation in the best manufacturing practices program, or BMP. The BMP program was first established 12 years ago by the United States Office of Naval Research. The BMP promotes technology transfer by offering a computerized database, annual workshops, and surveys documenting the best practices in defence and commercial companies. This includes information relating to defence conversion and dual-use technologies. In 1994 and 1995, Industry Canada and the Department of National Defence collaborated with BMP to present a series of workshops across Canada to encourage Canadian companies to participate. They were very successful.
Another technology initiative is our technology road maps. The road maps identify critical technologies industry requires to meet future market demands and customer needs. We have worked with the Ontario Aerospace Council and selected Ontario aerospace firms to complete a pilot road map for the aircraft manufacturing, repair and overhaul sector, and are in the process of taking this initiative nationwide based upon the success of our pilot effort. Road map initiatives identified for other industries may help defence companies identify conversion opportunities.
.1820
Industry Canada is also part of the government's trade development efforts in cooperation with, for example, the Export Development Corporation, the Canadian Commercial Corporation, and the Department of Foreign Affairs and International Trade.
Industry Canada's initiatives for international market assistance are delivered in the context of the Team Canada strategy that builds partnerships with provincial departments and agencies, industry associations, and the private sector to provide international business support through the aerospace and defence national sector team.
Industry Canada and our partners on the national sector team have developed a strategic plan for trade development in the sector that is outlined in the Canadian international business strategy. The strategy for aerospace and defence includes measures to collect and disseminate market intelligence, fostering teaming and partnering, promoting acceptance of Canadian standards, and promoting Canadian capabilities abroad.
Our regional trade networks in the provinces and our international trade centres located throughout Canada provide further help for aerospace and defence companies interested in pursuing export markets.
Another element of our tool kit is the industrial and regional benefits, or IRB, policy. The policy requires major crown procurements to include industrial and regional economic benefits as one of the program selection criteria. The IRB policy evolved in response to the pattern of major crown procurements in Canada and the need to be more strategic in building high-technology sectors such as aerospace, defence electronics and space. We continue to apply the policy to promote and assist the development of competitive Canadian companies. Diversification of products and development of dual-use technologies frequently arise from the IRB policy.
As for strategic information, I would mention Industry Canada's Strategis web site and the sector competitiveness framework for aircraft and aircraft parts. Strategis is Canada's biggest information network site. It gives business direct access via the Internet to Industry Canada's information resources and analytical expertise. By using Strategis, Canadian businesses - including those in the defence industries - are able to find out about export opportunities, company capabilities, international intelligence and business contacts, new technology and processes, management experts, market services, government programs, micro-economic research and more.
In October 1996 the aerospace and defence branch released its overview and prospects sector competitiveness framework report on Canada's aircraft and aircraft parts industry. The branch is currently preparing the second SCF report on the aerospace and defence-related electronics industry in Canada. This report will cover the majority of defence firms outside the aircraft industry that are essentially specialized electronics companies serving a number of markets, including defence, with technologies that are often dual use.
[Translation]
Throughout the world - and in every sector - industries in the 1990s must respond to enormous changes in market forces. They must trade in a global economy. They must respond to the growing impact that knowledge has on productivity. They must keep up with an accelerated rate of technological change.
Industries that can do these things will provide jobs and growth for the people of any nation where they are located. Because aerospace and defence-related companies have been at the forefront of these changes, many industrialized nations place a high priority on giving them the competitive edge they require to succeed.
Canada is no exception. Thanks to the creativity and innovation of our aerospace and defence-related industries we are in the top ranks of global production. And, thanks to the industry's willingness to respond to market changes over the past 35 years, we are also in the forefront of converting from military to civilian applications.
The Government of Canada has a role and responsibility to help the industry continue its present course. The system that has been established works well. We have fine-tuned it through Technology Partnerships Canada. We are ready to work with the industry to make it more competitive and help it adjust to market forces such as defence conversion.
[English]
Thank you, Mr. Chairman. I would welcome your questions at this point.
.1825
The Chairman: Thank you very much.
Monsieur Ménard.
[Translation]
Mr. Ménard: Thank you for being here. Your vision of the conversion process is much more positive than mine. You spoke of four categories of businesses and I am concerned by the third and fourth categories, those that need assistance.
I would like to ask you three or four questions. I don't know how long you have been with Industry Canada, Deputy Minister, but in the beginning of the 1990s, the Montreal Urban Community, Industry Canada and Industry Quebec had commissioned a study. This study determined that if nothing was done, 10,000 jobs were threatened and might disappear, in Quebec alone.
