EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, September 28, 1995

.0913

[English]

The Chairman: Order.

This is the first meeting of our session of studies on the small and medium-sized business export sector. I'm very pleased to be able to welcome on behalf of the committee our first three witnesses. We have Mr. David Killins from Legacy Storage Systems, Mr. Paul Russo from Genesis Microchip Inc., and Bill Friend from ATS Aerospace Inc. They will help us, I know, understand some of the perspectives and problems of their particular industries in the export market.

Gentlemen, I want to thank you very much for coming to us this morning.

[Translation]

Mr. Paré, I think that Mr. Killins, from Legacy Storage Systems International Inc., brought his material only in English. It was not possible to have it translated but the clerk told me that it will be translated as soon as possible.

[English]

Rather than each going individually, perhaps you could each take about fifteen minutes to make a presentation, if you're comfortable doing that, and then we'll open it for questions.

Mr. David Killins (President and CEO, Legacy Storage Systems International Inc.): I guess I won the straw for going first.

Thank you very much, Mr. Chairman, and good morning, ladies and gentlemen.

I'm the president and CEO of Legacy Storage Systems International Inc., a company that was established in 1983. We operate in the computer data storage business. In fact, in terms of innovation we are a global leader in the design, development, and manufacture of high-end data storage systems. The company has pioneered several innovative technological developments in the PC mass data storage business over the years. Most recently, in the fiscal year ending May 31 we recorded $30 million of sales, and we expect to double this figure during this current fiscal year.

Legacy is structured as a full-scale manufacturing company with an established MRP, or materials resource planning system. We should receive full ISO 9001 designation by early next year.

We have sales offices in Markham, Ottawa, and Montreal, for Canada; and in Boston, New York, and Chicago in the U.S. Through our distributors in the Far East we are very active in markets such as Korea, Japan, Hong Kong, and Australia. Approximately 40% of our production is exported. Today I'm thankful to say we're a well-established, fast-growing small and medium-sized company, with excellent prospects for unprecedented future growth and rapid expansion into world markets.

.0915

However, getting to our current situation was certainly not an easy road. Indeed, we certainly suffered our share of pain in terms of lay-offs and cutbacks during the recent recession. In order to get back on track and establish a springboard for the future, we had to make some critical and innovative moves, both in corporate financing and in technology acquisition.

Although we have always had good relations with the banks, like so many other small businesses we found difficulties in obtaining sufficient financing at an affordable cost. We found the cost of financing to be high and the terms to be somewhat restrictive.

For example, at one point during the recession we had our line of credit capped at an inadequate level given our growth and export business at the time.

I would just like to say that during the recession, which was most pronounced in North America, our greatest sales opportunities came from the Far East.

Only recently did I have my personal guarantee, which included my house and my children and my car, taken out of our corporate arrangements with the bank. I feel strongly that this was inappropriate given that Legacy is a publicly traded company.

However, the major concern I have regarding the stranglehold that the major Canadian banks exert on small business is in respect to limitations on financing of export trade. On the one hand, the banks say, we think you should be better off if you export. However, I found that the banks would not give our company full credit for export receivables, as they would for domestic Canadian receivables.

We don't view foreign markets differently from our own domestic Canadian market, so why should the banks?

I know they say it is much more difficult to realize on their security over clients' foreign receivables, but if this government wants to encourage the private sector to export, then I suggest that the banks should be asked precisely why they impose limits on export receivables financing. Pressure should be brought to bear on the banks to change this philosophy.

It is much more efficient to deal with one source of financing for both domestic and export business than to have to deal with a different organization, such as EDC, in order to secure adequate export financing. With all due respect, we have found that dealing with the EDC adds a level of insurance and administrative costs, as well as delays, which impact negatively on the effectiveness of this export program.

For the last year we have been using a $500,000 export support loan offered by ODC, the Ontario Development Corporation. Each time funds are requested, a substantial amount of documentation is required for each sale being financed, and each customer must be insured. These additional administrative and insurance costs generally outweigh the benefits of receiving slightly more favourable interest rates. As a result, we generally use the ODC line as a last resort.

If the banks won't change their current policy on export receivables, then I suggest that specifically designed credit insurance guarantees by the federal government might be warranted for small and medium-sized high-tech Canadian companies. This would minimize the need for insurance, reduce the administrative burden on such companies, and be responsive enough to enable Canadian companies to compete effectively and quickly in the highly competitive international marketplace.

In fairness to the banks, there now seems to be a trend away from asset-based lending policies, what I call the bricks-and-mortar mentality, toward cashflow, business plan projections and quality of management principles. The banks are now setting up groups known as special lending units. Although these so-called special lending units have marketed themselves as having adopted this new lending philosophy, we've found that they always seem to revert to the bricks-and-mortar mentality before a lending decision is made.

Can a leopard change its spots?

It was during the recession when we realized that in order to lessen and eliminate our total reliance on the banks for financing for survival, let alone expansion, we would have to branch out on the road of venture capital. I found this to be a fascinating but tortuous procedure. For several months - by the way, I was running a company at the same time as I was doing this - I spent a great deal of time sitting in front of potential investors across Canada and the United States, making presentations, only to be politely turned down. Part of this was brought about by the difficulty in trying to explain the complexities of our technology.

.0920

Finally we determined that the best method of finding venture funding was to go public. We met with the owners of a company called Patch Ventures, a shell company listed on the Alberta Stock Exchange. This company had no products and no operational record. It had been listed on the exchange with the understanding that it must make a major transaction within a certain period in order to acquire an operating company.

In 1994, after much negotiation we engineered the reverse take-over of this shell company and thus obtained a listing on the Alberta Stock Exchange. We were lucky to find that company and the principals behind it. Some of them are now employed as our investor relations arm.

To the best of my knowledge, the Alberta Stock Exchange is the only exchange in Canada where this type of transaction is possible. The procedure is called the junior capital pool. It is intended to allow small junior companies to get a listing on the exchange via such a reverse take-over. With the proper restrictions and safeguards in place, the Toronto Stock Exchange would be well advised to look into what the Alberta Stock Exchange has achieved in this area.

However, I want to emphasize that these manoeuvres took up a significant amount of time and legal costs that might have been better spent on product development if alternative methods of financing had been known and available.

In the final analysis, however, the most critical requirement for success in the high-tech industry is ownership of proprietary technology. It certainly makes it a lot easier to raise money. I'm going to illustrate that in a moment.

In the late 1980s and early 1990s our company had scored a number of global firsts in innovations in our disk array storage products. However, none of these advances could be patented, and they were quickly copied by our competitors.

So in 1993 we began a search for some kind of patented technology in our field. Earlier this year we were fortunate to acquire exciting new breakthrough tape storage technology which had been developed at the Institute for Space and Terrestrial Sciences, an Ontario centre of excellence. This unique new Canadian-developed technology, known as VAST - variable array storage technology - is fully patented and incorporates new proprietary software.

We signed an agreement with ISTS to acquire the company licensed to commercialize this technology. This agreement creates an ongoing pathway to continuous commercialization of the VAST technology. It enables ISTS to continue its future data recording technology development with Legacy as the technology receptor. Very importantly, it ensures a healthy return on the significant investments ISTS has made developing the VAST product.

Going public had introduced our company and its technology to investors and to brokerage firms. Our acquisition of the VAST technology has given us tremendous leverage - so much so that this May Legacy completed a private placement that brought gross proceeds of over $13 million into the company treasury. As a result we were able to retire all our debt, including all bank loans and financing, and have ample funds lefts over to conduct much-expanded R and D and marketing, particularly for our VAST technology. As a result, Legacy now stands poised for unprecedented sales growth and much-improved profit margins.

Last month we signed a semi-exclusive OEM agreement with Fujitsu Systems Business of Canada that will lead to worldwide distribution of this VAST system. We will sign more of these agreements as the system develops, and we will sell these systems directly.

I don't believe there's any shortage of good Canadian world-leading technology innovation. You probably have a couple of other examples sitting here today. It just has to be identified and nurtured. Above all, it has to be properly financed. In fact, I would say Canada develops more leading-edge technology in proportion to its population than many other countries.

Overall, Canada has an excellent education system, producing world-class talent. It's our venture capital system that's lacking. That's why it's often easy for U.S. venture capitalists to take over Canadian companies and often move the technology and employment opportunities south.

.0925

Perhaps the federal government should review the entire venture capital industry as it exists in Canada. It should consider legislation aimed at helping to expand opportunities for small Canadian companies to gain access to venture capital in this country. This would enable them to retain and build their businesses in Canada, thus creating employment and expanding the tax base.

For example, I would like to see innovations such as a high-risk, high-return venture capital institution on the campus of the University of Waterloo, to which developers of promising fledgling technology could turn for financial aid in order to commercialize their developments.

In the past we've exhibited at major trade shows abroad. We have taken advantage of government initiatives to explore opportunities overseas.

There's a comment in my brief on which, for the sake of brevity, I won't bother to elaborate.

I've been disappointed in the services I've received in the past from our trade commissions and consulates. For example, when I was living in California, I had my own firm. I was conducting research on Canadian universities. I phoned my local trade commissioner in San José, California, and asked him how many universities there were in Canada. A week later I got a reply from the consulate saying that they didn't know, but to phone this number. The number they gave me was StatsCanada in Ottawa.

It's not very helpful. I don't know how many of you have phoned StatsCanada for information such as that.

Overall, I think that Canadian high-tech companies - and I stress ``high-tech'' - understand their markets very well. Other kinds of businesses are a different story.

I know of the owner of one company that manufactures prefab houses and sells them into mainland China. Our trade commissioners in Beijing and Hong Kong obviously are invaluable to that person.

Another business owner whom I know produces medical products, and he, too, sells his products into the Chinese market. Again, the only way in which he could meet the key officials he needed was to be part of the Canadian government's recent trade tour to China led by Mr. Chrétien.

I'd like to conclude with this thought. In 1988 I left the United States to return to this country to try to build a business that would be helpful to Canada and Canadians. I believe this country is a better, kinder place in which to live than our neighbours' country to the south. I also believe that, given an equal chance, Canadians are just as innovative as any other people in the world, perhaps more so. So for me as a Canadian, the opportunity to build Legacy into a much larger company through the VAST technology is good for Ontario, for Canada, and for Canadians.

We're building our infrastructure and expanding our staff. By the end of this year, we expect virtually to double the number of our employees from a year ago.

As an entrepreneur, building a business that gives employment opportunities to a growing number of Canadians will be my ongoing contribution to Canada.

Thank you.

The Chairman: Thank you very much, Mr. Killins.

[Translation]

Mr. Russo.

[English]

Mr. Paul Russo (President, Genesis Microchip Inc.): Mr. Chairman, members of the committee, I'm here to give you a perspective on the semiconductor or micro-electronics industry and the views of Genesis Microchip regarding export enhancements for Canadian participants in that industry.

As I'm sure you are aware, the world's semiconductor industry is growing exponentially and is fundamental to all major cost and performance leaps in electronics products, be they PCs, cellular phones, telecommunications, video conferencing, or any other products you can think of.

For example, today's cars contain more computing power than a mainframe computer of 25 years ago, with microchips playing the fundamental role in fuel efficiency, safety, performance, and convenience.

The semiconductor industry is the highest-technology segment of the high-technology industry. The cost-per-microchip function is dropping at a compounded 25% per year, and has been doing so for 30 years. If that fact were applied to cars, today a Mercedes would cost less than $1.

.0930

In 1970, the year I got my PhD, you had 250 bits of information in a memory chip. Today we have 256 million bits per chip, a million-to-one improvement in 25 years.

In 1995 the worldwide microchip market will be in excess of $140 billion U.S. This market has been growing at over 30% per year for the past several years, at the long-term expected compound growth rate of 20% per year. The worldwide market will exceed $300 billion U.S. by the year 2000, a truly massive amount. It is no wonder Korea, Taiwan, Japan, and other countries have recognized not only the financial opportunity but the fact that microchips are to the electronics world what energy is to the industrial world. That is, they are the jugular seminal driver of the electronics revolution.

There are two types of microchip companies, those that fabricate chips and those that focus on the intellectual property content, have their chips manufactured by third parties, and then sell these devices through global sales channels. The latter type of chip company is called ``fabless''. Canada has a number of such companies, including Genesis. Canada has no leading-edge microchip manufacturing capability either in place or planned. It costs in excess of $1 billion to build such a plant today. As we speak, Taiwan is building or planning ten more such plants.

To put the ``fabless'' microchip industry in perspective, I will use Genesis as an example. Genesis was founded in 1987, has expended in excess of $15 million on R and D, has raised in excess of $15 million of equity financing, and is just now seeing its microchips enter volume production. It is typical for a fabless company to spend six to seven years and $10 million to $20 million on R and D before its products enter volume production.

