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DEPARTMENT OF FOREIGN AFFAIRS AND INTERNATIONAL TRADE SUMMARY OF CANADIAN INDUSTRY VIEWS

ON CURRENT ECONOMIC CONDITIONS April 2009

This report provides a summary of Canadian industry views and concerns on how the current economic downturn is affecting the business community, as revealed by reports and surveys conducted by Canadian Manufacturers and Exporters (CME), Business Development Bank of Canada (BDC), Bank of Canada, Canadian Federation of Independent Business (CFIB), Conference Board of Canada, and the Canadian Council of Chief Executives (CCCE).

Sales Growth Of the range of outside influences affecting businesses in the last three months, business owners focus on costs of energy and inputs, lower customer demand, and a gradually tightening financing availability. Research finds that:

• Firms expect sales growth to slow over the next 12 months, and their level of uncertainty about sales prospects has risen (Bank of Canada’s winter 2008-2009 Business Outlook Survey).

• Reported pressures on production capacity have decreased and the expected pace of price increases has fallen, largely reflecting the recent drop in commodity prices (Bank of Canada’s Business Outlook Survey of winter 2008-2009).

• 30 percent of respondents say conditions have deteriorated in the past three months and 55 percent believe that the investment climate for their businesses has deteriorated as well (Canadian Federation of Independent Business’ (CFIB) March 2009 Business Barometer).

• 42 percent of companies say that employment levels are likely to fall (Canadian Manufacturers and Exporters’ Business Conditions Survey of March 2009).

Customer Demand Business owners are becoming less concerned with labour shortages than they had in previous quarters. However, this is more a sign of economic weakness than a signal of actual improvement (Canadian Federation of Independent Business’ March 2009 Business Barometer). Additional research indicates that:

• 49 percent of firms expect orders to decrease between March and June (CME’s Business Conditions Survey of March 2009).

Key Recommendations for Government: • Improve access to credit to help innovative and credit-worthy companies

survive the economic downturn • Increase awareness about government business services • Work together with the United States to boost free trade and economic

recovery • Seek official mandates to launch negotiations towards a comprehensive

economic agreement with the European Union

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• 26 percent of Canadian small and medium-sized enterprises expect business performance improvements in 12 months, while 43 percent expect further deterioration (CFIB’s Business Barometer of March 2009).

• Canadians continue to indicate considerable concern about their familes’ current and future financial situation, but are more hopeful on the question of future employment opportunities in their communities (Conference Board of Canada’s March 2009 Index of Consumer Confidence).

• Many respondents also indicated that now is a good time to make a major purchase (Conference Board of Canada’s March 2009 Index of Consumer Confidence).

Access to Credit A large number of companies report having difficulties accessing credit (CME’s March Business Conditions Survey). According to CME, this emphasizes the need for federal budget measures, specifically access to credit, to be implemented on an urgent basis to help innovative and credit-worthy companies survive the economic downturn. Research reveals that:

• 59 percent of manufacturers and exporters report difficulties accessing adequate levels of financing including obtaining working capital, extending lines of credit, accessing financing for new technologies and product development (CME’s Business Conditions Survey of March 2009).

• The percentage of firms reporting tighter credit conditions reached a record-high level (Bank of Canada’s winter 2008-2009 Business Outlook Survey).

• 30% of entrepreneurs find that their current operating line of credit is not sufficient to meet their company’s working capital requirements (BDC’s February 2009 Survey on financing needs of SMEs for the Operating Line Guarantee Project).

• 42% of entrepreneurs who asked their financial institution to increase their line of credit have had their application denied (BDC’s February 2009 Survey on financing needs of SMEs for the Operating Line Guarantee Project).

• The number of BDC clients negatively impacted by the tightened credit conditions has increased slightly in the past three months

o Financial institutions either refusing to offer financing or offering only a small amount of money is the main cause of this negative impact (BDC’s Local Market Intelligence Survey of February 2009).

• Particularly for smaller companies, there is a lack of awareness of what government programs and services are available to them in both international business development, and domestic development such as financing, expansion, human resources management, and innovation loans (CME Roundtable Discussions between government officials and business leaders of fall 2008).

International Business Development Canadian business leaders noted a lack of leadership by the federal government, with regards to international business development. Main comments are that Government of Canada should:

• Lead the way on trade missions and business development in overseas markets (CME Roundtable Discussions of fall 2008).