What was said then was similar to what you have been saying, ie some large businesses have already diversified their markets, which is to their credit, but there are also businesses smaller than those belonging to the first category that depend on the defence market for 80% of their volume. There were at least 30 businesses of that type in Quebec. I would be happy to send you the list I was given, if that would be useful.
Do you think that Technology Partnerships Canada is a tool that will make conversion operational? During the good years, Quebec used to obtain 50% of DIPP funds. This was during the years of abundance when the DIPP fund contained $250 million. Even in our wildest dreams, of course, no one thinks that that time will come again, but don't you think that Technology Partnerships Canada is a tool that is comparable to the DIPP and its four sectors, a tool which can support our businesses? Can you give us some concrete examples of what can be done? In your brief, you talked about three conversion requests, only one of which was accepted. Do you have any indications that would lead you to think that businesses are not aware of that tool?
I would have two further questions, but I will stop here for now.
[English]
Mr. Banigan: Mr. Ménard, we have done a survey with a consultant to ensure that a large number of companies in Canada are aware of TPC and its possibilities. We have access to the report to which you referred, which was done a couple of years ago, and being a relatively small community, I think we know pretty well all of the companies in the community.
The technology partnerships program is mainly focused on research and development. This is the thrust of the program. It does include contributions for feasibility studies and market studies, but the philosophy of the program is to provide research and development money. The philosophy is not to provide money for working capital, not money for capital assets, but money for research and development of new products and processes. In that regard, we think it is useful for defence conversion. One could imagine other forms of assistance that could be made available, but research and development is the focus of this program.
We have been proactive to ensure that companies are aware of this program and could undertake some feasibility studies. Frankly, we've been a bit surprised as to how little interest there has been among companies, even in feasibility studies or market studies. This would suggest that perhaps they've already diversified on their own, they're not particularly interested in changing their business plan, or whatever. But for their own private reasons they've chosen not to avail themselves of this program despite quite aggressive marketing of the program through the industry associations, through our regional offices and through our consultant.
[Translation]
Mr. Ménard: But that could also mean that companies believe that the program is not adapted to their needs. You may have heard about the GRIM, the research group on the military industry which is presided by a man who is very well known in Quebec and perhaps also in English Canada, Professor Yves Bélanger.
He drew up a list of 30 businesses; if nothing is done for those businesses Quebec will be deprived of 10,000 jobs within five years. It might be interesting to see if those businesses, some of which manufacture equipment - here, we're not talking about the 15 largest businesses in Canada - would be interested in this program.
.1830
What do they need? If I understood correctly, they need help in finding new markets, but they also need assistance where their production technology is concerned. Do you believe that Technology Partnerships Canada might offer that kind of assistance to the businesses I am referring to?
Mr. Banigan: It is possible that this program is not exactly the one needed to meet the needs of those companies. When an Industry Canada employee is in contact with a company, he or she discusses industrial problems with it. For instance, we rely a great deal on the Canada Development Bank for investments and loans to companies. If a company needs capital to modernize its plant it can turn to the Bank. There are programs which guarantee loans to SMEs.
[English]
The Chairman: Thank you, Mr. Ménard. We'll go to Ms Brown and we'll be back to you for a short one.
Ms Brown (Oakville - Milton): Thank you, Mr. Banigan, for your presentation.
You're right in saying this is a high priority of this government, and you probably have realized that our statements around defence conversion were in our red book. We're trying to fulfil our commitments from that point of view.
I would disagree, though, with your presentation in the sense that the commitment we made was sort of targeted at aerospace. I think I would separate those groups of companies that you call groups one through four. I think we could probably assume that most people in this room are terribly proud of our aerospace industry and have great hopes that it will move to number four, that it has benefited from TPC. But may I be clear with you and say that my interest is more in those companies that are not doing this conversion, companies that, in your words, seem to express little interest, that have not availed themselves of the opportunities despite aggressive marketing.
In order that you will truly understand where I'm coming from, I would say that a lot of us are concerned about the export of what I call real defence products, like guns and destructive things, to the Third World. That will narrow our discussion considerably.
I don't think we need to talk about aerospace any more. I think we need to talk about those industries that are not making the switch, that are still having business plans perhaps. I think about half of them do and maybe half of them don't. Some of them are making a lot of money and others are really struggling.
It's obvious that the TPC fund is not working and the marketing you've done is not working. Have you used the IRAP people to go around to respond to this idea that you say is a case-specific issue? It would seem to me that if it's a case-specific issue we need a case-specific approach. So other than what you've described here, the general programs that are being picked up by what I call the winners, the people who are participating well in this global economy, what are you doing for the potential losers?
Mr. Banigan: Thank you, Ms Brown. I think your point of clarification is a good one.