Let me illustrate this point. Genesis began its R and D in digital video processing in 1989. It began developing its first chip in 1991. It began sampling it in 1993. Since it often takes companies one to two years to begin producing their new products that contain the Genesis chips, world-leading companies such as Siemens, Silicon Graphics, Texas Instruments, and many others are just now entering volume production. Genesis expects sales to reach in excess of $100 million by the year 2000, from under $2 million in 1995.

Before I begin commenting on which federal programs work and which don't for companies such as Genesis, let me point out that Canada has a great lack of venture capital for companies such as ours. Yet companies such as ours need massive amounts of equity. Genesis was fortunate to have found a number of individuals with the vision, patience, risk orientation, and deep pockets to stay the course. Only one institution, Crown Life Insurance Company, is an investor in Genesis.

Genesis also follows the ``Silicon Valley'' model of giving all employees stock options and the ability to purchase shares at a discount. Most Genesis employees not only have stock options but are also true shareholders. Our kind of company, as do most Silicon Valley companies, recognizes that the need to share control in exchange for larger amounts of equity is fundamental to success.

Let me now describe the federal programs that have been effective in Genesis's evolution. The industrial research assistance program, commonly known as IRAP, has been very helpful. Genesis has received a number of such grants over the years. The money was helpful, but the credibility and confidence given to the investor base from having a National Research Council endorsement cannot be overemphasized.

Smaller programs, such as the program for export market development, PEMD, have major administration costs and offer only small levels of assistance. They have not been extensively used by Genesis.

Federally supported R and D funding entities, such as the Strategic Microelectronics Consortium, are very effective because funding decisions are made by fellow industry CEOs and the assistance is in larger amounts and is generally in the form of loans. It is unfortunate that the SMC will have no more R and D funds to dispense after March 31, 1996.

Finally, SRED tax credits are a critical vehicle to encourage risk capital, since these cash refunds leverage investors' equity in funding additional R and D.

Now let me focus on programs that didn't work for us and areas that need more improvement. The FBDB, with its insistence on personal guarantees, is of no use to microchip companies, where the many years and many millions of R and D dollars needed usually result in a broad shareholder base. Genesis has in excess of 50 shareholders, so personal guarantees are not practical. Nor do the few larger shareholders want to carry the rest. As a consequence, the FBDB has not played and likely will not play a role in our financing.

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As an aside, Genesis has also not had any good experience with so-called labour-funded venture capital funds, such as Working Ventures. Significant and frustrating efforts were made to pursue such investors, with no success. I will say no more about this topic at this point.

Any participant in the microchip industry must have a global focus. Canada represents less than 2% of the world electronics market, and for us, of course, less than 2% of our sales.

Government assistance - and I always prefer loans to grants so the repaid moneys can be recycled to help younger companies - is needed to establish worldwide sales channels, as well as to secure international patent protection. The latter is especially true when dealing with Far Eastern markets, where respect for intellectual property is not at the same level as that in Europe and North America.

I should point out that it costs approximately $70,000 to obtain adequate international patent coverage, and Genesis has 12 patents issued or under way.

So here are my major recommendations.

One, increase the amounts of assistance, especially for non-R and D activities such as sales channel development and intellectual property protection, but have this assistance be in the form of loans - ones that banks, with their need for hard asset collateral, simply cannot fund.

Two, remove the FBDB requirement for personal guarantees so it can better address lending to long lead time and R and D intensive industries such as micro-electronics.

Three, focus. Canada, unlike the U.S., cannot afford to fund all areas of high technology. A small number of strategic industries should be identified and given funding priority. It is better to win in a small number of high-tech industries than to lose across the board.

Let me make one last comment. In general - and I agree with Mr. Killins' comments - Canadian high-technology SMEs are R and D and technology rich but product, marketing, management, and capital poor. These latter areas need far more attention. Canadian companies have lots of technology, but often lack the wherewithal to grow successfully into world-class companies.

However, we expect Genesis to be the exception.

Thank you.

The Chairman: It's nice to notice that both you and Mr. Killins have started on an optimistic note for your companies, which is encouraging for us. It's excellent.

Mr. Friend.

Mr. William Friend (President, ATS Aerospatial Inc.): Unlike the previous speakers, I do not have a prepared text. Perhaps this is just as well, because essentially I'd be repeating much of what they said. The experiences of ATS are really quite similar.

In our dealings with the banks and other financial institutions, the experiences that David discussed at the beginning of his talk are almost exactly parallel to our own. Our frustrations with the venture capitalists in Canada are the same as those expressed by the second speaker. So whether we're in Quebec or Ontario, the situation is much the same, and I expect that it is much the same anywhere else in Canada.

ATS is a relatively young company, as well. We were formed roughly in 1980. We started with two people. We're now just under 100. We are privately owned. We are Canadian owned. We have one institutional investor. Like the two previous speakers, we're growing at a relatively rapid rate, typically 30% a year over the last five years. We're expecting closer to 50% to 60% growth in the next year, to 1996.

We had no growth in the previous year because we ran through some of the recessions that others have seen.

.0940

We too are part of what can be called the ``knowledge-based'' industry. We're a software company. We produce high-tech products for defence and aerospace, primarily internationally. We export roughly 80% of our products. As I said, our principal products are in the aviation and marine safety areas. In the area of aviation, it's in air traffic control training systems and air defence training systems.

We've run the gamut from very expensive, multi-million dollar systems, which we've installed here in Canada and in Europe, to very small systems that are sold through ICAO, the International Civil Aviation Organization, for example, to developing countries. We're mainly PC based, using the products of my two friends, or similar products, in all of our equipment.

We have products in more than 35 countries around the world, so naturally we experience the same kinds of frustrations and the same kinds of problems in exporting as a small Canadian company. I might say our competitors are typically anywhere from a hundred to a thousand times bigger than we are. Internationally we are by far the smallest player in our field, yet in some circumstances and in some areas we are the dominant player, even though we are the smallest.

The Chairman: You slip between their legs, do you?

Mr. Friend: Small sometimes has advantages. We don't have ten layers of decision-making. My office door is always open, as I am sure my friends' office doors are always open. If someone has a problem, I have that problem presented to me within minutes and we get down to it and resolve it.

In the new product area, we are in ship's bridge and virtual reality trainers, including helmet-mounted 3-D displays for officers of the watch, the folks who drive the ships, so they don't bump into each other.

Actually, a ship's motion is not very different from that of an aircraft. It takes about the same physical distance to move a ship and to turn a ship. It just takes a lot longer. The inevitability of the event is just the same. You just watch it happen over a longer time.

We also produce a rather interesting product used to exercise the Canadian navy's air defence systems. It's a very low-cost missile emulator, a passive radar reflector we put into the nose of a projectile. It makes the projectile look like a missile to a radar system.

In our 95 to 100 people, we are virtually all university graduates. In fact, we do not produce anything ourselves, although our sales are products. All of our hardware is produced for us by companies primarily in the high-tech community in the Montreal area, but some is produced as far away as Ontario.

We have made very extensive use of both Quebec and federal R and D and export support programs. The federal programs that were mentioned, such as DIPP, the defence industry productivity program, is one that has suffered a major slash or cut-back by the current government. We've used PEMD, FORDQ, the Federal Office of Regional Development of Quebec, and of course EDC and CCC.

Because we are largely export oriented, because we are not a bank and have experienced the same frustrations with the banks as everyone else, we use EDC extensively to guarantee all our export sales. If we don't, the bank won't recognize the receivable; and if the bank doesn't recognize the receivable, we don't have any money to work with. It's a vicious circle.

Typically, our experience is that as a small company you need 25% of your annual turnover as a line of credit to operate successfully in the international market. In part this is because it takes a month or so to build the product, to ship it, and to collect takes two or three months. So there is an investment period.

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It is important for us to have export backing, because if we don't have that, very soon we run into problems with our bank line.

We have found that CCC has been very useful, although both institutions, being government, tend to be a little bit slow. That comment has been made previously. I would like to see both CCC and EDC sharpen up a little bit and not take three weeks to make a decision that they should make in an afternoon.

As a matter of fact, I was speaking to a CCC person from western Canada a few months ago and he told me that he was able to make a decision on the day on which he was given the question, whereas when he was in Ottawa it took him three to four weeks to get the same level of decision. So maybe being outside of Ottawa helps a little bit.

Quebec has similar programs. The Fonds de développement technologique is a program that came out of Quebec City. It is one at which Ottawa should look seriously, because its focus was - and still is - on what is called mise en valeur, which means putting into practice. It doesn't support the R and D but, rather, the marketing.

I am sure my friends will attest to the fact that the cost of putting a product in the market is typically three to five times the cost of actually producing it. You can make a better mousetrap, but then it is on the shelf.

That is one of the biggest problems that I have experienced with the defence DIR in the DIPP programs. They give you enough money to put you into real trouble. You develop the product. They give you 50 dollars. You have a bank loan, you have a banker on your butt, and now you have to find three times as much money before you can earn any money. So how do you do that?

I will leave that as an open question.

The Chairman: I wonder if the committee can find the answer to that question.

Mr. Friend: I don't know.

The Chairman: We would have done our job - is that it?

Mr. Friend: Yes. You can go to venture capital, and I will go through the same litany of venture capital problems. Yes, I can go to the bank, but the banks don't lend risk money. They lend money on receivables - certain receivables, if they are within 90 days. Often from an export requirement it is longer than 90 days. So they won't move unless EDC moves or unless you have a CCC backing. You have this kind of catch-22.

As a small company, a company that you probably started yourself or with some associates, you have spent all your money. You've mortgaged your house. You've rented out your cat and your dog. You haven't got any more. Where do you go? You go to a venture capital guy. They aren't there.

As soon as you need the money, you are really in trouble big-time, because now you are now going to lose control. You're going to lose the whole thrust of things, and you have no guarantee of success.

You are looking at three quite successful companies in that largely we own our own companies, we control our own companies, we control our own destiny. But we have done it by a kind of boot-strapping. We could do a lot more, we could do a lot better, if we had support from the government at appropriate levels.

That is what I have said here. We have these programs, yet within Canada is the lowest R and D spending of the G-7 countries. We have the highest unemployment rate, and I wonder if those two are connected.

Someone suggested earlier that if you eliminated all of the major foreign-owned companies, then we would have one of the highest R and Ds. The foreign-owned big companies don't spend R and D money in Canada; they spend it at home.

One of the suggestions I would make - and I could go through the same kinds of suggestions as were made earlier, but let me look directly at support to the smaller Canadian companies - is that I would like to see the DIPP program replaced by a non-defence-oriented, high-tech R and D export support program.

.0950

But I would like it also to look at the cost of putting products into the marketplace, to look at the real cost of sales and marketing, because that's where a lot of us fall flat on our faces, and it is at that level you'll find most of the small Canadian companies that are bought out by the foreign nationals or by foreign companies are bought out. They're bought out after they've innovated the product but before they put it on the market. Look at Softimage in Montreal, now a division of Microsoft - exactly the same situation. It developed the technology, but without a major take-over it couldn't produce a product.

I would also like to see some kind of direct tax advantage to exporting companies, particularly those of a high value-added, because it's the exporting companies that in fact are bringing real money into this country. We're not just circulating internal dollars. We're bringing real wealth, and making wealth, for the country. And we're not exporting raw materials. We have a sustainable export, because it's high-tech.

I'd like also to see the establishment of a real small business administration. I know there is a minister or a secretary responsible for small business in Canada. I've been a small business in Canada for fifteen years, and I have yet to see a single advantage or a single program which in fact protects the interests of small businesses in Canada.

If I go to the United States, there is a small business administration with three rows of teeth. They really make it stick. If they decide it is a small business set-aside program, then there is a set of rules and no one else is allowed to bid.

By the way, no Canadian company is allowed to bid either, because we have to go through CCC; and CCC is not ``small business''.

I'd like to see some kind of reciprocity in that sense. Establish a small business administration with some real teeth, one that says if small companies can do it, then they are the ones that will do it, and they are the only ones that are allowed to compete. General Motors doesn't need the $300,000 contract that kept me alive five years ago and that makes development work for a small company. We're making the 85% of the new jobs in this country, yet we have to compete against the foreign nationals and the foreign companies.

So I would like to see some kind of small business administration that gives some teeth and gives some support to small businesses. I think it would strengthen our position to export and perhaps go some distance towards resolving some of the issues that have been discussed earlier.

I'd like to show you two quick pictures of what we do. That's a computer-simulated picture of Salzberg airport in Austria. It's a real-time, interactive, out-of-the-window tower simulation that's used for training of air traffic controllers.

That's a bridge window. We are looking out of the bridge of one of the Canadian CPF ships. I don't remember which one 332 was. I think it was the Winnipeg.

