Submission—Canada’s Plastics Industry

June 2002

Table of Contents

1. Introduction : Canada and the Innovation Performance Challenge
2. Canada's Plastics Industry at a Glance
3. Assessing Industry Innovation Performance : the Plastic Industry
4. Strategic Recommendations : CPIA's 12 Points Plan
5. Conclusions : From Words to Deeds

Introduction: Canada and the Innovation Performance Challenge

The Canadian Plastics Industry Association (CPIA) is pleased to respond to Industry Canada’s Innovation Agenda Consultations Paper. According to research undertaken as part of the Innovation Consultations, there are troubling signs that the Canadian economy’s innovation performance has suffered in recent years.

Canada’s poor performance relative to our major trading partner, the United States, is illustrative of a widening productivity gap and an overall declining standard of living. Over the last two decades, the economy-wide productivity gap between Canada and the US rose from about 14% in 1981 to a peak of 18% in 2000. In terms of manufacturing, the productivity gap was 35% in 2000 compared with 21% in 1990.

There are a number of factors which account for Canada’s current innovation challenge. According to Industry Canada, Canadian firms are slow to adopt leading-edge innovations, receive fewer dividends from innovation and under-invest in R&D. There are a number of international comparisons which illustrate the extent of Canada’s innovation challenge:

• Canada has a Current Competitiveness Ranking of 11^th
  
  
• Canada has an R&D Intensity Ranking of 15^th
  
  
• Canada has a Technology Achievement Index Ranking of 8^th

Canada's Plastics Industry at a Glance

Canada’s plastics industry consists of those companies that produce resins, plastic products (custom & proprietary), moulds, and machinery. In 2002, Canada’s plastics industry had shipments of $43.9 billion, achieving an annual growth rate of 8%. Overall, the industry continued to outperform the manufacturing sector in general, growing more than twice that of manufacturing throughout the 1990’s. The plastics industry employed 161,500 employees in 2001 consisting of 3,758 firms. The three key end use markets for plastics are packaging (34%), construction (26%) and transport at (18%).

Throughout the 1990’s, Canada’s plastics industry achieved strong growth in export markets. For example, exports of plastics products rose from $1.4 billion in 1992 to $6.2 billion in 2001. In 1999, Canada’s plastics processors achieved a milestone of realizing a positive trade balance. While imports have also grown, reflecting strong international and domestic demand, the industry’s rising trade surplus is a positive reflection of increased competitiveness.

At the same time, there has been an important restructuring in the plastics sector, particularly among processors, that has seen a dramatic increase in the average size company as a result of consolidation. Where in the late 1980’s the average plastics company in Canada had sales of $5.4 million, current Statistics Canada data suggests that this has grown to $13 million. This has resulted in greater efficiencies through economies of scale.

Assessing Industry Innovation Performance: The Plastics Industry

The above indicators suggest that Canada’s plastics industry has, indeed, grown quite significantly during the 1990’s. However, in a global economy, success is relative to what your international competitors have been doing over the same period. A fundamental hypothesis of the Innovation Consultations is that Canadian firms lag their US counterparts in embracing innovation. Lower levels of productivity in Canada are attributed to this situation.

With some measure of concern, a recent analysis of Canada’s plastics industry suggests that this hypothesis is anchored in fact. Throughout the 1990’s plastics companies in the US reported strong gains in productivity, a fact that has been attributed to that sector’s widespread implementation of new technology. Gains in Canada, it has been observed, have been more limited. This section of CPIA’s 12-point plan explores the results of recent economic analysis which looks at key measurements of innovation, comparing the plastics industry in Canada and the US. It also tries to account for some of the reasons why the innovation gap exists.

Capital Investment Intensity

A key measure of innovation is the deepening of capital investment or the “capital investment intensity” in a sector. This is a particularly important variable in the plastics processing industry where specialized information technology applications, robotics, and JIT management systems, to name a few, all influence productivity. Recent data provided by Industry Canada confirms that in the last decade US companies have spent a higher percentage of shipments on capital investments than plastics companies in Canada. However, among processors and resin producers where such data exists, there are clear signs that in the late 1990’s and into 2000, Canadian companies have increased their spending while US firms have decreased spending.

Productivity

Canada’s innovation gap with the US also manifests itself in productivity issues. One method of measuring productivity is to compare shipments per employee. The following figures demonstrate significant differences in productivity levels between Canadian and US firms, removing the impact of the exchange rate and inflation.

Between 1990-2000, Canadian processors’ shipments per employee went from approximately $130,000 to $160,000. This constitutes a growth rate of about 23%. By comparison, US processors’ shipments per employee went from $147,000 to $240,000 over the same ten-year period, achieving productivity growth of 63%.