When we present statistics that describe the aerospace and defence industry, it's because many of the companies are in dual use. There are very few companies that are either in aerospace or defence. For example, if you're in the business of making air navigation equipment, it's often used on military aircraft and it's used on civilian aircraft. In our analysis we inevitably lump them together.
There is a rather small list of companies that one would say are exclusively in the defence business. Some of them are prospering in the business within the export control policy that Canada has in place, and don't have much interest in diversifying. I think others are having some difficulty because of declining markets and are truly interested in diversifying their markets.
I guess it is the latter category that we have focused our marketing efforts on. We have contacted quite a large number of companies we thought might be interested in TPC and have left the word with them. They will consider the material. They were grateful for the information, but, as I've mentioned, we haven't had a large number of applications so far. We certainly would welcome more applications.
Mr. Ménard, for applications from Quebec we certainly would welcome the list of those companies you can help us with to see if we can work with their needs.
.1835
I guess we in the department continue to be responsive, in that the firms will pursue their own corporate strategies and will decide what their business plan is and what their business strategy is and we will respond with business services in terms of technology and trade and so on. I believe our department has been quite proactive in reaching out to these companies, so the government's red book commitment has been honoured.
Ms Brown: So other than exposing these companies to what you have to offer and trying to be as responsive to their requests as possible...that would be the end of it.
Mr. Banigan: I think as far as Industry Canada is concerned we feel that has pretty well discharged our obligations under the red book promises. Before TPC, the Defence Industry Productivity Program was in operation. I believe Mr. Manley told the House that out of 41 projects approved, 39 were for dual-use technologies. I think that, in addition to TCP, supports the commitment to defence conversion.
Ms Brown: But those statistics are confused by the inclusion of successful aerospace companies in the numbers. Is there any way -
Mr. Banigan: They include dual-use.
Ms Brown: Yes. Could you perhaps get back to us with a more detailed picture about those industries which you perceive as struggling as opposed to making the switch successfully, competing successfully in the global marketplace? Those are the ones we're concerned about, because those are the ones which include the 10,000 jobs Mr. Ménard is concerned about.
We have another constituency of people who are very concerned about the export of weapons to Third World countries. I don't know what kind of statistics you have on that, or if you have any, but that is the other piece of the puzzle. The thing is we want a couple of small pieces of your much larger puzzle, and we want a little more detailed information on those pieces.
Mr. Banigan: I will be very pleased to give this committee some statistics and some company names, but I would prefer, Mr. Chairman, to lump the third and fourth categories together. I don't think it's incumbent upon me to label a company as struggling or having trouble with its business or that sort of thing -
The Chairman: That's fine. But those companies that would do that for us.... It would be helpful to the committee.
Mr. Murray, for a short question. I want to make sure Mr. Ménard gets another short question before we rush off to the bells.
Mr. Murray (Lanark - Carleton): Thank you, Mr. Chairman.
Mr. Banigan, I noticed that when you were talking about the second group of companies you said they have the technology, skills, and manufacturing base to achieve long-term growth in non-defence markets but they may need government help in determining the most advantageous areas for diversification. This is not so much a matter of industrial policy as winners and losers and all that, but should I assume there's a group in the industry department which is actively looking for opportunities? Is this a new group?
Mr. Banigan: My part of the industry department, Mr. Murray, entails twelve industry sector branches. They range from biotechnology to automotives, forest products, and advanced materials. They do a number of studies. They are naturally involved in trade promotion, technology development. This information is all available through Strategis and through our offices across the country.
Quite often businesses in one industry are interested in diversifying in another because you'll see a lot of migration of technologies from one sector to another. For example, in the advanced industrial materials, which you find in automotive applications and consumer products, a lot of those technologies were developed in the aerospace sector and now migrate into some other sectors. So there's a lot of cross-fertilization across sectors, and we encourage officers to exchange analysis done by other sector branches when they deal with their particular clients. Our business web site Strategis certainly facilitates this. It's very popular and receives a lot of ``hits'', as they say - a lot of inquiries from the private sector.
It's information-based. We basically make business and technology and market information available to business people for them to decide their own corporate strategies.
The Chairman: Mr. Ménard.
[Translation]
Mr. Ménard: I have a comment and a question. May I count on you to organize with me a briefing session with me aimed at the businesses I was mentioning? I find it a source of extreme concern that those 30 businesses which are highly dependent on the traditional defence market have not submitted any applications. I think something needs to be looked into there.
My colleague and friend who shares my obsession with conversion also asked you for something; can you provide us with a list of the projects submitted to the Technology Partnerships Canada program, as well as a list of those who were accepted and those who were refused.
.1840
You also discussed independent studies on the development of conversion and I think it would be interesting for the committee to get those. You referred to technology roadmaps. If you could provide us with that information, we would be grateful.