These are the kinds of products we can make in Canada, using the high-tech, computer-based technology that's available to us. We can export it around the world, and these are the areas where I think we're making jobs for this country.

Thank you very much.

The Chairman: Thank you very much, sir.

[Translation]

Mr. Paré.

Mr. Paré (Louis-Hébert): I would like to begin by a rather general question. Every time ministers of Finance, be they of Canada or of the largest provinces, present a budget, business representatives, from the Conseil du patronat du Québec or from the Canadian Federation of Independent Business, are usually heard stating, for all to hear, that we must put an end to grants to business since this is one of the causes of the deficit. Governments are truly being encouraged to regain control of public expenditures.

.0955

I'm always a little surprised to hear such statements when I see the very real problems of some Canadian and Quebec businesses who are trying to establish themselves in foreign markets. Do you really need grants? Would it not be preferable if the government forced financial institutions to adapt to your needs?

[English]

Mr. Friend: I would like to have a run at that one. First, I would say the larger companies have batteries of lawyers, who enable them not to pay the same kind of taxes we have to pay because we can't afford such smart lawyers.

Secondly, in the studies I have read recently - and certainly in our company I am sure the case is also true - the subsidies we get do a couple of things. One is that they tend to level the playing field. In the United States the maximum tax rate is about 30%. That would suggest we need about a 50% subsidy just to be on an even playing field with our American competitors.

But more than that, investment in R and D from the support programs is typically returned between fifteen and sixteen to one. That means every dollar the government spends in supporting high-tech development products is returned sixteen-fold within five to ten years.

In our case, if I were to sum up all the grants we have had, some of which were returnable loans, refundable loans, and look at the number of jobs we have created and the actual investment per job, it is a very small number. It is a few tens of thousands of dollars. If I look at the investment in the major companies, you are talking about several hundred thousand dollars per job created, and they are not sustainable jobs.

My jobs are sustainable. We are growing. David's jobs are sustainable. He is growing. The saying is true: the small companies are the engine of this economy. We are creating jobs. We are creating a tax base. We are more than paying our share.

I think these are absolutely essential for the smaller companies.

Mr. Killins: I want to be very specific that my presentation relates to my business and the sector my business competes in. I think you could detect from the presentation I made that I am not here asking for any subsidies. Just get these banks off my back. Now I have found a way to get them off, but that is what I am leaving with you. I am not here to ask for subsidies of any sort, especially anything that relates to incurring debt on the balance sheet.

But again, that is just me. With all deference to my friend, I believe he is in a sector that is very competitive. It deals with government agencies. It needs a way to balance that playing field for other reasons. I don't disagree with him.

Mr. Russo: We certainly are in an international marketplace. We are the kind of business that requires lots of investment for many years before we see the sales take off. When they take off it is dramatic, because once your chips are designed into products and they go to volume production, sales can literally explode.

Companies like ours have to be equity financed. I don't believe in grants. I believe if there is any kind of assistance, it should be in the form of loans. Certainly companies like ours should be equity financed.

Therefore, to answer your question, I think it would be preferable if we could find some mechanism to encourage more venture capital being available to fund companies that have these long lead times, such as ours.

There is a fair amount of early-stage risk capital here: $100,000, $200,000 from individuals. There is certainly a lot of financing when you need $10 million to $15 million when you are in business and making money. The in-between part is what is lacking.

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We've raised $15 million of equity. It's been very, very difficult.

Some of the funds that were set up, the so-called labour funds for venture capital, simply don't have the skills to value businesses such as ours. We expense our R and D, so our balance sheet is very small. We have no cashflow, or a very negative cashflow, until sales take off. Then the turn can be very dramatic.

If you have organizations that use taxpayer money and call themselves venture capital firms and then base their investment decisions on balance sheets, which are obviously discounted because their R and D's expensed, and cashflow...the valuations they put on our companies were so ridiculously low we told them to go away.

So what's needed is more risk capital, but not government subsidies. I don't believe in them either. I think people should be able to manage their businesses with equity.

From that point of view, if you look at Silicon Valley, they all raise venture capital. They have to give up control to get bigger money to make it succeed. I believe that's required. Too many times in this country people want to maintain too much control and don't go and raise the equity they need to succeed.

The Chairman: Mr. Penson.

Mr. Penson (Peace River): Mr. Chairman, I'd like to welcome the gentlemen on the panel this morning. I have been looking forward to this discussion on small and medium-sized business for quite some time, because I believe it's the backbone of our economy in this country, and whatever government can do to help get out of the way, in some cases, is what we want to hear this morning.

I wanted to pick up on Mr. Killins' point about the Export Development Corporation and the idea of government being in the export financing and insurance business.

You've made the point that you would rather deal with one source, probably a domestic source, a banking industry, but they don't offer the type of services you want. I've listened to some of the banking industry and the export insurance companies, and they tell us EDC is a tough competitor for them. They have a tap into government, especially on the concessional financing side, and it's very difficult for them to compete. If EDC were to back out of that area, what would your feelings be about whether the banks would be able to provide the type of financing you require for export financing? Would that give them the opportunity? How do you see that coming up?

Mr. Killins: Generally speaking, it's true the banks do have export financing groups. In most cases it amounts to nothing more than factoring operations, where it's not only the bank that's insuring that receivable. But that aside, the reason EDC is preferred vis-à-vis the banks' export financing group is that in effect it allows us another line of credit, if I may put it in those terms.

We were capped, so it didn't matter whether we qualified.... You could qualify for export financing through the bank, which was, yes, less competitive than the EDC rates, but it didn't matter. We were already at the cap, so we had no choice but to go, in our case, to ODC with EDC insurance.

Then the administrative part kicks in. You have to have a large order. It has to be an insured customer. It sometimes takes two weeks to process it. We're almost in a catch-22.

So yes, the banks do have the capability, but they have this tap turned and capped at such a point that you're not able to benefit from it.

Mr. Penson: What about my point, though, that if EDC were not in the business...would the banking industry and the insurance industry fill that void? I've had some discussions in which they've told us it's very difficult to compete with EDC and therefore they're just not putting the kind of money into that export financing. Some other countries don't have the government agencies to the extent we do. The German model, with the chamber of commerce system they have there, seems to work very effectively. Is there another role that could be played by the banks here if EDC were to back out of that?

Mr. Killins: There may be. I think it's worth looking at, certainly.

The Chairman: But do the banks themselves say to you the problem is they don't have branches around the world? The German banks may have branches all over the place that they can rely on.

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Mr. Killins: That's one of their responses.

The Chairman: Surely for exports they're going to have to have a relationship with another bank.

Mr. Killins: This is how ludicrous this situation is.

I have a perfect example. I approached the bank and said I want the same treatment for my U.S. receivables - U.S.; this is a country not far from here, with a generally stable economy and everything else - as I'm currently receiving for my Canadian receivables. I was told by my bank to speak to their branch in Buffalo.

It's ludicrous. In fact, that's exactly what we're faced with. In my speech I made a point. If we are going to be dependent on these banks, then they have to take a world view from Canada, as we do, as we approach markets.

There's a funny anecdotal comment that comes here. I was so fed up with the bank at one point that I did what every entrepreneur does: I went searching for what is referred to as a schedule B bank. Many of them are U.S. owned. I found one. They were willing to better the lending provisions my current chartered schedule A bank was offering. I received this response from Chicago, which happens to be where the head office of this schedule B bank was. They said, we have no problems with your U.S. receivables, but those Canadian receivables we have a problem with.

Some hon. members: Oh, oh!

The Chairman: So this is not only a Canadian banking problem. It may be a banking culture problem.

Mr. Penson: May I ask another question about venture capital? My understanding from what you're saying is that a pretty small pool of venture capital is available there. Certainly we'd all be better off if there were more access to more venture capital. But we know from the Alberta government experience in venture capital that...they've had a lot of failures. Would you be looking for government-funded venture capital or private sector venture capital?

Mr. Killins: Private sector. I think the answer lies somewhere in the tax. If we were able to give tax incentives to investors who were willing to make investments in high-risk, high-return, start-up fledgling operations, then you might have.... It definitely has to be private sector, in my view.

By the way, the model I've seen is on Stanford University campus. The incubation of the technology...I'm sure MIT, Caltech, Georgia Tech, and other places have similar arrangements. It's a good model to look at. That is where you have incredibly talented group of people in an institution, and within a half a mile from that institution - anyone who knows the address, it's 3000 Sandhill Road - there are over 100 venture capital firms based there. They just act as the feeder for a lot of the high-tech start-ups that come out of Silicon Valley and that originate at Stanford University. So you have the combination right there. I don't know what government involvement there is, but that would be the model I would think might work at a place such as Waterloo.

The Chairman: Mr. English.

Mr. English (Kitchener): I found your presentations very interesting. I was intrigued by a comment I think Mr. Russo made about the labour venture capital funds, which represent quite a large pool of venture capital. I read the annual report of Working Ventures. Those who invested are doing very well in treasury bills, but as you noted when you looked at these things, they're not actually putting much venture capital forward at this point.

You made the comment, and I wanted you to expand upon it, that they do not have the capability to identify appropriate risk-taking situations. I wonder what you meant by that.

Mr. Russo: I'll give you some of our personal experiences - and we've talked to more one of those funds. For example, we talked to a number of U.S. venture capitalists during our quite difficult period of time, because when you start our kind of company you always think it's going to take two or three years and a few million dollars. The next thing you know it's six or seven years and $15 million of equity.

What we found is that the threshold for a California VC to invest in Canada is very high, because it's a different jurisdiction and they want to be able to drive there and see you in a half an hour, to be really involved. We have in some cases some venture capitalists who have invested personally in our company and who were on our board, but their companies wouldn't invest. It's probably due diligence. What they would do is hire expert consultants for our kind of technology and under non-disclosure agreements they would do due diligence.

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None of the Canadian VCs we talk to ever want to spend the money to hire an expert in the U.S., because our technology, digital video, is very specialized. There are very few people who really can make a judgment: is this stuff really good or is it just no big deal? Without that due diligence.... Also, the Canadian venture capital community has a preconceived notion that if it's invented in Canada or done in Canada it can't compete with an Intel. Therefore the assumption is why bother? It's a real problem.

About these labour-sponsored funds, first of all, I suppose I could make the observation that if you are an ambitious world-class venture capitalist type of person, you would tend not to want to work there. So the kind of people they attract...they are very competent people, but their backgrounds are often not from the venture capital industry.

If you put in a banker making venture capital decisions, he's going to look at cashflow, he's going to look at book value. With a company like ours, if we raise $2 million to $3 million of equity, our book value is $2 million to $3 million. Six months later, because we spend.... Right now we're burning about $500,000 a month in operations, on R and D. In six months, before we raise our next round, our book value is getting to be close to zero. So there essentially is no book value until sales get going.

Then they look at cashflow. In our kind of business, it is not just that you have to develop the technology and the chips. With these chips...by the way, each time we go get a prototype made - and we use people such as IBM and Hewlett-Packard in the U.S., because they can afford it - in three or four months...it's $200,000 a pop just to get a prototype made. It's a long cycle.

Now you have this chip. It's a sole-source device that's very unique. Imagine these larger companies looking at a company in Canada. They say, if we put that chip in our product, how do we know they're going to be around in a year? Now our product has the chips in it and we're in deep trouble. There's the question of our own financial viability. There's the question of our source of supply. We're an established company, so we rely on IBM to make our chips. Suppose IBM tells us in six months, we're at capacity, go away. What happens to them? So there's a big threshold there that you have to overcome.

Then they say, fine, we'll design you in. They design you into a new product. Since we're a component supplier, it might take them a year or two, in some cases. In the case of Siemens, for medical imaging, we're in the new ultra-sound systems. It took them two years from when they first got a sample to when they actually began to produce those systems. So we saw essentially no revenue - sure, samples - for a two-year period before things got going.

So you have this very long cycle. The point was made before that the R and D in our business is very expensive. Establishing world sales channels - our sales are all actually out of the country; I think 99% of our sales are outside of Canada - is very expensive. So it has to be equity financed.

The people who can value companies like ours are very scarce in this country. We're planning to go public some time in the latter part of next year. It'll be on NASDAQ, because we feel only NASDAQ has the kind of investment bankers involved who can value chip companies. I'm not talking in general; there are for high-tech in Canada, but for microchip companies in Canada there are very few. There are no really experienced analysts in these industries who can value these companies properly.

Mr. English: It's really analysis that is impeding the flow of this venture capital, of which there seems to be a very large pool, to judge by the annual reports I looked at under these firms.

On that question, someone mentioned strategic partnerships. What you're suggesting - I would welcome your comments, Mr. Killins, because you've been in the United States - is that on the whole Americans can do this evaluation much better than Canadians can, and that's why venture capital firms can't. I understand recently in the Vancouver area a lot of strategic partnerships have been worked out and they have ended with the take-over by American firms of the Canadian firms that started up with the initial R and D. I'm from Kitchener, which is beside Waterloo, and that hasn't happened in that area yet.