The situation for resin producers paints a similar picture. However, productivity growth among Canadian firms appears somewhat higher despite the existence of a significant gap between Canadian and US firms. In 1990, resin producers in Canada had shipments of approximately $400,000 per employee compared with a US figure of $650,000. A decade later, Canadian resin producers had shipments of about $780,000 - a growth of almost 95%. By comparison, US firms grew by about 80% to about $1,170,000 during that same period.

However, there are some sub-sectors of the plastics industry where Canadian firms achieved the same, and indeed, higher productivity levels than their US counterparts based upon shipments per employee. Between 1996-2000, shipments per employee of Canada and US plastics machinery companies were very close. Indeed, in 2000 Canadian firms actually reported a shipments-per-employee figure that was marginally higher than US firms.

At the same time, it must be recognized that sales per employee measures between larger US companies and their Canadian counterparts also reflect economies of scale and volume related issues, which are to be expected given the difference in average company size. Perhaps another measure of productivity would be to compare the level of value added of companies in Canada and the US. This is particularly the case for plastics processors.

Sources of the Innovation Gap

There are a number of explanations that can help account for the innovation gap. According to one recent analysis, slower productivity growth in Canada’s plastics sector compared with the US can be attributed to a number of factors. The higher cost of borrowing in Canada combined with the impact the exchange rate has had on import costs of new technology has slowed the pace of innovation in Canada.

Strategic Recommendations: CPIA's 12 Point Plan

CPIA and its members fully recognize that governments do not improve industrial productivity or innovation. However, the federal government does play a determining role in shaping the policy and program framework within which the industry competes. To this end, the federal government, like all national governments, has policy and funding tools which are essential to any concerted effort at closing the productivity gap and infusing greater innovation into Canadian business strategy.

The following strategic recommendations are intended to help guide future partnerships:

1. SR&ED Tax Credits

The tax structure is an important variable that shapes the willingness and ability of companies to embrace innovation. Over the last decade, CPIA and the plastics industry have explored ways to ensure that companies gain enhanced access to Scientific, Research, and Experimental Development (SR&ED) tax credits as one means by which to drive the innovation process. We support changes to Canada’s SR&ED tax regime in accordance with the Canadian Plastics Industry Report. A key concern that CPIA and the industry hope to see addressed in the SR&ED Tax Credit program is a reduced emphasis on the “uncertainty criteria.” The current approach seems to reward companies whose efforts at innovation fail rather than succeed.

In addition to seeking a timely acceptance of the industry’s SR&ED Tax Credit Report, CPIA would recommend that Canadian Customs and Revenue Agency (CCRA) work with us to develop effective industry-specific information products and services. It is essential that companies understand how their research and development activities potentially qualify for tax relief in order that they be encouraged to make such investments.

2. IRAP Funding

CPIA and the plastics industry have a long history of constructive cooperation with the National Research Council (NRC). One of the key initiatives of the NRC that has helped companies identify and respond to innovation challenges and opportunities has been the Industrial Research Assistance Program (IRAP). As useful as this program has been to the plastics industry, it usually runs out of funding part way through the year. At a minimum, we believe that NRC should double the amount of funding that goes to the IRAP program. Such a budget increase should be made even if it means reducing the amount of funding that NRC directs towards universities.

3. HR & Skills Development

A number of studies of the plastics industry reinforce the message that access to highly skilled employees is essential to the innovation equation. The capacity of firms to embrace new processing or materials technology is not just a matter of having access to the right equipment. People are the key to driving the pace of innovation.

CPIA and Canada’s plastics industry have spent over a decade identifying and responding to collective HR needs. Throughout the late 1980’s and 1990’s the industry played a formative role in the development and launch of plastics training programs at the college level. Moreover, it was CPIA that played the role of lead organization in bringing about the national human resource study of Canada’s plastics sector. This study led to the establishment of the Canadian Plastics Sector Council.

More recently, the industry has played a key role in shaping the design and scope of university-level programs. In Quebec, for example, the industry has been instrumental in the launch of the Laval University undergraduate program in Polymer Engineering. This program is entirely industry funded and will soon be offered through McGill University as well. The success of this industry-academic partnership to direct industry-relevant research and education activities was the establishment of a CEO-level management committee that ensures senior industry and university cooperation.

This Quebec initiative offers a potential model for how the plastics industry in the rest of Canada can play a defining role in the development of highly focused programs that are responsive to their needs. To encourage similar initiatives, the federal government should direct some of the funding earmarked for universities to programs initiated by industry. To this end, the plastics industry believes that the federal government should, at a minimum, match industry contributions towards university programs.