You also talked about a framework report. All of that information would be useful to us because there are two schools of thought; there are those who believe that conversion can be brought about without public funds and there are those who, like myself, influenced by the United States, believe that if conversion there must be, there must also be an injection of public funds since thousands of jobs are at stake. I believe however that we must take targeted measures and ensure that the programs will be meeting the needs of businesses. The more information we have at our disposal the more we will be in a position to prepare a balanced, coherent, and consensual report.
Mr. Banigan: Mr. Ménard, I think it would be a good idea to hold a briefing session to give those companies all of the department's analyses, to talk about the TPC program and other government programs. I think that we can indeed organize such a briefing session with you.
With regard to roadmaps, I was referring to a study carried out with a group of businesses and organizations such as the public research centres. The study considers technological trends in the international market and client needs. In it, the private sector discusses technological trends and directions. We take part in preparing the reports.
We have completed a report on the aerospace sector which I could provide to you if you wish.
Mr. Ménard: To all of the members of the committee.
Mr. Banigan: Of course.
Mr. Ménard: Thank you very much.
[English]
The Chairman: Thank you very much. I apologize for the break we have to take here to go and vote. In about three minutes we have to go upstairs.
Mr. Banigan, I'd like to thank you. I wish your comments on Strategis were heard more across the country, because I hear people asking questions about a lot of the material that's right there, to be found at their own leisure.
I appreciate your comments concerning assisting the committee to do its work. Thank you.
Immediately after the bell we'll return with our next group of witnesses.
.1842
.1901
The Chairman: We reconvene our meeting of Wednesday, February 19.
From the Canadian Defence Preparedness Association I would like to introduce its president, Mr. Healey, who will also introduce his cohorts.
Mr. Healey, welcome, and on with your presentation.
Mr. Eldon J. Healey (President, Canadian Defence Preparedness Association): Mr. Chairman, members of the subcommittee, thank you very much. The Canadian Defence Preparedness Association is pleased to have this opportunity to appear before you today to represent the Canadian defence industry.
With me today is Mr. David Stapley, a member of the board of directors of CDPA, and Mrs. Amy Friend, whose company is a member of CDPA.
The CDPA is an industry association. The executive is made up of volunteers who also have day jobs. Amy Friend is executive vice-president of an SME in Montreal, ATS Aerospace. David Stapley is vice-president and general manager of Spar Applied Systems in Kanata.
Our association represents the majority of the Canadian defence industry and currently has more than 200 corporate members. They range in size from small, two- or three-people operations to our largest defence companies in Canada.
In looking at the question of defence diversification in Canada, it is important to understand the current state of the industry. As we note in our written submission, Canada has a very modest defence industry when compared with our nearest neighbour or other members of the G-7, or indeed the OECD.
Although the modern industrialization of Canada had its roots in defence production during Second World War, Canada has not sustained that defence production on a relative scale compared with some of our allies or indeed former Cold War enemies. As a consequence, our industry has evolved in a fashion that has sheltered us from the massive dislocation and adjustments necessary in other countries with the end of the Cold War.
Unlike the U.S., for example, only a small number of our companies were dependent totally on the defence market at the end of the Cold War. In other words, most were diversified and had done so over a long time.
.1905
It is also important to remember that our industry is largely composed of subsystem producers, with very few manufacturing complete weapon systems. We produce no fighter airplanes, no tanks, no guided missiles, no artillery pieces. We do, however, produce communications equipment, navigation systems, simulation systems, aircraft engines, some ammunition, mine detection and clearing systems, all of those by way of example.
The Canadian defence industry employs some 30,000 people. However, those engaged in defence production are only a portion of them. Generally these are high-tech jobs, requiring a highly skilled and educated workforce. The industry exports, but mainly to the U.S. and to our NATO allies or to the AFCCL countries.
The industry in Canada is changing, mainly as a result of external market forces. It's now smaller than it was in 1990, although hard statistics on the defence industry itself are not readily available.
In summary, the Canadian industry is small by world standards. It has diversified over the years. Canadian companies are mainly niche players, with few producing complete weapon systems. Most of what is produced is in the electronics and communications field, with some mechanical production in aerospace and marine. The industry is located across Canada. However, it is concentrated in Montreal and southern Ontario. The industry has been rationalizing and further downsizing since the end of the Cold War.
In 1994 the CDPA, our association, set up a working group on defence conversion. In 1995 this group issued a report based on consultations with the industry and on other research. The working group found that the defence industry in Canada fell into four groups. These groups merit different considerations. The four groups were what we term fully diversified companies, which had minimum dependency on defence sales; secondly, partially diversified companies, which had significant dependency on defence sales but also had a desire or willingness to diversify; thirdly, independent defence companies, dependent on defence sales but strong players in global markets; and last, dependent defence companies, defined as ones dependent on domestic defence sales.
