Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 2 - Evidence - November 27, 2007
OTTAWA, Tuesday, November 27, 2007
The Standing Senate Committee on Transport and Communications met this day at 9:35 a.m. to examine and report upon current and potential future containerized freight traffic handled at, and major inbound and outbound markets served by, Canada's Pacific Gateway container ports, east coast container ports and central container ports and current and appropriate future policies relating thereto.
Senator Lise Bacon (Chair) in the chair.
[English]
The Chair: Honourable senators, before we begin this morning, I want to congratulate the people from Saskatchewan on a great Grey Cup win last Sunday. We can appreciate how the people from Winnipeg feel; the Blue Bombers did their best.
We are fortunate to have before us from the Canadian Manufacturers & Exporters, Mr. David Fung, Chair of the Board of Directors and Chairman & CEO of ACDEG International Inc.
[Translation]
Also joining us today is Mr. Jean-Michel Laurin, Vice-President, Global Business Policy, Canadian Manufacturers & Exporters.
[English]
Welcome to the committee. Mr. Fung, please proceed with your presentation, after which we will distribute the documents to committee members.
David T. Fung, Chair of the Board of Directors, Canadian Manufacturers & Exporters, and Chairman and CEO of ACDEG International Inc.: Thank you for the opportunity to appear before the committee this morning. The documents that we await will be substantial because they also contain the slides.
The objective of my presentation is to leave committee members with images of what is happening in the global manufacturing sector and in Canada. It is not as focused on the details, and I hope that this committee will pick up the images of what manufacturing has been transformed into and will take some action to help our industry and Canada to secure their future prosperity.
To some degree, I will ad lib my presentation, because I had hoped to project the slide images on a screen. With that in mind, I will continue with my presentation and senators can refer back to the slides later.
The Chair: Yes, please proceed, Mr. Fung.
Mr. Fung: I will speak to my background first. I came to this country 41 years ago from Hong Kong. I received my bachelor's, master's and PhD degrees in chemical engineering from McGill University and completed my senior executive business program at Queen's University. I became the research manager for C.I.L. Inc., a subsidiary of Imperial Chemical Industry PLC, one of the largest chemical companies in the world at the time.
In the 1980s, Sudbury, Ontario, was like a moonscape because of the sulphur dioxide emissions, which killed all the vegetation. We took the initiative to recover most of those emissions and turn them into industrial sulphuric acid. The acid is very cheap and normally cannot travel more than 200 miles before the cost of freight is greater than the value of the product. We brought in unit trains and extended the economic distance to 1,200 miles. I use that as an example to show that transportation is an enabler of economic development. The information heard by this committee is fundamental to the future of our industry in manufacturing.
When I was a student, the manufacturing industry was based on vertically integrated manufacturing. When I went to Cleveland to inspect the Ford Motor Company plant, at one end iron ore came in and at the other end, one mile later, a motor car came out.
In Canada, we built our pulp and paper industry the same way. We built the mills in the forest, in the mountains — where the trees are. In contrast, China, which had destroyed the ecology a long time ago and did not have many trees, built paper mills along the coast. Today, China is able to source products from Brazil and Indonesia, whose pulp cost is about $220 a tonne. In Canada, in North America, every one of our pulp mills is facing a cash cost — not total cost — of $400 a tonne.
You can understand quickly why you have heard, week after week, about shutdowns of our pulp mills, sawmills and paper mills. I can assure you that this will continue, because we do not have an opportunity to make use of the cheap fibre that China has been able to use. In 2005, China — a country without trees — became the world's largest wood products exporter in the world.
I mention this example to highlight how manufacturing has changed fundamentally. In Canada, we have been blessed with all kinds of resources, and we have become very complacent in using these resources and not considering much added value. We are now facing some of the consequences of that.
You are hearing about how the container traffic has an opportunity to fundamentally change how we manufacture products, because transportation, as I said earlier, is an enabler of what we can do. Today, the intermodal transportation in Canada is quite backward. I am happy that you are having these hearings so that we can explore some of the alternatives that other countries have already achieved. It is not out of our reach for us to copy that process, if nothing else.
I would like to use another example, the Apple iPod, which retails for about $300. It is made in China and shipped to us at a price of $150. In bilateral trade statistics, we are importing an Apple iPod from China for $150. What we do not realize is that China imported $146 of components for it. To make the Apple iPod, China got $4. That is a $300 product when you buy it, and China got $4.
That is not our future, if I could venture to say. In Canada, for our standard of living to be maintained, we are not fighting for the $4. Who got the most money? Steve Jobs in California got $120 without touching the product. That is the future of manufacturing.
I am here, as the chair of the Canadian Manufacturers & Exporters, to share with you, if nothing else, the fact that the first reality of manufacturing is that it is no longer a smokestack industry. Manufacturing encompasses many more activities, including research and development, engineering, marketing, after sales services, logistics and transportation.
The old definition of "manufacturing'' is what we call "fabrication.'' That is what China gets the $4 for. Steve Jobs is a manufacturer of the Apple iPod and he receives $120 for not touching the product. This is our future in Canada.
As we move forward in terms of our containers, as we move our resources, we have to bear that in mind. It is the added value that will give prosperity to this country. If we took the Apple iPod and put it under the wheel of a car, the value of that particular material would be less than 50 cents. As we move forward, this country should be looking at turning our own resources, the 50 cents, into $300. It is the brain power and the transportation logistics that will make it happen.
With that in mind, I would like to leave with you the definition of "manufacturing,'' which means "the creation and delivery of value through tangible goods.'' Notice that I did not use the word "fabrication.'' It is our ability to deliver value.
Let me return, then, to the container issues. Why did I have such a long introduction to come to the topic of interest?