I know in the case of Vancouver the Canadian government was active in establishing strategic partnerships. Now we're left with a situation where you have firms that are very heavily dependent on the export market. They are now owned by Americans.

Is there not a tendency over time to have those firms disappear? In the case of the Waterloo firms, most of them are Canadian owned, but I've known a couple - I've known them very well - that have become American. It's been extremely lucrative for the people who established the firms. They're spin-offs of the University of Waterloo. But in fact they're not working in the firms any more. It's essentially an operation from the United States, or the R and D is relocated, or the students who graduate from the University of Waterloo end up in Seattle or wherever it is.

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It's something one notices in a community like this. Two of you are from Markham, and I suspect the same sort of thing happens there.

I don't know what all that means in the longer term, but it's something that troubles me, living in the community, when I see that 40% of our graduates from the University of Waterloo's computer science program now immediately go to work in the United States.

Mr. Killins: Most of them with Microsoft.

Mr. English: Microsoft's greatest source for computer scientists, in terms of their graduation, is now the University of Waterloo.

Mr. Killins: Of any university in the world.

Mr. English: Yes.

Mr. Friend: There's still McGill as well.

Mr. English: Yes.

It's an observation, but I wonder if you would comment on it.

The Chairman: We will take that as an observation rather than as a question, Mr. English, because we have quite a few people and we have only fifteen minutes left.

Mr. Lastewka.

Mr. Lastewka (St. Catharines): I really appreciate your comments this morning, and your input to this committee.

I understand that in the discussion you mentioned that R and D for Canada needs to be improved...and the venture capital needs. While you were on this journey of your three different firms, where did you receive interference from federal government jurisdiction or policies in place in order to make your three companies such a success? Was there interference?

Mr. Killins: That made us successful?

The Chairman: Or inhibited it.

Mr. Friend: I don't think there was active interference, at least not in our case. There may have been passive neglect, but not active interference.

Mr. Lastewka: I heard my colleague across the way say - and he uses this quite often - government should get out of the way of business. I wanted you to go further on that. Was government in the way?

Mr. Killins: I think it's generally conceded that the administrative side of government's well-intentioned involvement tends to be an inhibiting factor.

Mr. Lastewka: Can you explain that a little further and say what we need to get out of the way?

Mr. Killins: The time it takes to get an ODC receivable loan insured. I made note of that in my speech. There are certain administrative aspects to PEMD that take time. Generally, if there is interference - and there was an entire section of the speech that I took out because I didn't want to give a negative aspect to this presentation - it is the whole matter of paperwork to government in general, for a small business. For us it employs at least one person full-time; and we're a fifty-person company and growing. I don't know if I want to call that interference, but it's certainly bureaucracy or administrative procedures that take longer than one would hope for.

Mr. Friend: Yes, there's definitely a bureaucratic burden on any financial support from government. It takes a lot of time. Decision-making times are very, very long. As I mentioned, it typically takes several weeks to many weeks for a decision from EDC. There's no particular need for it, because the information is there.

As I said, in Calgary I was told that a decision could be made the same day the information was received. It's just a matter of getting at it. We solve things quickly in small business by getting at it, not by putting it on the shelf and waiting for three weeks before we get to it. That's basically the problem. It isn't that it takes so long to do; it just takes a long time to get to it.

Mr. Mills (Red Deer): I'll try to limit my questions to a specific area, but certainly I appreciate your comments. Things such as those personal guarantees...I personally understand totally what you're getting at there.

In answer to Walt's question, I would go further and say not only to get government out of the way of business and bureaucracy, regulations and all of those levels, but probably to provide a balanced budget, lower taxes, an incentive for incubators through tax benefits. Those would be the kinds of things I would say...in terms of getting government out of our lives.

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What I'd like to limit my question to, though, is the whole area of our consulates. I guess this is something I've personally taken on since I've changed careers, to look at what our consulates do. I visited Los Angeles, the Silicon Valley and San Diego and looked at those three parts of the Canadian government. I then went to other places. I felt we had some excellent people there, that they were doing a good job in terms of understanding who the players were, and if business could get to them they may well provide a service. I heard it from their end of things.

I guess I've been looking forward, as has Mr. Penson, to these meetings to get a chance to ask real business guys out in the field to rate the kinds of services. You asked about universities; it took three weeks to get an answer and that was to call Ottawa. Obviously that's not a very good rating, but if we rated our consulates on what jobs they have to do...I'd like to isolate what is their job. Second, do we need them? Third, if you have had involvement with them, where do they rate from one to ten?

Mr. Russo: For us it's very straightforward. We're in the microchip business. The consulates play no role in our business whatsoever because we work through sales reps and distributors who understand the sophisticated customers that our chips are going to. We sell components. We have to convince a customer that they want to buy from us and that's that, so we do not use those services whatsoever.

Mr. Killins: My understanding of the consulate trade commissions and consulates related to trade...the one I have most experience with is the one in Silicon Valley. I used that when I lived there. I also used that consulate when I repatriated my business to Canada. This was at a time when I was looking for venture financing. Arrangements were made through the San José-based consulate to arrange meetings. In the end, in effect, they turned out to be my chauffeur. I was the one who set up every meeting.

I don't mean that in a negative sense. This is an incredibly fast-moving industry. It's very difficult for a consulate, unless they have specific interest in my vertical expertise, to know who the players are in this business. I do not see a role for them.

By the way, anecdotally, that afternoon I was supposed to reserve three hours in my three-day trip to California to meet the then trade minister of the federal Government of Canada. About fifteen minutes prior to that planned meeting we were told that he had chosen to take the afternoon off and play a game of golf.

You've heard this before, I'm certain, and I don't want you to think that I want you to become business people, because I know there's a role of government that is not at all like business, which is essential. The reason we're a caring country is because of our government, a good government in that sense. But I think this government has to get pro-business. You have to have a trade minister who is pro-business, not that we don't have one today, but we just simply have to be oriented towards business. Trade commissions, I suppose, could play a role, but so far, on a scale of one to ten, for me it's zero.

Mr. Friend: Our experience is quite different from that, I guess to a large extent because of the different business sector. Our customers are primarily foreign governments, so we make extensive use of the services of the trade commissioners. It's somewhat spotty. The trade commission service is only as good as the trade commissioner who is there, and quite frankly the trade commissioners who came out of Industry, Trade and Commerce are head and shoulders above those who have been hired more recently by External. They are in fact business-oriented people. They were in the industry and commerce sector and were dealing with the Canadian industry and were knowledgeable of the industry and made great use of that.

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Those are the people I track. They're virtually all personal friends, because we've been doing business with them for so many years. They're our eyes and ears in these foreign countries. They alert us to opportunities in the various countries where there are government publications, and alert us about impending requirements in our sector. Canada has the Open Bidding Service. The U.S. has Commerce Business Daily. Every country has a similar kind of publication. We can't afford to buy and read them all. The consulates or the embassies - at least the good ones - do that for us, and it's a very valuable service.

I can think of $10 million in export contracts we've had over the years that have come from initiatives from the embassy, alerting us to a requirement so we could get our ducks in a row and bid on it and then get some support from the embassies in helping us with our bid. Particularly because we're a small company, we run into the same kind of problem as with the microchip in supporting a foreign bid when you're small.

Mr. Mills: Have you been asked to do an evaluation after utilization of an office? You said it depends on the trade commissioner. Obviously, then, within government there should be a way to say this is the good one, this is not a good one, let's improve this. What kind of feedback are you asked by government to give?

Mr. Friend: Yours is the first question.

The Chairman: Mr. Flis.

Mr. Flis (Parkdale - High Park): Actually, that was my question. It's been explored. But in 1982, in a document called Canada's Trade Challenge, of all the government's services and programs, the trade commissioners were rated the highest, being the most helpful in promoting exports for small businesses, etc. This morning we heard just the opposite, but we've heard a balance here. The truth may be that it depends on the person and where that person's posted. But I think that's something we should look at, Mr. Chair, because if in a dozen years that service has gone downhill, maybe it's something we have to address as a committee.

Mr. Russo: I would make the observation that it may also be a factor of the industry itself. If you're related to contracts and have government involvement in the foreign jurisdiction, then they could be helpful. If you're selling advanced components, whether it's storage systems or microchips, we know who the key accounts are and the consulates don't.

Mr. Killins: I know everything I want to know through Internet. I know all the trade publications that are relevant. I pull out just the information that's necessary to me. I know as much as I need to know. All I need to do is set up the appointments. That's on a worldwide basis, by the way.

Mr. Friend: That's true of our case too. You can't expect the consulate or the embassy to be a salesperson for you. They are a provider of information and you need to use those services in that way. But the bottom line is that you have to be there and you have to make the sale. You have to know the customer. If you don't know the customer, you have to get to know the customer.

In our case they can help us, particularly with understanding the various different government rules and regulations. That's a little different from being on the more commercial side.

Mr. Flis: But in new, emerging markets - and I'm thinking of Kazakhstan and the ``-stan'' countries, Azerbaijan, etc., where there's very little Canadian presence - would you also have the market intelligence you need in those countries? Or is that where the trade commissioners can be more effective?

Mr. Killins: That's where it's been most helpful to my friend who sells these medical parts. He has to know how many hospitals there are in China, and that's not readily available. That's available only through government sources. Our trade commission in Beijing is immensely helpful to him for that.

My business relates to developed markets. We're not concerned about a market unless it has developed an infrastructure to the point where they're using large numbers of computers and networks and that sort of thing. If that's the case, then we pretty well know what's going on.

The Chairman: Mr. Volpe.

Mr. Volpe (Eglinton - Lawrence): Mr. Chairman, I want to compliment our three guests today. I think they've been very informative.

The Chairman: Yes.

Mr. Volpe: I've found their presentations have taught me something and have stimulated a series of questions.

I would like to make observations on two fronts. The first doesn't require a response, but since you've raised it and since we're talking about or looking at what is required for small businesses to succeed in the export market, it has been my limited experience that perhaps our consulates, embassies, and trade counsellors suffer the same problems that all of us suffer: some are a little bit better than others on any given day. For example, I could put in a plug, as Mr. Killins has already done, for the Beijing office, but I could do it as well for the office in Havana, Cuba, where I think the ambassador probably should be given a piece of all of the action he puts together for everybody. He guides non-stop, and I'm sure that if anybody went to him with any question, the last thing they would get is a response that says ``call Statistics Canada''. He'd probably do that and give you everything right off the bat.

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So we have some good people. But I don't think that's the only problem, although I suspect,Mr. Chairman, that if this theme comes up more often, we'll probably have to rate what's going on in many of these places so that we can provide businesses with the appropriate information and encouragement.

I was more interested, though, in two items that were raised by both Mr. Russo and Mr. Killins, and I think by Mr. Friend as well. I suspect that all three of you are looking for a strategic government plan for increasing the venture capital pool. The word ``strategic'' is my own because I know that conjures up images for people who have a particular political philosophy, but I think that's what I detected from all of you, that there is a deliberate government program in place. There is such a program - and I think Mr. Russo raised it, both in his presentation and in his response to one of my colleagues - and that is the labour-sponsored venture capital fund. I think one of them has about $100 million in the pool that isn't being used. I think it was Mr. Lastewka who indicated that it's all in treasury bills.

Would you be advocating that the government look at that fund in particular and prescribe a particular type of investment?

Mr. Killins: I know Mr. Russo is contemplating a response here and I didn't comment on that.

I too approached Working Ventures, specifically in my efforts to raise capital. Of all of the institutions I approached, that was the most recent...I raised $13.5 million in two and a half days. I actually booked $25 million but only took $13.5 million. One of the institutions I approached was Working Ventures, and they told me they had reviewed over 400 business plans - one of which I am sure was yours, maybe yours - and they were not satisfied with the balance sheets.

My response is that it's not the plan, it's not the fund; it's the management. It looks as if you have bankers running it, and I don't mean you personally. It just looks as if they're taking a typical bricks-and-mortar approach to lending, and it's very low risk by the sound of it.

Mr. Volpe: I find that almost unacceptable, or at least very difficult to believe, especially - and I refer to Mr. Russo again, because he comes from a part of the country that should have a lot of the talents that you, Mr. Killins, have suggested are unavailable to many of these funds and to many of the venture capitalists in terms of analysing high-tech possibilities that you three represent.

Mr. Killins: It's not available, but it's not that it can't be procured. What's so wrong with hiring a high-tech analyst or a consultant from California to help them out if that's what it takes?

Mr. Volpe: For example, right in your area - in Markham or close to it, in Scarborough - you have a schedule B bank, the Hongkong Bank, with probably the busiest bank branch in the country. They constantly deal with businesses that are in the high-tech field. They make all kinds of investments. I'm sure they will come here before this committee. But we're getting a representative from Vancouver, and not the one from Toronto. They deal with this on a daily basis.