While, as I said, these four categories of companies have different needs, some common conclusions were evident. First was the need for a defence industry-based strategic plan. This goes to the question of what capabilities the government wishes to maintain for national security and economic purposes. We believe there still is a need for a defence industrial strategic plan.
The second issue the industry would concentrate on is procurement reform: the use of commercial specifications versus reliance totally on military specifications for the acquisition of new equipment, and secondly, cost-based accounting systems where incremental overheads can be charged.
Third, we believe export support is necessary, with transparent and stable rules, as for any other industry in the country.
Fourth, for those segments of the industry seeking assistance in diversifying, most companies need assistance with market planning and product development. They need it at the front end of the process.
The basic message from the industry is that one size does not fit all. There is no single solution. Some are in niche areas and continue to do well, both domestically and abroad. Others are diversifying as result of market forces, with more emphasis on existing commercial activities. They are increasing their level of commercial activities. Still others have been rationalized or restructured as the result of their foreign parent or parents doing an acquisition or a merger or both. All companies, however, seek equal access to government programs such as the TPC and export support for ongoing defence markets and diversification opportunities.
.1910
The Chairman: Thank you very much.
Mr. Ménard.
[Translation]
Mr. Ménard: You are a spokesperson for a certain number of industries active in the defence market and you represent a range of businesses, a certain number of which are labour intensive, while others are smaller.
You were here in the room when the deputy minister seemed to suggest that Technology Partnerships Canada as it is structured is not a much sought-after tool for the businesses which must convert. I see here that just like him you carried out a study where businesses are categorized into four groups.
As a spokesperson for that industry, what is your assessment of the Technology Partnerships Canada program? In light of the understanding and knowledge you have of these industries, do you think that it is an appropriate tool to assist conversion and diversification, as we understand those terms?
[English]
Mr. Healey: I guess my impression would be that TPC has limited use in diversification. Certainly the defence industry would like to have access to that program for diversification, but its ability to do that is less than one might hope. The limits on it in the amount of money available for any particular program are in the order of 30%, and they are repayable. So the question of diversifying into a new product becomes one that the risk may in fact outweigh the advantage of what is essentially an interest-free loan.
I think if the industry were interested on a grand scale it would be making an application and moving forward in that area. My suspicion is that in many cases they are moving into diversification rather than into defence conversion. We separate the two concepts. Diversification really means moving into the commercial world. That is not converting but really starting something different, probably with even a different plant, a different workforce, or a different portion of the plant. Therefore it probably doesn't become eligible, in that sense, for a conversion loan from TPC. It might in the aerospace business, as an example, in fact be able to apply for a TPC grant to do some commercial aerospace as opposed to doing something in the conversion area and it might be easier to get an application through on the TPC side in that way.
[Translation]
Mr. Ménard: As you know that industry well and deal with it every day, would your assessments be similar to those made by the Quebec Industry department or the GRIM, the military industry research group, which indicate that if nothing is done, if the status quo is maintained and if there is no assistance program to further conversion... You are right to remind us that Technology Partnerships Canada is not a conversion program, that it was not designed with this in mind. But can you assess the number of jobs you believe might be lost and the negative growth in your sector within the next three years, for instance?
I hope that that is not a trick question. I have government aces up my sleeve, these days.
.1915
[English]
Some hon. members: oh, oh.
Mr. Ménard: It's a joke.
Mr. David Stapley (Member, Board of Directors, Canadian Defence Preparedness Association): Mr. Ménard, that's a very good question, but I'm not going to try here to make up the response on the exact number, because I think that's what we would be doing. We don't have the hard analysis to answer the very specific question of direct job losses. As my colleague said, it's probably not quite that simple.
There is a collage of activities here, a collage of industries. If we look at the various positions they're in, whether they're fully dependent or partially dependent, whether they're partially diversified or fully diversified, it really requires some prudent analysis to determine what the real impact would be. So to throw statistics around I think would probably be misleading to the committee.
I think the bigger issue is the one you were focusing on a moment ago - that is, how do we accelerate innovation? How do we ensure that those jobs, wherever they exist today, are continuing on, using public money wisely, whether it be TPC or some other instrument? I think that's the focus.
[Translation]
Mr. Ménard: For instance, if you were to compare Technology Partnerships Canada and the defunct DIPP, would you say that the DIPP was an instrument which was more useful or better suited to the growth of your industry? What is your evaluation of the DIPP?