Senator Oliver: It was interesting.
The Chair: Yes.
Senator Dawson: I will never look at an iPod in the same way.
Senator Tkachuk: I liked the 50 cents.
Mr. Fung: China has become the workshop of the world because they have captured containerized traffic. Our West Coast is jammed with products because Christmas is coming and everyone is shipping goods from China into our ports.
We are very happy to have a Pacific Gateway and Corridor Initiative — $5.8 billion of commitment. In Canada, that is a lot of money. What we could not have understood was that in China, the Yangshan Port in Shanghai would have a 25-million TEU, or twenty-foot equivalent unit, capacity versus a 0.5-million TEU capacity in Prince Rupert. What we did not fully understand was that out of that, China is building 18 inland container ports.
I noticed that your first session involved presentations from Saskatchewan. I am sure the delegates from Saskatchewan and Manitoba have given you an idea of how they are being deprived of all the empty containers going back to China.
Senator Oliver: Exactly.
Mr. Fung: My job here is to say that it does not have to happen that way. I again use China as an example, in particular the Pearl River Delta, which populated the Chinese ethnic community in North America for a century, because it was forever having a famine. Half a century ago, every Chinese community in North America spoke one dialect from that one community. By turning all the ports into container-capable ports, using some very simple innovations, they have now turned the Pearl River Delta into the most productive region in China. That is the opportunity for us on the East Coast and on the West Coast.
Look at our Georgia Strait between Vancouver Island and the mainland; it is a shame that we have so little economic activity. Then look at Nova Scotia, New Brunswick and Newfoundland and Labrador. We are sitting between the world's two largest markets — the European Union and the United States — and we have a depressed economic zone because we did not allow container traffic to occur. Canada's Coasting Trade Act makes it impossible for economies of scale to take place.
Compare that to Hong Kong. My cousin, who holds a Canadian passport, whose wife lives in Toronto and whose son lives in Calgary, is a Canadian who controls 1.5 million TEUs of container traffic in Hong Kong — almost the size of the whole port in Vancouver — without a dock or a harbour. He loads and unloads all the container vessels using barges. I would appeal to you, senators, to take a look at how a Canadian with experience and expertise can turn our coastal areas into economic development zones if we would just allow it to happen.
When we built the St. Lawrence Seaway 50 years ago, we built 19 ports along the seaway and the Great Lakes, yet most of them have remained unused for 50 years. I only came across them when I was invited to Durham to look at an energy park. I passed by and someone said, "This is the Port of Oshawa.'' I said, "What Port of Oshawa?'' I never heard of a port in Oshawa.
The port is 150 metres from General Motors. General Motors was loading truck after truck, putting them on Highway 401 to go all the way to Windsor and Detroit to join the congestion on the Ambassador Bridge; yet 150 metres from General Motors is a port that is unused.
I approached a large company in Europe and they have done the calculations. It is more economical to ship these containers out of Oshawa to Milwaukee by ship than by truck. In this case, Canada's Coasting Trade Act is not even in the picture because it is considered international traffic. It is my opinion that the Great Lakes have enormous potential; we do not need to build a second Ambassador Bridge in 2015. Imagine what Ford Motor Company of Canada, Limited, can do from Oakville. When an automobile is made in North America, that automobile crosses the border seven times. Think of the traffic that we could take away from Windsor-Detroit. Additionally, we may not even need to expand Highway 401 to a great extent. Senators, I appeal to you again to look at how containers can fundamentally change manufacturing, and how manufacturing delivers value.
Let me go back to the topic of inland ports. Kamloops is in the middle of British Columbia, inland about 400 kilometres. Today we are sending 50,000 trucks into Vancouver for the shipments to be loaded into containers. Do you know what happens? The 50,000 truck-loads coming into Vancouver go to a warehouse. They have to be offloaded from the trailer and, at the same time, empty containers are coming down through Kamloops on CP Rail, chasing the trucks all the way to the Port of Vancouver. Then a truck needs to take the empty container off the rail to move it to the empty container storage yard. The warehouse now has to order an empty container. Therefore, another truck has to move that empty container to the warehouse for loading. The fourth truck has to move it back to the port for exporting.
Does that make sense, honourable senators? Those are the fundamental issues. Not only are Saskatchewan and Manitoba denied empty containers, even British Columbia, whether Kamloops or Prince George, is denied empty containers. Why is this so? The reason is very simple: It does not make sense for the railways to stop.
Earlier, I spoke about my background regarding my unit train movement of sulphuric acid, because I want you to know that I do have some railway operations background. It would be wrong for us to stop the railways through legislation because that would be counterproductive to a free market. We need to build some simple infrastructure for the railways to gather and pull 6,000 feet of empty containers, switch the engine across to the next track and pull out 6,000 feet of filled containers. It would make money for the railways and would allow us to change the freight from Saskatchewan, where we are shipping peas and various products to China. They are paying $2,000 to $2,200 per container. I can ship a car and all the old auto parts I want from Hamilton to China for $1,150, without negotiating. If I negotiate a bit harder, the price is even lower. That same container passes right by Saskatoon and Regina on its way to Vancouver.
Senators, I would like you to remember that now logistics do not equate with distance; they are not the same thing anymore. We can now move products from Montreal to China. Last year, I got a container from Hamburg, Germany, all the way to Shanghai through the Suez Canal for $180. That was a 40-foot container. You can now move products from Halifax to China for $400.