However, the industry recognizes that much more must be done to build the talent pool necessary to drive innovation. We welcome the federal government’s budget commitment to increase funding to sector councils. We urge HRDC to target an appropriate share of such funding for those sector councils that represent sectors that have been deemed to be a priority.

Increased funding to help existing sector councils to expand their skills upgrading activities is only part of the solution. HRDC must work with manufacturing sectors to highlight the value of manufacturing as a high technology, rewarding career choice. Such efforts need to begin much earlier in the decision-making cycle of young Canadians.

At the same time, federal funding to universities must ensure that the pursuit of academic excellence also means the pursuit of teaching excellence. Increased funding to universities should be accompanied by an increase in the number of plastics/polymer related courses being offered by the recipient institutions. In the past, such funding decisions have paid too scant attention to the needs of industry.

4. Benchmarking Programs

One of the key factors in knowing how to move forward on the innovation front is knowing where you are as an industry and as individual companies. In the past, Industry Canada offered highly useful, and cost-effective programs that enabled companies to benchmark their productivity and performance against their peers.

To this end, the Advanced Manufacturing Technology Application Program (AMTAP) and the Inter-Firm Comparison Program (IFC) were widely utilized by the plastics industry and helped to demonstrate the need and benefit behind quality and technology related improvements. In light of current concerns about widening productivity gaps, such programs should be re-instated for priority sectors as they offer critical analytic tools that can help companies identify the source of competitive advantage and changes to business strategies. In addition, they should be expanded to include US firms where possible.

5. Funding To Universities

CPIA and the industry commend the commitment that the federal government has made to increase funding to universities. Some of this funding has been aimed at collaborative research projects involving industry and academic institutions. Such funding is crucial and needs to be based upon an increased commitment to science and research which balances the pursuit of academic excellence with commercial relevance. Therefore, additional such funding should be made available for collaborative research which contributes to job creation.

In addition, NSERC provides funding to universities in the form of major equipment grants. Where funding is given to universities for the purposes of purchasing equipment, guidelines need to be established whereby such purchases are aimed at equipment that has practical application for industry and is accessible. There are too few instances where analytic equipment purchased by universities is readily used by Canadian firms. There are notable exceptions that serve as potential best practices. The analytic and testing services provided to the plastics industry by the institute affiliated with University of Western Ontario represents how universities can establish effective, competitive service delivery arrangements.

6. Trade Development Programs

Embracing innovation by making the needed investments in people and new technology needs to be accompanied by an expansion of export markets. The success of the US plastics industry in Mexico in the face of the productivity gains made by US firms is no coincidence.

While more needs to be done, CPIA and the plastics industry have worked closely with the federal government on the trade promotion front. Indeed, the industry has set a goal of doubling the value of exports between 1997-2005. As noted earlier, significant progress has been made on this goal. To this end, CPIA and the industry continue to value their membership on Trade Team Canada.

Since taking over many responsibilities previously handled by the Department of Foreign Affairs and International Trade (DFAIT), CPIA has organized:

• 8 major national pavilions
  
• 12 information booths
  
• 5 outgoing missions
  
• 3 incoming missions
  
• An export branding program in 1996/1997
  
• A new branding program in 2001
  
• 3 export capability guides
  
• 10 Canadian capability plant tours

First, the federal government needs to increase PEMD funding based upon priority sectors and where the greatest market opportunities exist. Access to such funding should be based upon performance. At the same time, the complexity of the program needs to be reduced.

It is felt that the eligibility for PEMD programs should be raised from $10 million to $50 million in order that a greater range of export capable companies have access to support funding.

CPIA and the industry also believe that the Trade Association component of the program should be expanded given the economies of scale and reach that it offers. Increased funding should be accompanied by the ability of associations to recover a portion of the overhead expenses they must incur to support program delivery.

7. Trade Development Offices

CPIA and the plastics industry believe that Canada’s trade commissioners overseas are valuable resources that we have yet to tap to their full potential. However, we believe that some commissioners lack the expertise necessary to play a more supportive, informed role on the plastics trade development front.

To this end, we would encourage the Department of Foreign Affairs and International Trade to allow its sector officers to stay in their positions for a longer period of time, allowing them to develop stronger sectoral insights. CPIA and the industry are anxious to help. The current practice of rotating staff into new sectors diminishes the benefit that these individuals are able to bring to their jobs. The positive working relationships that exists between many sectoral associations and their respective sector branch officials at Industry Canada is greatly enhanced by the level of sectoral expertise these staff are able to develop over the course of their careers.