[English]
Mr. Stapley: As a general comment, I think they were both good at the right point in time, and they probably transitioned from DIPP, which was much more focused on things that were uniquely defence, to what we're doing with TPC today. It was very timely in terms of the move.
I think it's generally relevant, but relevant to what? That's the question. If we said ``accelerated diversification'' or ``accelerated innovation'', then I think it would be an extremely useful tool. As we implied in our brief, to apply it specifically to conversion assumes that we have enough economic wealth in the country to do it and it's in fact achievable as opposed to setting up new companies. I personally have some doubts as to whether that's a wise use of TPC, but as a general instrument I think it's a good idea.
The Chairman: Thank you very much, Mr. Ménard.
Before I go to Miss Brown I'd like to get some clarifications, if I could, on the response to Mr. Ménard's question.
When you talked about the TPC not being good enough, have you had applications for projects turned down? Have you had experience in that? I'm trying to find out the reasons why you decided it was not for you.
Mr. Healey: Of course, we're an industry association. The industries themselves put in the applications, not us. In most cases they don't share that information directly with us in any sense, because a lot of it is commercial, confidential-type information.
But, yes, we have been told by some of our members about applications being in. Some of them have received favourable consideration, but I think we're a little early yet in the TPC process to either praise it or condemn it in terms of how it's going to be seen both in terms of helping defence conversion, if at all, and more broadly, in the defence industry. It's a little early to give you an honest assessment. We would only be basing what we know now on very limited information, a and that would be dangerous.
Maybe one of my colleagues here has had some particular experience.
Ms Amy Friend (Executive Vice-President, ATS Aerospace Inc.): In our company we've had some experience under a similar program, one of interactive imaging technology. One of the important differences I would see between DIPP...and we're very familiar with all these programs. We've used them effectively. We've been very grateful to have them, whether it's IRAP or DIPP or all of the similar supports the government offers to industry.
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Under government contracts, procurements, both Canadian and foreign, plus the support of IRAP and DIPP, our entire technology base and product line has been created. Each one of them, I would have to say, sets a benchmark worldwide.
So it has really worked for us. We are fully diversified. We serve both markets. We don't make anything that goes ``bang''. It has brought us state-of-the-art technology and it has brought us a lot of growth.
From the point of view of the DIPP and the TPC, there is a particular challenge in learning to work jointly with another corporation. We are applying under the TPC program. I hope we'll be approved, because I believe we can make it work. But it's really quite challenging to share your secrets, to learn to work with other companies which may have an entirely different culture. It's quite a challenge. It may be that has something to do with the fact that this program has not been flooded with applications, because I believe it's a good program.
We did get the message in Quebec. We've had the message for quite a while. We would have applied before, but we were just too darned busy.
So I would encourage those.
The Chairman: Maybe I misunderstood, but the impression I got was that you were negative to TPC for some reasons. But that's not the case.
Ms Friend: No, not at all.
The Chairman: Both Mr. Ménard and I think Mrs. Brown and I are trying to look at it from the standpoint, if it hasn't been successful, of trying to find out why it hasn't been successful - to answer the ``whys'' behind it. But your explanation has made that clear.
Ms Friend: I don't know if that's the whole explanation, but for me it might be a clue. We did find it very challenging to work with another company. They led the project and we were a part of it. We were a partnership of three. But we do business in very different ways. It's an adjustment. It's a challenge. You have to find the right partner - that's very important - and the right project. And you may well have sub-partners. It's extremely challenging and difficult to integrate the partnerships, integrate the budget, and integrate the pieces of technology.
I agree with my colleague. I do see this as an R and D innovation tool more than as a conversion tool.
Ms Brown: You talked about a survey you did, and you've divided the companies surveyed into four groups. Did you survey every company you could find in this business or only those which are members of your association?
Mr. Healey: Most of the defence companies are members of our association. We believe in Canada about 250 companies produce defence goods and services. Other companies supply to the defence market, but most of them are people such as Imperial Oil, supplying fuel oil, or people who supply food, build buildings, or whatever. We believe the hard-core companies which do some service or some portion of their business with defence are about 250. We currently have about 205 companies as members of our association.
In doing this working group in defence conversion - and we included a couple of workshops - we attempted to survey our membership, which wasn't as big a year ago. We broadly went to the various companies, went out with surveys, and did attempt to find as much information as possible from those companies.
Did we get them all? No, we didn't, not by far. In that sort of business you don't get responses from 100%. But we did go out and attempt to get their input back to us on what they thought of this subject.
Ms Brown: Assuming you got a good sample, and looking at those companies you seem to put into the fourth category, and knowing what you know about TPC, can you think of any other mechanism by which some of these companies in the fourth group might be contacted, motivated, or whatever to get on with this defence conversion - or, as you put it, diversification?