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The Royal Bank, for example, hired somebody with an Asia-Pacific - I think that's the operative term today; I was going to use the word ``oriental'' - with an oriental perception and perspective on high-tech and high-technology industries and businesses. That's the person they have doing the evaluations of all applications that come before them for your types of industry.

I'm wondering whether we're getting the whole picture or something is missing from the puzzle.

Mr. Russo: Banks are banks. One has to recognize one doesn't go to banks for equity financing.

Certainly our kind of business requires equity financing. There's a long lead time, it's R and D incentive, it's big bets over long periods of time. The world changes very rapidly and the timeframe.... It has to be equity finance. That's why Silicon Valley companies are just about all equity financed and not debt financed. You can't afford debt. If your R and D takes about three years you're dead.

While we were talking to our friends at Working Ventures, we had a private individual who wanted to invest a fair amount of money in us. He hired an expert consultant. We had to agree on who the consultant was, because we didn't want to expose our technology to anybody who could be a potential competitor. To make a long story short, the consultant himself invested quite a bit of money as well, because he saw what we had and liked it, whereas Working Ventures never did and didn't invest. It basically said, well, gee, your company is worth one-fifth of what we were raising money at at that time. We said with that evaluation, thank you very much, but we don't need you.

Mr. Volpe: Would you agree, then, with what my perception was initially, that perhaps you're looking for a more strategic plan from the government, especially with these things?

Mr. Russo: As a taxpayer, it galls me to see people getting tax credits and then Working Ventures putting the money into treasury bills. It defeats the whole purpose. I don't believe in subsidies. I believe there should be tax legislation to encourage riskier investment, but in our kind of industry it has to be equity. It can't be anything but equity.

Mr. Friend: They tend to be money managers, as opposed to -

An hon. member: They're not venture capitalists.

The Chairman: We're going to have to move to the next panel, but for the record, for the purposes of this study, I want to get a very quick reaction to a couple of points I want to make.

The first is that I assume, given the nature of your businesses, you must produce for the export market. In other words, you are in a world market, all of you, and we can make that assumption, and there are many businesses like yours in high-tech. We could assume, whether they're small or medium-sized or gigantic, they are in a world market and we can't assume there's a domestic market. Would that be fair? You're all agreeing with that.

To what extent would you say you must go beyond the North American market into global markets for your products? Do you first start in the North American market and use that as a take-off point to go into global markets, beyond North America?

Mr. Killins: I don't differentiate. Every market is exactly the same to me, including our domestic market.

Mr. Russo: In our case we have found the U.S. market is the quickest to adopt new technologies. We find the Japanese market requires a lot more time, effort, and comfort level before they will work with a small company in Canada, because we are small. We tend to sell primarily to the developed world; in the Far East primarily to Japan, in Europe primarily to western Europe. North America is about three-quarters of our market right now. Over the long term we expect it still to be about 60% of our market.

The Chairman: But your selling to the developed world is largely a reflection of the nature of your product?

Mr. Russo: It's the nature of our product, yes, absolutely.

Mr. Friend: Seventy-five percent of our sales are outside North America and our major initial successes were outside North America. Canada was one of the last countries we were able to sell to successfully.

The Chairman: I'm sorry.... Your conclusion was that in fact the domestic market was the most difficult for you to break into?

Mr. Friend: In our case, yes. It's the same old problem: if it's Canadian, it ain't so good. You have to earn your spurs outside before you can do it at home.

The Chairman: On financing, I wonder if I could get your reaction to this observation, or semi-observation question. I gather all three of you are frustrated with the whole business of raising equity or raising finances, which is obviously something we're going to look at carefully in the committee.

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Turning to government's role, one of your frustrations is time. Is the time in getting money or access to money, guarantees, insurance, etc., any worse from a government bureau than the banks you described? These are people dealing with the public's money. If they give it away to you too quickly they're going to be criticized in the House of Commons or elsewhere in terms of the budget deficit, etc. Do you find they are worse than other people you are dealing with in terms of furnishers of capital? On that level, is there any difference between the various federal programs and the provincial programs? Do you find the provincial governments easier to deal with because they're closer to you or not?

Mr. Russo: In Genesis' situation, any help we have had has been primarily federal. It has been through the IRAP program, and that has worked reasonably well.

We've had very little government involvement. In our whole company history we perhaps have received, excluding R and D tax credits, which everyone gets, in the order of half a million dollars in grants in total over nine years and maybe a million dollars in loans. We basically are an equity financed company. In our kind of business we feel that's important. So we have not dealt with a lot of government programs.

The IRAP has been fine. The Strategic Microelectronics Consortium for the R and D loans has been effective because other CEOs are on the board and decide how to apportion the funds. With some of the smaller programs, such as PEMD and some of the smaller programs in Ontario, we have found in most cases the effort required to get $10,000 or $15,000 is just not worth it.

Mr. Killins: Legacy is not a large consumer of grants or funds. The reason we use EDC is because we use ODC. The reason we use ODC is because it was a way around the cap that the bank put on us.

Mr. Friend: Of the three, I guess we're the largest users of government funds.

I don't find any significant difference between the Quebec provincial government and the federal government in terms of level of difficulty to deal with or length of time. Sometimes, strangely enough, there's an extra layer of bureaucracy in Quebec, for whatever reason. Quite frankly, the Quebec government has established a number of very innovative enhancements to the R and D tax credits that are available to high-tech companies from Quebec. It has also established an industry-run but government-owned organization called Innovatech that provides equity financing to Montreal- or Quebec-based companies and supports the venture capitalists by providing a top-up. If you can get $1 million from a venture capitalist, then you can have $400,000 or something of that order from Innovatech as a matching kind of investment. It's a mixture of long-term repayable loans and equity.

So there are programs that can be used and there are programs that are very beneficial to companies. Quebec in fact has one of the better programs.

The Chairman: I want to thank all of you very much for coming. We appreciate it. We know you are all very busy running your own companies, so we are very grateful to you for taking time out of your busy schedules to talk to us. We wish you well and success in your business. Thank you very much.

We will take a five-minute break.

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PAUSE

.1054

The Chairman: Our next two panellists are Mr. Leonard Lee, who is the president of Lee Valley Tools, and Mr. Knud Simonsen from KSI Engineering Ltd.

We're grateful to Mr. Lee for having rearranged the opening of his showroom to enable him to come this morning. We appreciate that. We also understand you are a former trade commissioner, so that may throw some perspective on things. The members would probably like to know that information.

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Mr. Lee, I think we'll ask you to go first.

Mr. Leonard Lee (President, Lee Valley Tools Ltd.): Thank you.

[Translation]

Mr. Chairman, ladies and gentlemen, since I am a former civil servant, I am perfectly bilingual as far as the Public Service Commission is concerned, but I will make my presentation in English because it's easier for me and it will also probably be more clearer for you.

[English]

I left government in 1978 to start this business. I'm not going to speak about having been a trade commissioner because I will be accused of either sour grapes or boosterism. I'll just deal with other issues.

When we started the business, it was my wife and myself, and we raised the funds by putting three mortgages on our house, although the third one wasn't worth much. We had substantial difficulty getting sufficient funds in the early years because we wanted to maintain control of the business, so we were limited to the internal rate of capital generation.

For the first decade we had a compound growth rate of 42% per year, which meant doubling approximately every 18 months, which was at least up to if not past the management capabilities involved.

We're in the woodworking and gardening tool business. You have our woodworking tool catalogue and also a catalogue of manufactured product we have, which is under the firm Veritas, our manufacturing firm.

We started designing product early because we could not get the product we wanted. We hired our first full-time design engineer in 1983. We now have eight full-time industrial designers and four part-time. When I say industrial designers...they could be engineers, skilled machinists or actual industrial designers. We have them all.

The company has grown to the point where we now have six retail stores: Vancouver, Calgary, Edmonton, London, Toronto and Ottawa. We're opening another one in Toronto in February. We'll be opening in Winnipeg, Victoria and Halifax within the next couple of years. Sixty percent of our business is done through the retail stores and 40% by mail order.

We employ 46 people in manufacturing and 192 in retail. That's 238 employees, an increase of 37 over this time last year. We expect to hire another 50 in the coming year.

Of our manufactured product, we export 64%. In the last year our exports increased 38%. Just as a point of interest, we spend 16% of our manufacturing sales dollar on research and development. In our mind, that's the secret to our growth.

We expect our export sales to increase 50% next year as well. Our retail sales have consistently increased in the low double digits, and we expect that to continue next year.

We're just moving into the U.S. market in a major way on the retail side with our gardening product, and we'll be moving in with our woodworking product. We do it all from Canada. Of our 238 employees - I just got these numbers this morning, so I don't know them - 234 are employed in Canada and 4 in our subsidiary in Ogdensburg, New York, where we distribute product in the U.S.

My concern is primarily the climate for business in Canada. The reason this is so significant for exports is we developed based on the domestic market, although we started exporting early. Within a few years of starting the business, we started to export.

Incidentally, on the retail side, we have customers in probably 35 countries. We ship retail shipments to Japan every day. We ship to Europe every day. Even now, although we're not really in the U.S., we ship probably 50 retail shipments a day to the U.S. We ship all over the world on a retail basis.

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But on the manufactured side we start into the export early. To my mind, we have to link the imports and the exports, because many of the products we make....

I can use one as an example. We have a piece of steel rolled in Germany to a certain shape. We have it polished in France. Before it's polished we have a tang forged on it by a small chisel manufacturer. So it goes from a roller to a chisel manufacturer, who forges a tang on it, and then it goes to a polisher. We have a handle made in England. We bring both to Canada. Then - it's almost embarrassing to say this - we put this piece of steel in the handle; and we sell it all over the world.

That is the classic entrepreneurial activity. You have to be able to have ease of flow of product if you're going to be an entrepreneur in today's world. So importing of raw materials and components is very important to us in order that we can export as well.

For a good export market you have to have...I shouldn't say you have to have a secure domestic base. Probably the next speaker will say that may not be the case. I don't know. In our case it certainly is.

I've given you a statement, but I'll just touch on the concerns I have very quickly. The first one is our failure under the free trade agreement. As you will remember, this was resisted by the Liberals. It was resisted by me, I might say; but since we've signed the thing, we should make it work. It was resisted by the Liberals, signed by the Tories. Once the excitement of signing it was done, nobody wanted to do the housework; and it hasn't been done.

If you had read, and I'm sure you haven't - unless you're very short on reading material you will not have read it.... In any event, you have four newspaper articles I'd sent. I wrote in 1991 saying what had to be done to make the free trade agreement work. I can tell you I did a check before coming here, and there has been only one advance on that sorry state of affairs, one concrete thing that has happened. We haven't harmonized any standards. We haven't rationalized any regulations.

What has happened is now the Department of National Revenue collects provincial sales tax on personal postal and courier imports for Quebec, New Brunswick, and Manitoba. That's the sum total of the advances under the free trade agreement in the last four and a half years - and we now have fifteen months till the full implementation of free trade.

There's no political will to do this, and there's certainly no bureaucratic will to do it. It is a looming disaster for the country.

One of the worst areas is this failure to harmonize standards. We are coming up to free trade. We haven't even agreed on the weights and measures, whether they will be metric, imperial, the American gallon, which is different according to whether it's dry or wet. We haven't agreed on language, on symbols, on anything. Yet in Canada we're forced to put on our packaging French and English, with same prominence and so on.

We're selling all over the world. If we're going to put something on a package, it will be French, English, German, and Spanish. We'll probably make English dominant because that's the universal language. But in Canada we have the blinders on so firmly that we require any manufacturer wishing to sell in Canada to meet a number of regulations that are purely Canadian. They certainly don't help in the export market. In fact, they make you duplicate everything in the export market.

So we haven't considered that. Meanwhile, the way our regulatory structure came about was that we had a closed economy where goods came in to Canadian distributors and went out to Canadian retailers. So all our regulations are imposed on the seller, not the buyer. As a result, while I must sell everything packaged in a certain way, you can buy it where it's measured, as I mentioned in my statement, in quintals and firkins, with the language being Urdu. That's perfectly legal. You can buy in whatever you wish. It doesn't have to be French, English, or in any weight system or volume system that you're aware of, because the restrictions are all on the vendor, which means you can buy in the U.S., as 4 million Canadians do every month...they cross the border to buy, and nothing they buy has to meet these standards. They can buy anything they wish and it doesn't have to meet the standard.

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So we're faced with meeting standards that are irrational in an international environment and are antiquated because of the nature of their imposition.