I think I have used up my time, but I have outlined for you three main issues: First, manufacturing is no longer a smokestack industry if we want to have an economic future. Second, we need to examine our marine traffic and decide how we can turn our ports into container-capable ports to allow them to have access not only to international ports, because the Pearl River Delta became so productive because they started trading with each other. The Coasting Trade Act needs to be re-examined. I cannot afford to move a container from Saint John, New Brunswick, to Halifax because it would cost me $1,000. I cannot afford to move anything from St. John's, Newfoundland, to Halifax because it could cost me $2,000. Yet I can move that same container from Halifax to China for $400. We are Canadians; we have the ability to help ourselves to increase our barge traffic. For $3 million, we can make every port a container-capable port.
Third, I would like you to look at the inland port issue. Our railways have been given the mandate to help us move products, but they also have certain cost structures that are very difficult to change. We need to understand how we can help them to help us.
This month, it cost me $6,000 to move a container from Shanghai to Chicago. I have paid for the return trip already. How can we help the railways to make a bit more money so that they can stop along the way and allow our products to fill those containers? In 2005, CN shipped four million tonnes equivalent of air back to China. I know that our air is better than China's, but they do not pay us for air or empty containers. It is time for us to look at this vehicle, which can enable us to turn the Prairies into a productive commodity centre. China's dairy industry is growing at 20 per cent a year. They are running out of hay. Manitoba and Saskatchewan can grow all the hay that China would want. However, it will never get out of Canada if we do not build these inland ports to allow the hay to go into the containers to go to China. This is something we are already doing for Asia. We are shipping 350,000 tonnes of hay from Alberta to Korea and Japan.
Let me stop there. I would be glad to take questions.
The Chair: Thank you, Mr. Fung. Last March, our committee went to Vancouver to meet with people from the Port of Vancouver. We also visited the Deltaport, which was interesting. We missed Prince Rupert because the weather was bad and the plane had to go back to Vancouver. However, some of our members will be visiting Prince Rupert soon.
Exports are the foundation of our economic well-being. It is important to establish and find the most efficient, reliable and environmentally friendly system in order to continue to make economic progress. It benefits all Canadians. Canada exports a great deal to the United States, and you mentioned that briefly. I think it is 86.9 per cent of our export market.
Would you say that the situation at the border in the last five years has improved or worsened? Also, what are the principal challenges at the border?
Mr. Fung: I am glad that you raised that question. I was speaking ad lib and therefore missed talking about our border with the United States, which is a very important element. I mentioned that using marine traffic would ease the congestion on the Ambassador Bridge, the Peace River Bridge and other bridges. However, security is the major issue. We all know how long it is taking us to move anything into the United States; the border has "thickened.'' Canadian Manufacturers & Exporters is on the steering committee for the Coalition for Secure and Trade-Efficient Borders. We have talked about different issues regarding how the United States could change in order for this process to become more efficient. It has become clear that with the United States, security will always trump trade. We need to accept that reality. At CME, rather than trying to convince the Americans to change, we are trying to move forward by using new technology and innovation to allow the United States to achieve the security measures without slowing down our trans-border traffic.
In Asia earlier this year, our industry completed an experiment in which a black box was put in a container. The black box has a GPS so it can be followed by satellite. It has four analyzers that record light, oxygen, humidity and temperature. The black box records this information using a radio frequency chip and reports every hour through a satellite.
I mention this because it has already been used in commercial application for land transport between Thailand and China. Every trailer has a black box. When the trailer leaves the factory, it is sealed. The four components are measured because at one time we sealed the container and thought we were fine. Well, thieves drilled a hole in the top and took everything out. Now we analyze light. If they drill into the container, the light will change. Any tampering with a container will be recorded on the chip.
IBM is working on the radio frequency chips. You may want to examine this particular opportunity. Every trailer and every container would be fitted with a black box. When made in such large quantities, the cost will be minimal, and we know exactly who will make them.
Senator Oliver: China.
Mr. Fung: We should not be ashamed to import to equip our system this way. The objective is that when a sealed trailer leaves Ford Motor Company, the radio frequency chips record the four parameters continually. Also, with the GPS locating where the container has traveled, by the time it reaches a border, the U.S. can now have a "fingerprint'' of the container. If nothing has changed, there is no reason for them to delay the container.
More importantly, if we get to the point where we have barges that can move 300 containers instead of 300 drivers moving those containers, we will have four people moving 300 containers by water using a fraction of the fuel otherwise used for highway traffic. All 300 containers would send signals to the customs in Milwaukee or Cleveland where those signals can be read and the containers immediately approved for customs clearance.
I would like to add that input to my earlier remarks to indicate that our border has worsened. It is now costing at least $800 per car to cross the border. This is a major disadvantage compared with imports from Korea or Japan. They cross the border only once, whereas we have to face it seven times.
It is imperative to develop mechanisms and regulatory regimes that will allow us to make every trailer and container easily cleared through the U.S. Border Control.
Jean-Michel Laurin, Vice-President, Global Business Policy, Canadian Manufacturers & Exporters: The situation has considerably worsened in the last five years, especially during the past summer. Some people are even calling it the summer of hell. The conditions were terrible at the border for Canadian exporters. We get many calls from members indicating they are exasperated with the situation and they do not see it getting better any time soon.
We are working with the Canada Border Services Agency, CBSA, on those issues, but as Mr. Fung indicated, we need to review them. There are things we can do in the short term to address the technical issues, but the strategic issues have to be addressed in the long run. It does not make sense that it is easier to ship a container full of products from China, or any other country, into the U.S. than it is to ship an equivalent volume of goods from Canada into the U.S. We produce things together and that is what we stress to the Americans whenever we meet with representatives and senators in the U.S. We try to stress the importance of the economic relationship for their own states and districts, but we need to do a better job of explaining this to them.
The Chair: Do they appreciate the problem?