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• Seek official mandates to launch negotiations towards a comprehensive economic agreement with the European Union and India (Canadian Council of Chief Executives press release March 2009).

• Increase visibility in markets such as China, where senior political leadership is an essential component of business development and which lends tremendous support to Canadian businesses trying to penetrate those markets, e.g. modelled after the Team Canada missions under previous governments (CME Roundtable Discussions of fall 2008).

• Work together with the United States to boost free trade and economic recovery (CCCE press release March 2009).

Departmental Programs and Services Roundtable Discussions held by Canadian Manufacturers and Exporters found that there are a number of ways that the Federal government can better assist Canadian companies. Participants of these roundtable discussions noted that Government should:

• Help exporters market their products internationally through programs or financial incentives

o The Program for Export Market Development (PEMD) that was discontinued years ago was helpful for exporters, for example by helping pay for some of the costs of attending trade shows

• Streamline programs to help alleviate the time consuming paperwork needed to apply for and comply with associated obligations

• Services offered by trade commissioners are not always up to expectations. When companies’ questions are too specific, trade commissioners cannot advise. Companies don’t know what trade commissioners can offer or not.

Maintain Competitiveness The importance of maintaining Canadian manufacturing competitiveness was a recurring theme at CME Roundtable Discussions. Business leaders noted that:

• Canada will be faced with continued erosion of its manufacturing activities and should aim for growth through global value chains (GVCs)

• Government should improve image of Canadian products (e.g. by branding Canada)

• Synergies are needed among natural resources and manufacturing capabilities • Manufacturing will inevitably have a lower share in Canada

o Quality must improve along the Japanese model • Increase quality to compete with China, e.g. too many parts are purchased in

China instead of being manufactured locally.

Government Assistance To help bring companies out of the economic downturn, business leaders at CME Roundtable Discussions noted that the Government must:

• Simplify and streamline its programs, including Industrial Research Assistance Program (IRAP) and Scientific Research & Experimental Development (SR&ED) Tax Incentive Program

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• Publicize its business support programs more effectively • Provide subsidies for companies to attend fairs and foreign trade shows • Provide assistance for manufacturers in developing and financing “lean

manufacturing techniques” through tax credits and training incentives • Consider creating a stability fund for manufacturers to even out the fluctuations of

oil and dollar spikes that affect various sections of the industry • Government assistance should take the form of a triage process:

o focus on potential successes o facilitate international trade activities o provide tax incentives for success

Market Intelligence CME Roundtable Discussions found that Canadian companies need access to market and competitive intelligence. Roundtable participants noted that:

• Market diversification is required with manufacturers looking overseas rather than just to North America

• Harmonization of regulations is required on a global basis • Technology can provide an edge in the competitive world • Use our global champions such as SNC-Lavalin and Bombardier to help SMEs

become suppliers to these groups and start exporting around the world Labour Shortages and Labour Costs CME Roundtable participants noted that manpower and skilled workforce recruitment are the main obstacles to growth. Due to difficulties attracting labour and dealing with higher labour costs, especially for entry-level and less skilled positions, participants noted that there is a need for:

• More robotization to meet manpower shortages • More machine tools and machine operators and technicians • More foreign workers

o Procedures are too long to have foreign workers; can be a burden for SMEs

• Government should encourage immigration of skilled workers Identifying Business Opportunities Business leaders at CME Roundtable Discussions recommended that the Government should:

• Develop a strategic response team among trade commissioners at posts to

quickly relay business opportunities to Canadian businesses • Maintain and increase our national competitiveness through innovation and new

processes such as: o Ontario Centres of Excellence (universities/colleges) o Partnerships between colleges/universities and industry o Students can be assigned to study solutions to real, clearly defined

business opportunities and challenges of companies • Help companies in identifying and accessing business opportunities

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o More accessible training programs should be made available to companies, including how to access international markets with their products and services and how to streamline and promote innovation in their companies

• Have more of a local presence in markets such as the Middle East and Africa • Build partnerships with foreign companies to have a strong local presence in

emerging markets where growth is high • EDC should take more risks in emerging markets, notably Africa.

Drafted: Erin Oldynski – 947-4261