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Mr. Healey: I think the companies themselves have to be motivated by market forces to do this. I don't think you can do it by legislation or by coercion. The marketplace is going to determine how they're going to react.
In some cases they will move to other areas that are more profitable and offer a more profitable use of their capital and resources. In other cases they'll do it by acquisitions and by mergers. They'll do it by those sorts of processes. And we're seeing a lot of this.
In the last several years, for example, we have seen this happening because of outside forces, not because of forces in Canada. We used to have GE Aerospace, Martin Marietta, Lockheed, Laural, Paramax Electronics. They're now all one company called Lockheed Martin. Because of outside and external forces, they are very much downsized from what the six or seven companies were before. So this change is happening not because of anything we're doing here in the country, but because of what is happening outside the country.
Ms Brown: But none of those companies you named would have been in your group four anyway, would they have?
Mr. Healey: Yes. Most of them were relying on domestic Canadian markets.
Ms Brown: But would this have been government purchases?
Mr. Healey: Yes. This would have been government purchases in Canada.
Ms Brown: You wouldn't put the new company in group four, which you described as struggling, would you?
Mr. Healey: I didn't describe it as struggling.
Ms Brown: No?
Mr. Healey: No. I think this was the previous witness.
Ms Brown: Okay.
Mr. Healey: No, our group four was companies that are dependent on the domestic market.
We believe to help them diversify, if this is an objective of the government, there are all sorts of mechanisms that could be used. There are tax incentives. We're not advocating this, but there are mechanisms one can use to give people incentives to do this.
Ms Brown: I think we're talking at cross-purposes. You're talking about the domestic market. I'm talking about the difference between defence departments buying their goods or other customers buying their goods for civilian purposes. That's the difference.
We're interested in companies that have over the years grown dependent upon defence contracts from the Canadian, the American, or some other country's defence department. In other words, we are talking about public contracts. We know defence budgets are shrinking in almost every country. Some of those companies are threatened and some of them don't seem to know how to make the switch-over to the private sector customers, or to commercial purposes as opposed to defence purposes. So whether their customers are in the country or out of the country isn't of as much interest as whether they are converting their goods to civilian purposes that might have a commercial market.
Mr. Healey: Maybe we can try an example. Pratt & Whitney, an enormously successful Canadian company, started in the 1950s in Canada with a research grant from the Department of National Defence.
Ms Brown: Yes, I have the book.
Mr. Healey: It was 100% defence for part of the 1950s and 1960s; it is now 90% commercial.
Ms Brown: I'm aware of this. I'm aware of the history of the aerospace industry and how successful so many companies have been, Pratt & Whitney being a top example. I'm talking about 1997, with the new DIPP program. Did you identify companies that have not been successful in making this switch, and is there something the government can or should be doing to assist them?
Mr. Healey: I know of no companies that are remaining in the business if they are losing money or they are, as you suggest, struggling. They will move to something else.
Ms Brown: The market will solve it.
Mr. Healey: The market will solve it.
Ms Brown: Okay.
The Chairman: I want to hitch-hike on Ms Brown.
What I heard you say is the companies dependent on the domestic market are companies that are there because of this market. They are not moving out of there because they don't know the other markets or they don't have the initiative to change or any incentive or assistance they might need to transform from a military-type operation over to something else.
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Mr. Healey: I don't think I intended to convey to you or to the other members of the committee the idea that they weren't moving or that they weren't intending to move. If the market forces dictate it, they will move. I was only suggesting in our fourth category they were companies in Canada dependent on the domestic market. They have traditionally supplied the defence department in Canada. They clearly are going to be smaller because the defence budget is going to get smaller. They will have to diversify, get out of the business, or increase their export sales. Those are the only things they can do. They can exit this business, they can diversify into other businesses, or they can increase their export sales. They won't stay still, and they will go out of business if they start to lose money. I didn't mean to suggest they would rely solely on government support to stay in the business.
The Chairman: So they are there because the market is there. If the market weren't there they would be making other choices at the right time.
Mr. Healey: Absolutely. But you are going to lose employment. Some of that has already happened.
The Chairman: Mr. Ménard.
Mr. Ménard: A tough question, because it's a tough issue.
[Translation]
You once held a workshop where the conversion issue was examined. It might be interesting for the members of the committee to have the report prepared in that regard, if that can be divulged, of course.
Secondly, you seem to say that where conversion was possible it has already taken place and where it was not possible, it will not take place. Could you explain that statement to us, because I really have the feeling that there are still a certain number of businesses that are very dependent on the defence equipment market and have not converted. However, they may not be members of your association.