Mr. Laurin: Some do, because their district or state borders Canada, or they have Canadian companies with plants in their district and they hear about the situation.
I know Rob Merrifield, who is the MP currently chairing the Canada-United States Inter-Parliamentary Group, went to Windsor earlier in year to tour the facilities there. We have some champions on the U.S. side. It is a matter of leveraging them.
The situation in the U.S. being what it is, our members are quite concerned right now because there are a number of bills in front of Congress and the Senate in the U.S. dealing with food safety. I do not do not understand why we cannot deal with this issue on a continental basis, having common standards and mutual recognition of our standards. It does not make sense to inspect what goes back and forth across our border. We should be spending more time and resources inspecting what enters our continent.
Another issue that needs to be addressed is the fact that governments, both in Canada and in the U.S., have asked companies to join voluntary cooperation or participation programs such as C-TPAT in the U.S. or Partners in Protection in Canada. These programs show that you are a partner in ensuring the safety of Canadian or U.S. territory.
Some of our members, especially those who do a lot of cross-border trade, have invested massive resources — time, human resources and money — in complying with these programs. They do it because they are good corporate citizens and to maintain market access between the U.S. and Canada. However, they are saying that they have invested millions of dollars and have done everything they were required to do, but the inspection rate keeps going up. I am told that twice the number of shipments are being inspected now than was the case a few years ago, even after 9/11. They do not understand why that is the case.
The automotive industry is the perfect example. These companies ship hundreds of trucks every day or every week. Border authorities know them. They will do anything. They are even willing to have the authorities audit their internal processes and correct mistakes. As Mr. Fung explained, there are technological advances that could allow equipment to track shipments to improve border crossings. Some of these programs were originally intended to offer exporters these benefits, but if there is a two kilometre backup at the border and only two lanes on the highway, you are still stuck in traffic.
We need to look at these issues in a strategic sense. There are a too small number of companies doing much of the Canada-U.S. border trade. We need to ensure that these companies and industries, which are integrated across both countries, are provided with easy access to the border if they show they have the processes in place to ensure that their shipments are secure. Otherwise, as a jurisdiction in North America, we are making ourselves less competitive.
In Europe, products can be shipped from the Scandinavian countries all the way to Greece without a single border inspection. Mr. Fung indicated how logistics have created a competitive advantage for Asia. I do not see why we cannot do that for North America. We just need the political will and support. That is why we are happy you are doing this comprehensive review of Canada's logistics and trade infrastructure. It is becoming a strategic issue for Canada's economy. It is not just a transportation issue. It touches manufacturing, and many other sectors of the economy depend on manufacturing as well. We are thankful that you are examining this issue.
Mr. Fung: Many Americans share the concern, but I am a realist. I know that the United States' political system is different from ours. They have a southern border. Perhaps the northern border states are sympathetic to our issues because they are impacted by them, but some of the southern states think it is the right thing to happen because that means more assembly plants go to Alabama instead of staying up in Michigan.
As a country, Canada needs to apply political pressure, but I am more convinced, after five or six years, that we need a different approach. You have seen that our experiment of trying to move the customs clearance away from the border has failed because Americans insisted on certain jurisdictional issues, and we are not ready to give up our sovereignty in the process.
Containers are important for you as a committee to examine, because containers allow security and protection of the product, and they would allow us to take away a lot of the congestion on our land border crossings at this point in time, and that is fundamental to the issue of a two-mile line-up. We can do nothing if traffic continues to increase because we are successful in increasing our manufacturing activity. It is imperative that we take immediate and urgent action to do something about allowing the movement of barges across the lake to become a major alternative to highway traffic.
The Chair: It seems that we have entered a new era in transporting goods. How can the federal government help regarding legislation or policies that could contribute to the rise of our exports?
Mr. Fung: I would suggest that the government can look at several elements. All transportation must be economically viable, which means economy of scale. If we continue to have the Coasting Trade Act, which prohibits cabotage, prohibits our trading among ourselves, moving from Oshawa to Sarnia or to Hamilton, then in essence we are crippling our own ability to move and we are reducing the scale of economy for a viable operation to take place.
In order for the transborder economy to work, we need to examine how we can help the existing vested interests gain advantage in going into this new pie, which is a thousand times bigger than the current little pie held by a few vested interest groups. They are members of Canadian Manufacturers & Exporters too, so I have to be careful what I say, but at the end of the day they are best placed to take advantage of the new developments if we would allow them to develop.
From a marine perspective, it is completely a federal jurisdiction issue. The federal government also has jurisdiction on land bordering waters. Land use rights become critical. If you do not protect those land use rights, even if later on we develop the traffic, we will not use these ports effectively. That is another critically important element.
In Canada, because of our federal structure, there is a need for the provincial governments to be involved. The federal government needs to take a catalytic role in bringing the provinces together so that we act together instead of fighting amongst ourselves. We need to act together as a nation in order to capture whatever value is out there in the marketplace.
Senator Oliver: I would like to go to the iPod for one moment. If Steve Jobs is making $120 and China is only making $4, how much longer will the Chinese people put up with making such a small amount of money from the input that they have into an iPod? In other words, if it is not going to last much longer and that $4 will soon be $40, and that $40 will soon be $100, then the global economy will change and China will not have this advantage. How much longer can that persist? In ten years time, will $4 still do the trick in China?
Mr. Fung: I think, senator, your remark is quite correct. In my package, I touch on the number of engineers graduating from China, India and the United States. China is graduating 500,000 engineers every year. This is not an estimate but from a study done by Duke University. Two professors went to China for two years, interviewed all the agencies and came up with the best estimate as half a million engineers and scientists graduating from a four-year program. Maybe the quality is not that good. Assume 50 per cent of them are no good. Still, that is 250,000 competent engineers a year. Do you know how many engineers we have in Canada? We have 180,000 registered engineers, and I am one of those. That is all that we have. China would double the number every nine months, assuming even half of them are no good. Imagine what it is like to double the number of engineers every three months. Your point is well taken. We should be concerned.