We're faced with a problem where we have a total lack of federal and provincial cooperation. There has been a small amount with the provincial sales tax, as I mentioned earlier. In fact, when I asked somebody at National Revenue if they had approached any of the provinces, the response was interesting. He said, it's their responsibility to approach us. What kind of a childish power play is this, for a country that wants to be an international trader?

Anyway, there it is. As I said, there's neither the political nor, I feel, the bureaucratic will to solve some of these.

With the provinces we have this whole problem of cooperation on taxation. Nova Scotia will send us a bill and say, we estimate you sell this amount in Nova Scotia and we want this tax money. We'll say, right; have you collected from L.L. Bean yet, or Lands' End? Or are you just trying to break the Canadians' knuckles on this one? And they'll say, well, we can't collect from them. I'll say, you're right; you can't collect from me either; we don't have any facilities in Nova Scotia.

But the Canadians are always trying to cripple other Canadians, not to work out a system where the taxation would be equal whether the vendor is Canadian or foreign.

I mentioned in the earlier submission the lack of coordination in national policy. This I see as particularly critical, because we have various government departments acting in manners that have disparate effects and crown corporations acting with virtually no control whatsoever.

I'll be glad to answer questions on that or any of the previous...I won't detail the lack of coordination. You have it in your document. There's only one thing I would mention. Under that heading I had mentioned a situation regarding books. I misled you, not in substance but in fact. The regulations are somewhat different. Only part of the regulations have been promulgated, and not one part of the one affecting distributors. Anyway, the sense of it is still there.

There are two other problems we have difficulty with. One is country-of-origin marking. In Canada we use the approach that if more than 50% value-added is Canadian, then the product is made in Canada. The Americans use the approach of material transformation. As long as it looks the same as before it was worked on, they say you have to use the country of origin of the original lump of material.

A good example would be the engine block for a car. You would have a hard time convincing U.S. customs that the raw casting made in Argentina, even though afterwards it was machined - substantially drilled, tapped, and had any number of things done to it.... You will have a hard time convincing them that's a material transformation, yet the value-added could be 95%.

That's the difficulty we face going into the U.S. Any customs officer at the border can say, I think this should be marked with the country of origin of this lump of steel. You'll say, but it's virtually insignificant in value; it hasn't been materially transformed. If you don't like the ruling, appeal to Washington. You have to wait eighteen months to have your appeal heard.

The last point, which really is substantially significant to anybody who's doing anything in a highly technical manner, which I think we are.... Most of the things we make are blunt on one end and sharp on the other, but we make them in a highly modern way, with absolutely the latest of CNC equipment, and we also have patents on almost everything we make. We take out half a dozen patents a year.

The difficulty with our intellectual property legislation is that back in the late 1960s and early 1970s Canada had deemed itself to be a net user of intellectual property, so we had negotiated...we had aligned ourselves with Third World nations and we designed an intellectual property regime that maximized the distribution or the dissemination of technical or technological information. It made it very difficult to maintain patents or to take them out.

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For example, we have in Canada a system where it's the first to patent.... If I have invented the water glass, and if I show it to you, you can patent it, because I have then revealed it and you're the first to patent. I'm scuppered, even though I'm the inventor. It's not a very smart system.

In the U.S., it's the first to invent. In the U.S. you have a full year after you've revealed the product in which to patent it. This gives you an opportunity to find out if there's any market for water glasses. That's very important. We invent so many things in a year that we couldn't patent them all. The process of patenting is $5,000 U.S., just in one country.

So Canada has an intellectual property regime that is very restrictive if we intend to be intellectual property producers, and I would contend that's where the entire future of Canada is. We have just about the smartest labour force in the world, certainly with an excellent work ethic. We're going to have to earn our way with our heads, because we're sure not going to do it as hewers of wood and drawers of water.

I've used up every minute allotted to me. I'll be glad to answer questions later. Thank you.

The Chairman: Very effectively used, though, if I may say. Thank you very much, sir.

Mr. Simonsen.

Mr. Knud Simonsen (President and CEO, Knud Simonsen Industries Engineering Ltd.): Mr. Chairman, ladies and gentlemen.... [Witness speaks in Danish]

I was just saying the question is whether I should speak the same language as Erik the Red spoke when he came to North America 200 years before Columbus. But I can see you don't understand Danish.

Mr. Volpe: We accept it only if it is in written form and therefore we can promise the person a record.

Mr. Simonsen: Very good. Thank you.

The Chairman: You will have to prove to us that he drew Vinland as well.

Mr. Simonsen: Thank you very much for giving me this opportunity to express some of my thoughts in relation to the very important issue of how we export more from our country, Canada.

On October 22, 1958 my wife Bente and our one-and-a-half-year-old daughter Ingrid arrived in Toronto knowing two important facts, namely the name of the city and that of the YMCA at 410 College Street, the address to which we had forwarded our furniture. These 37 years in Canada have been full of excitement and pleasure and hard work.

I immediately began to introduce Danish meat packing-house equipment to the meat-packers here in Canada, and gradually, about 33 years ago, I incorporated Knud Simonsen Industries Limited, which is today a company that specializes in engineering, manufacturing, and installation of complete meat packing-house systems. The customer brings the livestock to one end of the building and we deliver whatever product a customer wants to sell at the other end of the building. In other words, we supply the facilities for killing operations, cooler systems, cutting rooms, processing systems, etc. We have made more killing floors across Canada than any other company has ever made, and internationally KSI has supplied more continuous systems for the mass production of cooked products such as bacon, ham, hot dogs, etc. Normally we export 85% of what we manufacture, and we do business with approximately twenty countries. KSI employs around 120 to 140 people.

We have been involved in many interesting and challenging projects around the world. The largest job KSI has done is a $28 million contract in Sofia, Bulgaria, where we designed and supplied a prefabricated building, refrigeration equipment, and all the other processing equipment to produce fifteen tonnes of processed meat per hour.

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KSI has supplied several systems to South America, South Korea, Japan, and all over Europe, and our largest market is the United States.

The question some have raised is, how does KSI get the connections or the leads? To be quite honest, the meat industry seems to be becoming more and more concentrated in a few large companies, particularly in North America. Here at KSI we know those potential customers because throughout the years we have exhibited at special exhibitions related to the meat industry, both here in North America and in other countries. KSI has, for example, exhibited five times in Russia.

When you sell our kinds of systems, it really is a matter of knocking the doors down, coming to know the people, and selling our ability and getting the confidence of the customer. Most of the systems KSI sells cannot be seen before the job is complete; therefore, the customer must have confidence that we can supply what they believe they are buying.

Our company is primarily known as KSI, which is an abbreviation of the name Knud Simonsen Industries. I have to say that KSI has an excellent connection to the Canadian authorities in Ottawa, such as the Export Development Corporation, EDC, and the Canadian Commercial Corporation, CCC. When we did the job in Bulgaria, 85% of the contract was financed by the Export Development Corporation, and the contract was actually signed between the Bulgarians and the Canadian Commercial Corporation. Then the CCC gave exactly the same contract to KSI.

As you all know, EDC is owned by the Canadian government and has as its purpose financing export projects for the purpose of ensuring that there will be as much employment in Canada as possible. Of course the people who borrow the money from EDC must be screened and have their credibility approved in order to get such financing. However, I must admit that the people KSI has dealt with at EDC in Ottawa have been very business oriented and very, very helpful. I can only recommend the usage of EDC to Canadian manufacturers. In fact, it is amazing what the Canadian exporters can really benefit from when working much more closely with EDC.

Coming to the CCC is a story slightly different from the EDC one, because CCC becomes our partner in our sales efforts. I must admit that I have spent a long time with people from CCC in many different countries. I am constantly impressed by the business attitudes of the people from CCC and the way they demonstrated it to a small company such as KSI, which is in the $20 million to $24 million sales bracket. Often small companies such as KSI think that organizations such as the CCC are in the business only to help the really big companies in Canada, but I am finding more and more that they are very enthusiastic to help us middle-sized companies to receive the order. As a matter of fact, they almost break their backs to assist us in getting the contracts, which secure the employment in Canada, which gives the customer outside of Canada the assurance that, should KSI fail, the CCC will then fulfil the contractual obligations.

I have travelled in many countries but have yet to find another country that has a government-owned organization similar to ours in Canada, the CCC.

In some instances we have probably all experienced that government authorities are difficult to deal with because of bureaucracy, etc. However, I must say in all seriousness that if all businesses, in particular of course export businesses, knew about the value of showing yourself together with an officer from CCC, then our exports from Canada would jump as you wouldn't believe.

The world is full of opportunities for Canadian export, and when you come out to visit the customers with an officer from CCC, they give you a much better acceptance. They put the red carpet out a little bit more, and they take it a little bit more seriously because they have great respect for CCC representing the Canadian government.

I know I shouldn't talk forever about CCC, but in my opinion it is the most important friend a Canadian manufacturing company can work together with.

CCC is doing a lot to make itself known. I am surprised that there are not more Canadian manufacturers who take advantage of this service from the Canadian government for the purpose of promoting employment in our beloved country, Canada, the country of sunshine and opportunities.

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Talking about financing, I am sure every privately owned small or medium-sized business goes through the same curves up and down as KSI. In particular, if you are in a contracting business, as we are, it is a matter of up and down. We all know the commercial banks are very quick to give you an umbrella when the sun shines but are quite eager to put the umbrella away when it rains.

However, I must admit that till now the bank we have been dealing with for 24 years, Canadian Imperial Bank of Commerce, has gone through the bad times and the good times with us. I hope we will continue to go through battles together with the banks, who have our records for about 25 years.

Through my years of experience with the banks, I have found the most important thing is never to give the bank the opportunity to catch us when we are in trouble but always to warn the bank ahead of trouble, so they can have total confidence in our performance and honesty. By putting all our cards on the table, at least till now, I have found that CIBC has been very supportive. Under the management of a successful chairman, Mr. Al Flood, I am sure they will continue to back up KSI.

I would like to come back to the issue of how you find the customers out in the world. I can say only one thing. You have to play less golf and make more trips out of the country, because you have to call on the customers to get the orders. As a good friend of mine in Denmark said a few years ago, technology you can always buy, but to get the order is a matter of who you know.

Because of my age, and because I have travelled so much around the world throughout the years, naturally I know many meat packers. It certainly helps if you have the personal touch with the executives.

Another thing I would like to say is that having come from Denmark, which is a very popular exporter of agricultural products - in fact, in Denmark they kill 20 million hogs a year and export approximately 90% of them...and if we consider that Denmark is approximately the same length as from Toronto to Windsor, one wonders why we in Canada produce only 14 million hogs a year, with the size we have, and why we are not exporting more. The reason is very simple. Life is too comfortable and too easy and good here in Canada. People do not understand that if you want to develop exports you have to travel. You have to make contacts. You have to knock down the doors around the world and get the contracts.

I find, going around the world, that Canadians are very popular in our business. I always say to the people, if you buy from Canada, you get the best in the world, because we know the North American technology, and we also know the European technology, because we have so many European immigrants in our company; therefore if you buy from KSI in Canada, you get the best in both worlds. We have no political ambitions. We only want to get the business.

Now, what can the Canadian government do to encourage medium-sized businesses to work harder and to go out to get the orders and thereby contribute better employment to our country? In my opinion it should be easier to get government financing for business trips out in the world. I know it is possible to get some business trips paid, and then you have to pay them back if you get the order. In my opinion the government should extend the potential of exporters and be willing to finance reasonable business trips and reasonable projects, and not necessarily get the money back, because the government is really getting the money back by getting more employment and thereby getting more taxes.

Some would argue, why shouldn't you pay the money back? Others argue and say, because I am setting aside my family life and the comfort of home and instead travelling around the world to try to create more employment for Canada and more growth for Canada.

I am not saying the government should give a prize to us people who travel out in the world, because we are no better than anyone else. But in my opinion, if the government had a better program in supporting business projects and potentials out in the world, I believe we would get much more exports.

As a matter of fact, last week, while attending a very large exhibition in Chicago, where there was a 32-year-old manufacturer from England that has now set up a manufacturing company in competition with us in the United States, I could not understand how he could afford such a big exhibit in Chicago last week, until I learned that the Government of England assists a lot in those exhibitions.

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I also know that the Government of Denmark does all sorts of things to finance the exporters in order to get the order. We all know - in particular myself, of course, coming from Denmark - that Denmark is a tremendously successful exporting country, in spite of the fact that it has practically no raw materials. I am totally aware that if the government expands the financial export drives by Canadian manufacturers, then of course there will be some people who will misuse those facilities, but that is the price you pay for the big gain.

In conclusion, I would also like to say a few words about our beautiful country, Canada.

We are a country with unlimited potentials; however, certain vibrations are going through our country right now and affecting our world trade.

I believe there are three alternatives in Canada. The first is the one-third of the population who originated in England. The second alternative is not one-third of the population, but it is the second alternative; namely, the people who originated in France. Let me point out right away that I said English first because ``e'' comes before ``f'' in the alphabet, and for no other reason at all.