I think there is a whole range of means that could be put at disposal of businesses that want to convert or diversify their activities. You make that distinction in your brief and I agree with you, but I think that we have not exhausted the possibilities as to the means we must put at the disposal of businesses that want to diversify. The role of the committee is to find innovative means to do so, ably guided in that by our chairman. I'm convinced that those means can be found.
In light of that, why do you say on page 6 of your brief that where conversion was possible it has already been achieved? What did you mean by that?
[English]
Mr. Healey: Mr. Ménard, I apologize. Part of our brief did not get tabled with the committee earlier. I've given a copy of it to the clerk. It was unfortunately overlooked when we sent in our brief. That did have the report of the defence conversion working group from the CDPA. It's a fairly comprehensive document. We worked on it for some time.
The Chairman: We'll send it out to all the committee members once we get it translated.
Mr. Healey: Thank you, Mr. Chairman. I apologize for that.
Our contention is that these processes are ongoing and moving continuously. Change is happening in the industry daily. The industry is quite different today from what it was in 1990. The balance in most of our industry is changing in terms of the amount of commercial work they are doing versus the amount of military work.
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To take another example, in the Montreal area Bombardier's percentage of defence work today, as I understand it, is probably 2% or 3% of its total output. That has been brought about by an enormous increase in its commercial work but also by a somewhat diminished amount of defence work. In a sense, they haven't converted the defence business - they run it as a separate business - but the offsetting work they're doing in the commercial side tends to mask those statistics in terms of what it is they're doing.
That's the same process, to a smaller extent, that goes on in most of the industry. In the few companies that are totally defence, of course, they can't rely on that strategy because they don't have that. There are companies, some in the Montreal area but some in other parts of the country, that have almost a total dependence on defence. Some of them are looking to convert. Others, as we suggest in our paper, are doing very well in world markets and at the moment are not motivated to diversify. Those that want to diversify, though, have generally found a strategy, either through acquisition, mergers, or increasing the proportion of their commercial business, that allows them to diversify.
Mr. Ménard: Thank you.
The Chairman: Ms Brown, do you have any more questions?
Ms Brown: No, thank you.
The Chairman: Perhaps I may.
From what we've heard today and previously, and in some of my experience, the marketplace sure will dictate very quickly where business will go. If they don't know where to get help, they soon find help from either their partners or competitors.
Whether it's the furniture-making business or the automotive business, with which I'm very familiar, there have been many changes in the last 20 to 30 years and certain technologies and certain market forces have forced both industries to change. Those that got on to the change early became very successful because they were able to change. Those that didn't change had a harder time when it came time for them to make that decision to change. Is it any different in the military side?
Mr. Healey: I think it is to a certain extent. If you're in the defence business and producing high-quality military equipment, weapons systems, it is very difficult to take that structure - and I'm talking here about physical plant, I'm talking about human resources, I'm talking about processes, about quality assurance, all of those sorts of things that go into that - to convert that to something else. In fact the experiment they.... It was more than an experiment. They tried it in the United States, and it didn't work. Generally speaking, it really was a failure. So the strategy that has really evolved by market forces is to exit that business, in part or in whole, and to move into something else. And that's what we term diversification, as opposed to conversion.
It is not easy to take that mentality or that plant and to have it one day producing APCs and the next day producing refrigerators. That's presuming somebody wants more refrigerators, by the way. The two just don't match. If you're in the defence business, you're generally in the defence business.
There are some exceptions to that, obviously, some where there is dual-use technology, particularly in the electronics field but in some mechanical fields such as.... A Pratt & Whitney turbo-prop engine is almost identical whether it's used in a civilian or military airplane. But a lot of the processes in other portions of it are just not transferable.
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Norm Augustine, the chairman of Lockheed Martin, described defence conversion as an attempt to run the sausage machine backwards to create pigs. He didn't think it was very practical in terms of the experiment in the United States, particularly in California. As I noted in my paper, three million jobs were lost as they moved out of that business and into civilian business.
The Chairman: Thank you very much. I'm going to learn more and more about that. When I was hired at General Motors we were in three plants that converted and became automotive plants. I know the turmoil you have to go through, and the change. Nobody likes change. In the end, it became an automotive plant and part of General Motors.
I've often talked with the people back home who had to go through that change. They've told me stories similar to what you just repeated. But I think we've learned in industry a lot more in the last 20 to 30 years than what we knew in the forties and fifties. That's why I asked you that question.
Thank you very much for your presentation. I really appreciate it. Our time schedule forced us into a late evening meeting.
I'll conclude this meeting before we go into an in camera session. The next meeting will be at the call of the chair.
[Proceedings continue in camera]