I would suggest that we are not here to compete with China. I think maybe I am pretty good, but I do not think that with a 35-year lifespan I need to fight 40 Chinese engineers by myself. Every Canadian engineer needs to fight 40 of them, and another 40 Indian engineers by the door. We will not win that battle.
Look at how the other economies work. Remember Hong Kong in the 1980s and all the plastic flowers and all those things. They do not make anything any more. When I left Hong Kong, it had 3 million people, and now it has 7 million people. On a purchasing power parity basis, their GDP is now the same as Canada's, with zero resources. Even to take a shower, they have to buy water from China. What do they do? They are employing 12 million Chinese workers in China, making products. Like Steve Jobs, they never touch the products. They just collect the money. That is one example.
Senator Oliver: The question is how much longer that can go on.
Mr. Fung: If we are clever, it will go on for a long time, because again, it is a case of cultural issues. The Chinese economy is a command economy. In some ways, it is very efficient. "Do this. Everyone does that.'' What does that mean? There is a lack of creativity. Their society prohibits creativity. No matter how many engineers they have, I would not worry about competing with them in new concepts and new designs. We will always be ahead. Maybe that will change. Look at Singapore, which is trying very hard to change the culture. Changing culture is very difficult. Learning new skills is easy. You take a course, and now everyone knows how to weave or whatever. However, changing a culture is very difficult. I think we are fairly safe for the foreseeable future. That does not mean that the Chinese cannot change. I employ some of the best engineers in Shanghai, and what do I find? They have a very narrow education. A graduate engineer cannot do an economic feasibility study. I will not worry about an engineer who is a good engineer but who does not understand economics.
I am not here to lower our concern. I am here to say that it is not without hope. That does not mean we can sit back and things will happen, because the $4 will move from China to Cambodia or inland and they will start to move up. The question is how fast they can move up and how fast we can move up. You talked about the iPod. We have an example at home — Research in Motion, RIM. You heard that our BlackBerrys are made in Canada, but they did not tell you that there are seven components and where the seven components come from. China makes those components too. You pay $600 for your BlackBerry or maybe you sign a three-year contract and get a deal and pay only $300 for the BlackBerry. How much do you think the Chinese will get? Probably the same $5, but that is the power of added value. The power of the new reality of manufacturing is in not touching the product. At IBM, 50 per cent of the employees never touch a product. It is critically important in that process and what else does it mean? It means logistics — a $150-import sells for $300. Who gets the $150? The Port of Vancouver, the bank and everyone else along the way that touches the product along the way gets part of the $150. Senator, I would suggest that yes, we need to be concerned. We need to be vigilant about our education system but at this time, the Chinese are not a major threat if we do not compete with them but rather begin to manage them. Currently, Taiwan has 1 million Taiwanese managers in Chinese factories. Officials in Beijing told me that their economic growth is limited by the availability of Taiwanese managers. How can they fight? It is the most ridiculous thing to worry about Taiwan and China fighting because Taiwan has $120 billion invested in China and 1 million managers in Chinese factories, plus whatever workers are there. They are so intertwined. They can have all the slogans they want. China can have its missiles pointing at something, but it is a just a show. We should not get ourselves entangled in this internal squabble and get ourselves worked up in the process.
Senator Oliver: I am from Nova Scotia, on the Atlantic coast, and we are talking about our open gateway. You have talked about one of the biggest acts that prohibits cabotage — the Coasting Trade Act. Have you done research and papers on that act that you could give to the clerk of this committee so that we would not have to reinvent the wheel and find out all the problems associated with that act? Have you given speeches on that subject or done research on it so that it can be laid before this committee to help us?
Mr. Fung: Senator, a professor at Saint Mary's University has published a study on that subject. I can send a copy of it to you.
Senator Oliver: What is his name?
Mr. Fung: I cannot remember her name but I have it here in my computer. It is not an exhaustive study but it will give you a tremendous foundation for your examination of what the Coasting Trade Act is doing to our coastal domestic traffic.
The Chair: We will get a copy of the study and distribute it to members.
Senator Merchant: What an interesting presentation — you have a wonderful way of presenting your facts. I am from Saskatchewan. Last week we heard from a group who talked to us about the inland port. Currently, we cannot get the containers but because they are going by, I presume that the railways need to move those containers quickly because they have goods waiting at the ports that they want to reload and move back and forth.
I assume that the railways would do anything to make money. I believe that you said in your presentation that we cannot force them to do this. Can you elaborate on what hope, in the not too distant future, we can give to the people of the Prairies who want to set up this inland port? Are we able to guarantee that the railways goods will always be available? Is there a start-up cost and if so, who will be responsible for that cost? Can you elaborate on an inland port in Saskatchewan, for example?
Mr. Fung: The railways do not always consider me a friend because of my history with the shipment of sulphuric acid — 1.5 million tonnes and they would not move it for me. What did I do? I built 10 terminals around the Great Lakes and I brought in a ship every year to move two shipments to demonstrate alternatives. Every year, CN would come to me and we would make the deal. They could not give me the cars on time so I leased my own cars. I had the world's largest fleet of sulphuric acid cars, which we designed so if there was a derailment, the tanks could not be punctured, thereby eliminating the risk of a spill.
I would like to suggest that it is not the railway's problem. Rather, it is our will and ability to organize ourselves in order to make it happen. Maybe I said it a bit too fast earlier but it was 6,000 feet and three sidings.