The third alternative consists of us people -

The Chairman: What about the Irish?

Mr. Simonsen: - us Eskimos, Indians, Scandinavians, Irish, Poles, Germans, Italians, Africans, Asians, from all over the world, excluding those from England and France. We are approximately 48% of the population in Canada, and while the first two alternatives have spent years arguing over what language we should speak, wasting time and money on this matter, we, the people in the third alternative, have worked, because somebody has to do the job.

I know you think this is a joke, but let us be honest. So many immigrants have come to this country and started up small businesses, and some have come up to have very large businesses. As a machinist to another machinist, I admire Frank Stronach for building up Magna, which employs about 23,000 people. He came as an immigrant from Austria.

Why do I bring this issue up? The reason is this. Whenever you hear debate on television and radio and in other media, it is primarily between the English and French languages. You practically never hear anybody who represents the other 48% of the population, as to what we think.

Since most of us, 48% of us, are bilingual, we have no problems in agreeing that it is nice to speak more than one language. I speak four languages, for example. If we had a proper federal school system here in Canada and made sure that all children could speak English and French when they came out of the school system, you have no idea of how many problems it would solve.

When I came out of school in Denmark, I first of all spoke Danish, of course, but I also spoke English, German, and Swedish. Some of my classmates who were really smart also had French and Latin.

I bring this issue up because it reflects the impression of Canada that is out in the world. It raises the question, are we united or are we not united? Are we developing a new Yugoslavia situation in our beautiful country? What is the future?

I love the Quebec people and I love all the people who originated from England. My big problem is to understand why we should spend so much money and lose so much international confidence in our country because there is a little group of, not in the least, lawyers in Quebec who want to break up our beautiful country.

I am also of the opinion that we people who are not French Canadians have not done enough to demonstrate our love for the French Canadians. With love you can achieve much more than with anything else. In my opinion, we non-French in Canada are partly guilty for some of the French Canadians who feel like strangers in Canada and want to be on their own rather than going back to France, where everybody speaks French. Who knows - maybe we should all take a week off in the following four weeks to go to Quebec and let everybody know that we love them and we want to stay together.

Once again, I thank you very much for your time. I apologize for not presenting a more scientific speech to you, but I have just made a speech that has come directly from my heart. My problem is that I have been travelling too much out of the country since I received your invitation; therefore, my speech is not as well prepared as I would have liked it to be. Please, once again, forgive me, and thank you very much for your time.

The Chairman: Thank you very much, Mr. Simonsen. I know that the members will be interested in some questions of both yourself and Mr. Lee, and I'd like to turn to them now.

Mr. Paré.

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[Translation]

Mr. Paré: I find it interesting that two businessmen can hold such opposing views.

For starters, although the last speaker praised the Canadian system, I'm not sure this is the place to do it. Moreover, in the document he presented, Mr. Lee showed us that government structures are cumbersome. He showed us how the presence of several levels of government hinders trade and businesses and how, after signing a free-trade agreement with the United States, we did not adjust to that agreement. I suppose the truth lies somewhere between the two.

I do not really have any questions to ask. Mr. Lee seems to operate on the fringe of government programs or seems to be in a position to run his business without much recourse to subsidies or government programs, on the other hand, Mr. Simonsen seems to rely a lot on them. He spoke very highly of the Export Development Corporation.

Finally, I'm a bit skeptical, because the positions seem so divergent to me that I have trouble forming an opinion.

I too am going to close with a sort of political conclusion. In my view, Mr. Lee's statement shows why so many Quebeckers want their own country, where some levels of government would undoubtedly be eliminated. It is important to say that we're not doing this against Canadians and against Canada. We feel that we're tangled up in a system that has not always served Quebec's interests well, and that is primarily why, with all due respect for the rest of Canada, we plan to establish our own country.

I am aware that my comments are a bit political, but Mr. Simonsen left the door wide open.

The Chairman: I believe your last remark was quite true, Mr. Paré, but Mr. Lee could, nevertheless, respond. You made a statement instead of asking a question. Mr. Lee may perhaps want to respond by saying whether, in his view, your conclusion as to the scope of his comments is accurate or not.

[English]

Mr. Lee: First of all, let me explain why I am not a user of government programs. I am a proud person. Having been a trade commissioner and having been a public servant for seventeen years, I did not want anyone to say I made my living by trading on government knowledge. I must admit I don't have a great deal of respect for people who spend their years in government making life difficult for others and who when they retire become consultants to lead them through the mess they helped create. So I have avoided that activity.

The second reason I have avoided it is I find that if you become concerned about how much you can get from the government to do something, you're not going to appraise the situation very accurately. So I can say quite proudly there's no one in this town who can say we've ever taken 5¢ from government in what we've done, other than the natural assistance you get by being able to put in an up-charge on R and D.

But to comment further on what Mr. Paré said, I think our problem now is one of being too introverted. What I was trying to say was, if we're going to be an international trader, we have to be less introverted in worrying about what our internal regulations are and try to harmonize them with those of the rest of the world.

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One of the difficulties we have as a country is to negotiate these harmonizations, to harmonize the standards and negotiate common systems with our trading partners. I would have to say that should you achieve your objective, you'll find it three times as difficult to negotiate anything with your trading partners, because you're just that much smaller and you'll have to be a taker of regulations, not a maker of regulations.

Mr. Mills: I'm asking people to rate our trade offices around the world on how effective they are. I'm not sure it's fair to ask Mr. Lee to do that. I'm concerned about the job of delivery of the services. You might allude to that, either of you, if you've had any dealings with our trade offices. Just how effective are they in helping you?

I've listened with a lot of interest about the standards, and I can understand the problems with the language, the standardization of measurements, and so on. I'd like to be more specific, Mr. Lee, about how we solve that problem. You say there's no political or bureaucratic will. How do we solve that problem? To go even further, how do we solve this interprovincial problem we have? As you see it, what's the answer to that?

Mr. Lee: If we take just one problem, Mr. Mills, which is the Canadian Standards Association, the degree of importance that has been placed on the Canadian Standards Association is indicated by the fact that the last Prime Minister appointed a hairdresser to head it, and the current Prime Minister didn't change the appointment. This is how concerned we are about standards. I shouldn't be so demeaning of the person who was appointed, but it was a patronage appointment, it was not because of any particular skill in the area, and that shows the level of concern we have for standards.

When the Canadian Standards Association was first formed, it was to ensure that electricity would not get a bad reputation for being dangerous. So its whole concern was with safety. While it may be an apocryphal story, I believe the Canadian Standards Association at one time approved a toaster that wouldn't toast bread but was perfectly safe to use.

What we have now in our electrical standards is an inspection process. We need standards you have to meet, but why inspect each one? With the Canadian Standards Association, we can't manufacture a product that uses an electrical component without having that approved by the CSA. It costs us thousands of dollars, maybe tens of thousands, to have this approved. Yet we can sell it to everyone else in the world by just meeting their standard, not by getting an individual approval with a little CSA stamp.

The Canadian Standards Association is probably the biggest millstone there is on the back of Canadian exporters. It's because we're using a specific approval process instead of just stating the standards and then prosecuting those who break them.

The Chairman: Mr. Mills, with your permission, if I could just interrupt your train of thought....

My understanding is that, for example, the Europeans and the Americans are seeking to coordinate standards. As you know, in the European Union there is a great deal of work on standards. My understanding was that there is now afoot an attempt to coordinate Europe, American, and Canadian standards...or at least mutual recognition, if not harmonization, of the ways in which they're granted. Has that not happened?

Mr. Lee: No progress is being made on that, no.

What the Europeans have done within the Common Market is say, look, if you're going to produce a product, you're going to have to give the weight in grams or the volume in litres and you're going to have to say what country it's made in. Past that, you can do whatever you want. But you have to put this on the package. That's the kind of harmonization you have.

Here most people say, well, the U.S. has UL approval. I don't think people realize it is not illegal to sell any electrical product in the U.S. without UL approval. That's a buyer's standard. The City of New York requires you to meet UL standards before it will buy from you. It has no standing in law other than the standing the buyer gives it.

In Canada it is illegal to sell any product that plugs into a 110-volt outlet unless it has CSA approval. But notice, it's illegal to sell it; it isn't illegal to buy it. Any one of you can buy a product that plugs into a 110-volt outlet and you're not breaking the law. It's just illegal for me to sell it.

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The Chairman: So it would be illegal for a retailer to sell a foreign-made product that didn't meet the standard, as well.

Mr. Lee: No. It can meet the Canadian electrical standard. It must have CSA approval.

The Chairman: So if I import a Korean toaster that doesn't meet the CSA standard and I plug it in, can I sell it?

Mr. Lee: No, you can't.

Let me just clarify that.

Mr. Mills: I can buy it.

The Chairman: You can buy it, but from whom are you going to buy it if it's illegal to sell it?

Mr. Lee: We have 4 million people crossing the border every month.

Mr. Mills: There are catalogues.

Mr. Lastewka: They are shopping every day across in Buffalo.

Mr. Lee: Mr. Chairman, I've put in the document.... I didn't want to go through my presentation.

The Chairman: I'm sorry, Mr. Mills; I've really interrupted your question.

Mr. Lee: In my document, the last page says ``an accumulation of regulations that kill competitiveness''. That's probably the best summary I can give you of what regulations do to our competitiveness, and that shows just that: how you can buy a dishwasher and why a $200 product will cost $42 more when bought from a Canadian than from an American.

Mr. Mills: So this is where the political will comes in. We have to have the political will. Let's get this system fixed, get all of these regulations and everything standardized. Hey, that's the will to do it.

Mr. Lee: On January 1, 1997, there will be the full implementation of the free trade agreement. There will be no duty between the two countries. What is to stop any Canadian from ordering a dishwasher from the U.S.? When it comes in.... I refer you to the table I used in the last part. If you buy it from Ogdensburg, then you don't have to pay the PST. You don't have to pay GST on the freight. The guy in Ogdensburg can buy a cheaper dishwasher in the first place because it doesn't have to have CSA approval. When you have to do warranty work on it, because the Canadian government views warranty work that is billed to a foreign firm to be an export of services, there's no GST on the warranty work done for the Ogdensburg firm, but there is for that done in, say, Prescott, or anywhere else.

I find it hard to imagine a more perverse combination of regulations to cripple our domestic trade.

Mr. Mills: And then throw language and all these other things into that. Right on.

Mr. Lee: This isn't a terribly exciting area. Do you find your heart palpitating now as we're discussing regulations? Most people don't. This is not -

Mr. Alcock (Winnipeg South): That's why it's replacing...[Inaudible - Editor]

Mr. Lee: That's the problem.

The Chairman: No. I think the committee have shown by their efforts.... That's exactly why we're sitting to hear this evidence: because this is what we would strongly like to take to the political field to see what we can do about it. We're very interested. I don't say that my heart is palpitating, but you've got my brain cells working. And you've got Mr. Lastewka really upset.

Mr. Lee: One of the things I almost did a number of years ago was to take one of our products - this was when no GST was being collected on mail orders coming into the country. I was going to advertise in Canada from our U.S. subsidiary and show how you could buy a Canadian product for 15% less from an American location because I could export it to the U.S. and mail it back into Canada and there'd be no GST and no PST. As it is now, I could take virtually our entire product line and mail it back into the country - of course it's duty free; it's made in Canada - and Canadians could save on it.

Anyway, the significance of this regulation is that if your sole intent is to make money, then don't locate in Canada if you're going to be a North American trader. That is spelled ``trader''. An American location is infinitely superior in those terms.

Mr. Flis: I found both presentations to be very refreshing, so I hope you won't apologize for them. We should get more Canadians making presentations such as our two witnesses have made this morning.

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Mr. Lee, you talked about how imports and exports must be linked very closely, and if we don't have a proper business climate for this...plus exporting more. How does the value of the dollar affect your company? If the dollar is low, I guess it helps your exports, but then doesn't it affect your input costs? What is a good level for the Canadian dollar not to affect your business negatively?

Mr. Lee: The level of the dollar is almost incidental. What happens is when the price of aluminum goes up, it goes up in Canadian dollars the same as it does in U.S. dollars. When the dollar is lower, for a short term you will have an advantage in labour, possibly, but because of the increased cost of living, if you're paying at least the cost of living increase, that filters through the economy very quickly.

We don't hedge, because we have so many thousand small contracts around the world. We buy a lot of products. We have 8,000 products. We have so many small contracts we can't hedge. We just use our inventory as a hedge, and we live with the swings.

The lower Canadian dollar is in a sense just a calculation for us. Prices percolate through the economy so quickly it doesn't matter.... If you're buying newsprint from Canada, it's still going to be priced in U.S. dollars, or the equivalent of U.S. dollars. The Houston Post pays the same price for newsprint as the Montreal Gazette.