8. Making Priority Sectors A Priority

In 1997, CPIA and the plastics industry were extremely pleased to be defined a “Priority Sector” by the Federal Government. However, we have not always been certain what this has meant. Sectors identified as being a “priority” by the federal government should enjoy access to broader program funding and increased policy support. If we are a priority sector, then such a designation should mean something in both practical and substantive terms.

9. Enhanced Governmental Coordination

Many of the competitiveness issues which shape the policy environment affecting the plastics industry touch on the mandates of various federal and provincial departments. There are numerous examples of areas of where greater coordination between and among government departments would enhance the effectiveness of industry-government partnerships. For example, Industry Canada and Statistics Canada currently employ different definitions when describing the plastics industry.
Indeed, the challenge of bridging Canada’s innovation gap will require a more concerted effort to coordinate the actions of provincial and federal governments. Trade promotion, example, is an area where both federal and provincial governments play a role. Ensuring that funding and staff resources are coordinated should be a priority for officials responsible for program delivery.

10. Immigration Policy

Canada’s plastics industry is anxious to see how changes to Canada’s immigration policies will affect the ability of companies to access highly skilled immigrants to fill current and pending employment vacancies. Currently, there is widespread uncertainty as to whether or not such changes will impede or facilitate access. We encourage the federal government to closely monitor these changes in consultation with industry sectors to assess their impact on targeted immigration.

11. The Regulatory Playing Field

A company’s capacity to invest in new technology or hire the best and the brightest of employees, at any point in time, is a product of its competitive position. To this end, it is essential that the federal government recognize that Canadian companies must compete on a level playing field with our competitors. A level playing field helps to bolster business confidence and influences corporate decision-making in relation to medium to long-term investment decisions.

However, when companies in Canada face policy initiatives that impose costs not borne by our key competitors it potentially stifles innovation. The US’s position on the Kyoto Protocol is a case in point. Any move by the Canadian government to ratify and proceed to implement this policy initiative must recognize the competitive disadvantage that would be imposed on Canadian companies should the US choose not to accept the Kyoto Protocol.

Implementation costs will slow the pace of innovation in Canada as limited resources within companies get directed towards compliance measures in response to “command and control” regulatory frameworks. At the same time, we would see the innovation gap between Canada and the US widen as US firms proceed with business strategies unencumbered by the Protocol’s objectives.

12. The Strategic Role Of Associations

A common theme that runs throughout our 12 Point Plan is that associations like CPIA serve as a strategic conduit to their sectors, both from a policy consultation and program delivery perspective. CPIA’s role in the delivery of PEMD is a case in point. In many instances, associations have had to assume a co-delivery role of federal government programs as a result of a reduction in the number of government officials.

While CPIA welcomes the opportunity to assist in a program delivery capacity and feels that it is strategically positioned to undertake these functions effectively, it is often challenged from a staffing and financial perspective. The problem is that existing funding guidelines often do not recognize the real costs that associations assume in the co-delivery of government programs. If associations are to be leveraged for the delivery of programs aimed at narrowing the innovation gap, funding programs must allow them to offset administrative and operational costs.

Conclusions:From Words to Deeds

CPIA and the plastics industry applaud the federal government for its efforts under the Innovation Agenda. The Innovation Consultations offer an important call to action and an insightful international context in which we can better understand the issues and challenges facing Canada’s plastics sector. As such, we welcome the opportunity to play a meaningful part in the consultative process and hope that our recommendations and analysis find tangible expression in policy and program outcomes.

At the same time, we have been down the path of sectoral consultations before. Months of consultation under the auspices of the Prosperity Agenda over a decade ago produced little if any change to industrial policy and program orientations at the federal level. The success of the Innovation Agenda, indeed of the collective improvements to innovation that may result, requires that words get translated into action. This goes for both industry and government. As such, any response or plan of action from both the federal government and industry needs to be accompanied by defined timeframes and performance measurements.

CPIA and the plastics industry believe that implementation of the Innovation Strategy in a manner that embraces the recommendations outlined herein will provide a framework to allow for the sustained growth of Canada’s plastics industry. Over the last decade, the industry has grown at a rate 2.3 times greater than the manufacturing sector.

CPIA and the plastics industry are committed to continue our constructive industrial policy partnership with the federal government. Improved productivity through increased innovation will benefit both companies and indeed the quality of life of Canadians.

Canadian Plastics Industry Association
5925 Airport Road, Suite # 500
Mississauga, ON L4V 1W1
Tel: (905) 678-7748
Fax: (905) 678-0774