I talked to the people in Moose Jaw, Saskatchewan, where CN and CP come together. I told them to give me three 6,000 foot sidings. I went to CN and CP and ordered 6,000 feet of empty cars, double stacked and I paid them — no questions asked. I told them they did not need to worry about what I did with them and that in 48 hours, I would give them back. They did not need the empty containers in Vancouver.
Last year we moved 230,000 empty containers. We do not need those empty containers in Vancouver. Right now, the railways have a mixed train such that they fill up with many different things, not just containers and then hitch on the empty containers whenever they come by. When a whole train is moving and you want to stop it to get five cars, it is very expensive.
I suggest that if we have the infrastructure so that the railways can pull in a unit train of empties, move the engines across, move 6,000 feet of filled containers, it would create fluidity of operations, as Hunter Harrison said — utilization of assets and fluidity of operations. I am not asking them to do any backtracking, because under the method I described, their unit continues to move and they are paid for doing it. If we provide that kind of infrastructure, the railways would come to the table.
When I was at the Regina conference last year, I asked the farmers if they could bring the container back full if I gave them 48 hours to do it. The farmers said they could do it. I said that when the train comes, they could pick up the container, clean it, fill it with their produce and have it back in 48 hours. Otherwise, they might pay a demurrage that would double their freight. They all said that they did not see a problem with that. I do not think they are right because today everyone is getting five cars so everyone gets a tractor to come in and pull the five cars. If I bring in 400 empty containers, and everyone knows they can be penalized if they are late, they will all come in the first hour and return in the last hour. We need to think about not only the sidings but also about the highway traffic. With all the concern about climate change, we need to rethink long distance trucking. We should use the waterways and the railways as the backbone of long distance movement, and trucks would become the hub so that they can do the short distances.
If this committee is serious about having inland ports, I have one slide in which I say clearly: Do not look at the integrated distribution centres. All of the consultants that we are hiring would tell us to do that. These consultants have experience in Europe, and in the U.S. They came from an environment where there is high population density and great economic activity. We are different. In Canada we have a long stretch of 200 miles and then nothing much of anything else.
We need to say do not build me a warehouse and distribution centre — those are things needed for the retail trade. When they bring in a container, a Canadian Tire store does not need all of it. They need to break it open and reconsolidate. That is the retailer's requirement, not mine. If I am making auto parts, why do you want to touch my container? Do not touch my products.
This is why I say if we are going to build these kinds of centres, do not get into distribution centres; that is the retail trade. They generate economic activity, but I would suggest the economic activity — the retail trade doing distribution or the transportation jobs — is a small portion of the benefit for Canada.
What is more important is what we can grow, what we can export. That export job does not need the same thing as the retail trade. Do not mix the two. As soon as you do, you end up double-handling all my products, which I do not want you to, and you charge me for it.
I am suggesting that you give some thought to the concept. I talked to some of the operating people in the railways. Obviously, they need to look to the big bosses to see what they say; but internally, they said it is viable.
We want the shipper to load the containers. Forget about trailers. Why do we want to stuff a trailer, go to the hub, unload the trailer and stuff it onto a container? Each double-handling is a cost. Your job in transportation is to reduce my cost to get to the market. Do not double-handle my products; do not build me a warehouse where I do not need it. CN is going the wrong way.
The kind of inland ports they are building in Prince George and Grand Prairie is exactly the country's distribution concept. You bring your grain to me and I will fill it for you. Why do I need to do that? You bring the container to me; I blow all the grain into it, close the door and off it goes.
I want you to give some thought to the fact that we are now subsidizing grain cars to move grain to Asia, the overseas market. I made a presentation to one of the railways' main board. I asked, have you thought of how hard it is to be grain moved that way — from a silo in the farmer's location into a truck, go to another, central elevator and get thrown into it? Then that has to be loaded onto a hopper car, which you and I subsidize, then moved to the Port of Vancouver or Montreal, get blown into another elevator and then blown into a ship. Then, when it gets to the other side, it gets blown into another elevator. That is crazy. You put it into a container and it never has to be touched; it goes all the way to the miller.
On top of that, you do not co-mingle our grain. When you co-mingle it, you are selling it at the lowest denominator. If I am a guy who wants pasta, do not mix my wheat with something else. I want red durum, I want this quality and I will pay you for it. I do not want you to touch it because I want it to come to me at the highest possible quality.
I want to introduce those concepts to this committee. Not only can you think about the inland port issue, you can also re-examine whether there is a potential migration of movement of grain from hopper cars into containers — just as we have done in Germany, where we have blown all the recycled plastics into it. No one needs to touch it, no more shuffling and all the rest, no more elevators.
Some of your constituents may not be happy when they hear that. However, currently, a farmer's grain is handled many times and each time someone handles it, someone has to be paid. Imagine the extra margin the farmers of Saskatchewan would get by having just one handling and then the container goes all the way to the end user without being touched in the process.
Some infrastructure has to be put in place, including the roads to allow everyone to come in the first hour to pull out 400 containers. Then everyone will come in the last hour to put the containers back out.
Senator Dawson: Regarding the ownership of the container itself, in an issue like that, you are very far from the marine, the ones that traditionally owned the container. You are very far from the farm. Who owns the containers, if you want them? Why would the marine company care about what is happening between Vancouver and the farm, and who will pay for that since the container belongs to the marine company?
You also talked about the black box. Let us say you have put a black box in the container. Who will control the information — the marine company, the train company or the middleman? Those are the issues.
You have enlightened me on the inland ports; we had been hearing about them as being a triage for incoming and we were seeing it that way. Today you have convinced me that on the outgoing side, they are not as useful as triage by companies like Wal-Mart and the Hudson's Bay Company.