Dollars.... I've never been able to get heart palpitations over that one.

Mr. Flis: I wonder if we could hear from both witnesses about the GST.

How is it impacting on your export business? Should the government just leave it where it is? Should it get rid of it if we want to increase our exports?

Mr. Simonsen: Because we export most of what we make, we really don't have a problem with that.

About the dollar exchange, we really enjoy it the way it is right now. It makes us more competitive, even if the salary and the social benefits are higher here in Canada than they are down in Carolina, for example. So right now I think we are in a good position as far as the dollar is concerned.

Likewise, on the issue raised here about the trade commissioners out in the world, I have to say the trade commissioners we have dealt with throughout the years in Paris, in Poland, and particularly in Moscow, and in many other countries, have been, as far as our company is concerned, very useful. But you cannot expect the trade commissioners to develop business. You have to ask them to help you. You have to ask them to find out what you want to find out. They are all willing to work for us, but they don't have the initiative to get the idea why someone should make 25,000 pounds of hot dogs an hour and not 12,000 pounds per hour. That's something we had to tell people.

Our experience with the trade commissioners in principle has been very good. But we have to guide them ourselves. Then they'll jump for us.

In connection with Russia, we had a contract signed for $62 million U.S. The buyer over there would get the 85% financing from Moscow through EDC in Canada. However, they could not find the 15%. So then I asked the Ontario government if they would guarantee the 15% to the federal government, the EDC, because if the Ontario government did that, then it would get approximately $5 million in income taxes. So I asked a simple question of the Ontario government: which do you prefer, to get $5 million in income tax or to continue paying $5 million in unemployment? Of course they said they'd prefer to get the tax. But that was the end of the story.

The good news for our friend from Quebec here is that if I move the business to Quebec, the Quebec government will guarantee the 15% in order to get the business going.

Mr. Flis: I'm very interested in how you penetrated the market in Bulgaria, because we have no trade commissioner resident there. We serve Bulgaria, or we used to, from Budapest, etc. The Canadians here of Bulgarian descent - and not necessarily of Bulgarian descent - have formed a Canada-Bulgaria Chamber of Commerce. A lot of former Soviet Union countries are doing this. There are a Canada-Ukraine Business Chamber of Commerce, Canada-Poland, etc.

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Do these help Canadians to export to those countries?

Mr. Simonsen: I have to put a commercial for Bulgaria in now. I cannot understand why we in Canada don't have at least a resident trade commissioner, if not a consul general, in Bulgaria. I recently had a meeting with the president of the Bulgarian government and the Bulgarian ambassador here in Ottawa, who said they hope that one day we will recognize Bulgaria as a worthwhile country in which to have a government representative.

In answer to your question about how we got a contract, someone said to me at the show in Paris that Dr. So-and-so in Bulgaria wanted to buy a sausage plant, but you had to deposit money in Switzerland in order to get the order to him. Then I went to Bulgaria and met this Dr. Spassov there. To make a very long, exciting, and colourful story short, we signed a contract for making hot dogs. We took the people to Canada and trained them at Schneiders and other places in how to do it. It was a great success.

As a result of that, we then got phase two, which was for the $28 million job.

The good news is that I could say in speeches in Bulgaria that we from Canada were very proud to have supplied this very modern meat-processing plant, in particular because we didn't have to bribe anybody.

Talking about bribing, we just lost a contract in Russia for about $8 million because the president of the company didn't think that the way I wanted to reward him was as good as the way the Germans do it. I wanted him to earn what he wanted, but he wanted cash; therefore the contract for $8 million U.S. was cancelled. It could be financed from Russia through EDC, but the fellow there preferred the way the Germans do it.

We had to walk away, because I believe that in the long run we are best off not to bribe. Russians come to us now in Toronto, and when we start a meeting I say to them right away, if you want bribing, then the meeting stops now, so make up your mind. I am not fooling around any more. We have spent $700,000 throughout the years to try to do business in Russia and we will still go for some big jobs over there, but there are not going to be bribes.

Mr. Flis: Good for you.

The Chairman: That is certainly a subject that I think the members will be following up, because we hear many stories and it is very difficult to know how to operate in different jurisdictions in that respect. That is very interesting evidence.

Mr. Lastewka: I congratulate Mr. Simonsen on his presentation and his no-bribe policy. You are setting a very high standard and I want to commend you on that.

Mr. Lee, I didn't see this in your presentation. Perhaps you mentioned it but I missed it. How much of your manufacturing is exports?

Mr. Lee: Sixty-four percent this year. We expect that it will be about 75% next year, because the export market is growing substantially faster than the domestic one.

Mr. Lastewka: You mentioned earlier that you bring materials into the country after they have gone through two or three countries. When you bring those materials in, do you have to pay a duty on them?

Mr. Lee: Yes. This is why -

Mr. Lastewka: Do you go through duty deferral or remission programs later?

Mr. Lee: Duty drawback is.... I forget. It might be disallowed now. If it isn't, then it will be very shortly. I think it is disallowed now. We can't draw back the duty any longer, which is why the federal government will have to harmonize its duty rates with the American rates. Otherwise, you would be at a constant disadvantage. You would go to the country where the lowest duty would apply.

Mr. Lastewka: I think Bill C-102 going through might be of assistance in your business. I don't know if you have heard about it.

Mr. Lee: No, I don't.

Mr. Lastewka: I am always interested in hearing about the problems you have mentioned on your last page, and I would be very interested to hear about any other examples you have. By these examples we can make changes in our policy within government.

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Any people or manufacturers who live in border towns.... Your example is exactly what happened in the Niagara Peninsula, for example, when the free trade...one portion was done, and then with the GST causing the problems, as you have pointed out, people would go to Buffalo or New York state to buy, purchase. Even when they look at everything included, they're still saving 10%, 15%, 20%.

So I'd be interested in any other examples you might have along that line. I think it's those examples we need to carry forward as a committee to make changes in government.

Mr. Lee: I won't bore the committee with all the examples I could give you, but I'll give you one or two.

Recently we wanted to bring in some citric acid crystals so these could be used to adjust the pH of a hydroponic system. These were banned by the Department of Agriculture because any amendment to a growing medium must be a mixed fertilizer. It can't be pure component.

We said, but citric acid crystals are available in the local supermarket, virtually. You sprinkle them on your peaches so they don't turn brown. Are you telling us if we mix these with rat droppings we would have a blended fertilizer and we could bring that in?

Of course they didn't want to answer that question. The truth was we would have had to adulterate the citric acid crystals in order to provide them to our customers so they'd be able to adjust the pH of the fluid in their hydroponic systems. This is the extent of the madness of the regulation.

About these, many of them are simple to change. When I spoke earlier about the lack of political and bureaucratic will, I'm sure this committee will remember the difficulty recently in Foreign Affairs about annual travel tickets. There was some question about conversion of funds where people were buying air tickets and then cashing them in again. You will note this was legalized. The regulation was changed so now Foreign Affairs people will be able to...that's an automatic entitlement now.

I would like to see the same sort of dedication to the other regulations that are hampering us. If there were the political and bureaucratic will to change that one, why don't we have the same political and bureaucratic will to keep the rat droppings out of the citric acid crystals, and for a few other ones like this?

But these go on without end on the regulatory side. As I mentioned earlier, provinces are trying to collect provincial sales tax from Canadian firms that are outside the province but they do nothing to collect them from the Americans.

At the moment National Revenue has proposed a program called the NCAP program. This is the non-Canadian accounting program. What they're saying to very large firms - in this case these are mail-order firms, such as Lands' End or L.L. Bean - is if you register and collect the GST and the duty on products, we will let you put a sticker on your parcels so when they hit the Canadian border they'll shoot right through to the customer; you just collect the duty and the GST in advance, and you can remit that duty to us once per month by the 24th day of the month following the month's collection; so if you start collecting on July 1, by August 24 you must have remitted the GST.

My response to National Revenue is you're giving them 54 days' credit here. You're letting them remit the GST once a month, and even then 24 days after the end of the month. As a Canadian, I remit GST every two weeks, and I don't have even 24 days' credit. The other thing is that I clear my shipments at the border every day with a certified cheque. When you're ready to give me the same facility you're offering the Americans, I'll agree to this NCAP program. Until then you can be absolutely certain you'll get as much press as you deserve on this program.

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I find it absolutely outrageous that we would flip over on our backs without putting up any fight on this. We just fall down in front of the American mail-order firms.

Canadians have this approach: We have you captive. It's them we have to deal with. Somehow we have to entice them to remit more duty and taxes. The fact that we'll give them a better deal than you is incidental; that's the way it goes.

I'll give you another one. This will be my last one. I told you I wouldn't bore you with too many examples, but I'll give you one more. We have Canada Post. When I spoke of loose...no, I didn't call them loose cannons; I spoke of uncoordinated federal governments and crown corporations.

Canada Post is going to firms in the U.S. and saying, look, right now you're paying $4 a pound to send this product into Canada by international mail. Under the Canada Post Corporation Act we have the right to designate what is mail and what isn't mail. If you deliver these parcels to us in Windsor, we will designate them as international mail. They'll go through the mail system. You will not be classified as having made the sale in Ontario, because then you'd have to collect the Ontario sales tax, or your customer would have to pay it. So we will designate it as international mail and we'll save you a buck per pound.

What they've done is they've essentially snookered the U.S. postal service, subsidized an American firm, and in my stance perverted the term ``international mail'' because they have the authority to do it, and by doing so they undercut the courier system.

What are we doing? Why are we doing this? It is just insanity that's taken to the nth degree. It's because people don't seem to be concerned about the regulations and how they function in our trade with the U.S.

As I said, it's not a terribly exotic subject. But you can see that somebody gets palpitations over it. I do, because I just find it crazy that we put these manacles on our wrists in this manner in our trade situation.

The Acting Chairman (Mr. Flis): The last questioner will be the hon. member for Nepean, Beryl Gaffney.

Mrs. Gaffney (Nepean): Mr. Lee, I live just across Baseline Road from Lee Valley Tools, so I'm very familiar with your firm and wish you continued success.

You mentioned you've never taken money from the federal government and do not believe business should take it. But you quickly qualified that by saying yes, on 16% of your manufactured products you do in fact receive the federal government's very generous tax credit. Canada is known as having the most generous tax credit system in the world. Knowing the type of financial constraints we're under right now as a federal government, and looking at all the means of saving money we possibly can, do you believe Canada's tax credit system is too generous, not generous enough, or adequate?

Mr. Lee: The only thing I could say on that is that we wouldn't spend 5¢ less on R and D if it weren't there. On the other hand, I think that is a reasonable reward, which is to give you an up-charge.... If you spend $100 on R and D, you can charge $125 against your expenses. I think that's a reasonable approach.

In our own case we put...16% of your sales dollar is a huge amount to devote to R and D. On the other hand, it comes back in spades. We have.... I don't know how to describe it without seeming to brag. We'll brag.

Mrs. Gaffney: Go ahead and brag.

Mr. Lee: Yogi Berra said, if you've done it, it ain't bragging.

We have products reviewed every month by every woodworking magazine in the U.S., because we produce more new product in woodworking hand tools than the rest of the industry put together. We would be crazy not to do this innovation, because they look to us. They fight to get the chance to review the product. They want to be given early notification of new product we come out with so they can review it, because they need new product.

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When we told our American competitors that we were going into the U.S. - and I always told them I'd give them one year's notice, because we sell to every one of our competitors; they all need this new product as well. I told them we were going into the U.S. market, and they all complained and carped, and at the international show in Chicago in August I met a number them. They said, why are you going to do this, Len? We've had a good relationship, and now you want to come down here and sell - and so on.

Do you know how many quit buying? Not one, because they needed the new product. They know they're supporting one of their competitors, but they need the new product.

We would do it on R and D anyway. I am not a believer in subsidies for business, end of story. I don't believe in subsidizing business, because all you do is pollute the.... You see what my concerns are. I want a decent climate. Apply the same taxes to my competitors as you apply to me, give them the same stumbling blocks, but I don't want any extra money.

Mrs. Gaffney: Thank you very much, Mr. Lee.

The Acting Chairman (Mr. Flis): Mr. Simonsen and Mr. Lee, the order of the day for this committee is a study of small and medium-sized businesses in the globalized economy, the Canadian experience. Thank you for sharing your Canadian experience in that globalized economy. We need more Canadians like you. I think if the number of companies in Canada increased by 10%, we'd probably eliminate our deficit, our public debt, and have zero unemployment.

So thanks for coming and sharing your ideas with us. If there's anything you'd like to send to the committee later as the process goes on, please feel free to do so. On behalf of the entire committee, thank you very much for coming.

This meeting is adjourned to the call of the chair.