However, my question is who owns the container in your model and who controls the information that would be contained in your black box?
Mr. Fung: Thank you for that question because that is another one which I would have loved to have time to explain as well. This is wonderful news for me to go through some of these concepts.
Today, we have empty containers chasing grain hopper cars across the Rockies. We then have empty hopper cars chasing full containers back the other way; and we said that we do not have capacity crossing the Rockies.
I want to leave you with that thought: Why are we doing that? Why do we continue to subsidize grain hopper cars in order for someone—and not the farmer— to make money in the process? Second, in terms of container ownership, I said earlier when the railway said they could not give me the cars, I went out and leased my cars. If we are looking at our grain hopper cars, you can go back and look at your accounting and see how much it costs. China will give us all the containers we want for $2,000 each.
What would I do? First, the marine and railway people are allowing us to fill the containers because they make money. It is not free. If I am paying them $1,000, someone is splitting up that $1,000 between the railway and the ocean carrier.
The reason they objected was when your farmers in Saskatchewan said they wanted five containers and a week to load them. We are paying them $6,000 to move the container the other way. Every week you take to load is taking away from another $6,000 trip. That is the reason for the 48 hours. If you allow that 48 hours, they would get that delay in the port anyway. No one would object to it. Second, if they do, I would suggest that, as a country, you do what I did with the sulphuric acid cars and buy 500,000 containers, inject them into the system, and tell them not to bother you. They use our containers; we use their containers. All they want to do is go back and get another $6,000 from me. As long as they get their containers, why would they worry about another container sitting in Saskatoon?
I do not want to overdo that because as a taxpayer, every time I ask the government to spend some money, you need to tax me for the money. We need to have the discipline to say, yes, maybe we will inject some cars into the process; however, for 48 hours, farmer, if you do not come back and for 48 hours, auto parts manufacturer, if you do not come back, your freight rates will double.
I, as the middleman — and I am not in that business — if I am doing it, however, I go to the railway and say that I am getting 400 containers from you. I will pay you $400 to move it all the way. I go to the farmer and say that now I will give you five containers for $500 each. Someone will make money in that process.
I could then evaluate and say that if that makes money, should I go in and build a facility if you will make the land available at three times 6,000 feet? Ideally, down the road, it would be three times 12,000 feet because the more we put in, the more efficient the whole process could become.
They do not have to be every day. You have to remember the railway can one day come to Moose Jaw; the next day they are depositing the one in Brandon, the next day they want to do it in Edmonton. They can organize themselves.
I want to move 5 million tonnes of hay to China. I will fill a lot of empty containers in the process. Most of the cotton in the south-eastern United States is now moved by CN from Memphis to China, through the Port of Vancouver. We are benefiting from the export of cotton from the United States to China because we have a gateway, a corridor and the facilities. However, the United States farmers are getting a better price by having access to that market. When you ask who should own the containers, if the marine companies are willing to offer it, we will take it. If not, I think for $2,000, we will go and get our own. In that case, we can even design them to suit our purposes based on what we are shipping.
In terms of who controls the information, I think it would be presumptuous of me to give an opinion. When it comes time, the industry needs to get together to determine who will do what in that process.
Today, my role here is to try to introduce some concepts and realities that we are facing in trying to cross the border. We are facing delays and creating extra costs, making ourselves uncompetitive. My role today is also to try to introduce the new reality of manufacturing, where touching the product is not always the most important portion of the equation. That does not mean that we should not look at our resources. We have a tremendous country blessed with tremendous resources. How can we keep adding value to them? That is why I want to talk to you about using containers to ship grain. If I am the farmer and this year my lot has the best yield, I do not want it to be co-mingled with my neighbour's lower-grade product. I want to be able to get the best price. Similarly, for the miller on the other side, I want to be given assurance of the quality so I can get value out of it, too. It is all a global value chain. Logistics becomes the enabler to allow these values to be added together to create benefits for the people who are managing the process.
Senator Tkachuk: We are interested in interprovincial trade here, as everyone is. You mentioned the container from Newfoundland and Labrador to Halifax for $2,000 versus a container from Halifax to Asia for $400. Could you explain the particulars of why it would be $400 versus $2,000?
Mr. Fung: That was not a fair comparison.
Senator Tkachuk: You used that comparison.
Mr. Fung: It was $400 because when I shipped from Shanghai to Halifax, I paid $4,000; I paid the return trip already. So that $400 was paid so that someone would say that he needed an extra day to fill the container. It is an extra cost for everyone in the process.
It costs the ocean-going vessel $100 to lift the container. In a way, you could say they lose money. However, if they do not fill it, they do not have the $400, they still have to pay the lifter. It is an incremental issue.
Why is it so expensive between Saint John's, Newfoundland, and Halifax, or from Saint John's, New Brunswick, to Halifax? Fundamentally, it is because the Canada Coasting Trade Act states that vessels must be built in Canada. You must staff with Canadian sailors. Everything has to be "Canadian'' in the process. From that perspective, we are protecting jobs and that sounds great. However, that also makes it so cost-prohibitive that there is no traffic. This is how Peerless Clothing Inc. in Montreal has grown to over 5,000 employees: The U.S. put a duty on non-NAFTA textiles and Canada decided not to do so. What was the result? Canada can bring in all the cheapest textiles, turn them into garments and then export to the U.S. duty free. The U.S. garment manufacturers cannot touch that. Each time we put a duty on something we seem to be protecting someone, but what we do not understand is that the downstream impact is much bigger than the rest.
In our case, the Canada Coasting Trade Act was, at one time, trying to protect our ship-building industry and our marine employment. However, you have seen what happened over the years: The volume continued to decline. Contrast that with the Pearl River Delta where they do not have any of these protections. It has mushroomed. There were no container capabilities 30 years ago in the Pearl River Delta. They relied on Hong Kong and had to truck everything over there. If you did not have a bridge across the river, your community was gone; there was no economic activity without access and that is exactly what is happening to our coastal communities.
In British Columbia, right on the mainland, we must take a ferry because we do not have a highway to cross the estuary. Think about the Maritimes and the North Shore of Quebec. There is no opportunity for these communities to develop because there will never be the land infrastructure to allow them to be connected. Water changes that. Container ports are important because if you ship goods break-bulk, the weather and other issues come into play. It is very expensive to move individual boxes, but when you put them all into one box and there is one single lift, it changes the fundamental economics of logistics. That is why it is so important for us to think about what we should do to enable our coastal communities to participate in the Pacific, Atlantic, St. Lawrence and Great Lakes gateways and corridors. CME participates in all of them. I went to Halifax six times in 2006 to promote the Atlantic gateway concept. I can tell you that the Atlantic gateway is not moving along because the Nova Scotia government took over the project. When I wrote the super port paper in July 2004, the B.C. cabinet looked at it and said, "David, what are you waiting for? We will support you right away. You do everything.'' I said, no, that is not the way to go; we want to involve some private parties first. We brought in the private parties, such as CN and others. I said, "We want to bring in the Western provinces.'' CME actually neutralized the interprovincial rivalry because it is not a B.C. project. This Canadian project happens to be in British Columbia. The Nova Scotia government made a fundamental mistake by saying that it is a Nova Scotia project. What do you do if you are from New Brunswick? If you are from New Brunswick, you ask for your share. That is natural, is it not? It is your project and you want the federal government to give you money.
When CME was leading the way, while none of CME's money was involved, we wanted to be able to say who would use it and participate in it. The government is just a partner; they do not have the entire say in the process. The Pacific gateway is history. You saw one of my slides. In June 2004, I wrote a paper for the B.C. cabinet and in May 2005, $500 million was committed. Now, $5.8 billion has been committed.
What happened in Nova Scotia? China shipping vacated the Halifax route. There was not enough traffic to justify it. When you talk about interprovincial relations, people need to be clever about how to manage those relations. We, as an association, are sometimes willing to play a role because it benefits our members and it benefits the communities in which our members reside. It is not that we want to take more work. We have more than enough.
Sometimes with the nature of our Confederation, we need to be sensitive to interprovincial concerns. For example, if Halifax wants to do well for itself, it cannot rely on the CN railway, which is just too long with too little in between. It does not go to Chicago; Prince Rupert is doing that already. Halifax needs to rethink how it should reposition itself and clearly, it has to consider coastal traffic.
In the process, all these ports were discussed, and somehow Montreal was left out. From CME's perspective, Montreal was not forgotten; rather we believe that Montreal will serve a different purpose. This is because the ice on the St. Lawrence Seaway makes it compulsory to reinforce the hull of every ocean carrier coming into the St. Lawrence in the winter. As a result, the cost goes up. On the other hand, if we had coastal barges such as those used in Hong Kong, Montreal can become a centre for that whole area using barges instead of railways. My cousin runs that operation in Hong Kong. Hunter Harrison will not want to take me out for dinner anymore.
However, as we build the country, we have to look at different elements; they all have a purpose. I am here as a Canadian, to build Canada. I am not here to lobby for the railway, the port, the barges, or for the traffic. We have to copy other people's success. The Chinese have no shame in copying. Why should we be ashamed to copy their success?
The Quebec North Shore will thrive if we ever allow the coastal traffic to be connected to Halifax. Sept-Îles can connect to Rimouski at a fraction of its current cost. We have to stop talking about roll-ons and roll-offs. Within that system, you can only put one container on each deck. You will see in my presentation how the containers can be stacked on small barges. All that is needed is this $3-million crane onshore and it lifts them off at a rate of 26 containers per hour. The truck comes underneath it. It is all computer-controlled. That means someone pays an operator who has sufficient education to do the job. That person is no longer a logger. Someone needs to be able to operate that machinery in the most remote corners of the St. Lawrence. Senators, when you ask me questions and allow me to dream and push the concept further, I believe that we can build this country by observing what other people have done and try to copy successes.
Senator Zimmer: Thank you for your presentation this morning. It was very interesting and you have given me a new understanding and faith about inland ports. However, we have not touched upon our port in Churchill. It is not an inland port but it can feed it, although the rail line is not as good as it should be.
There is the issue of the port whereby it can feed the North and then goes on to those other countries. There is always the issue about ice, but it is opening up more now with global warming. I would like your views on the viability of Churchill servicing not only the inland ports but the other ports around the world through the north polar route. What are your thoughts on that?
Mr. Fung: The port of Churchill presents tremendous opportunity in terms of accessing the global market. Of course, ice is an issue, but shipping lanes are clear from about August to November, and then an ice breaker may have to come into play.
We sometimes need to look at the strengths and limitations of a port in trying to utilize it for a particular purpose. I do not think, in the immediate future, Churchill can compete on a month-by-month basis. However, in the summer months Churchill has tremendous opportunity not only utilizing the traditional routes, but also in working with the Russians. You can go directly to Murmansk and cut right across to Asia. That is the shortest route from the centre of Canada to the centre of Asia. We should allow ourselves to imagine these opportunities.
I would argue that it is not difficult if we examine China and look at Manchuria, where they are building and importing Russian logs. The three ports between China and Russia have grown to an extent that we could never have imagined 10 years ago. The Russian railway is a different gauge than the standard so their railway cannot come in all the way. Therefore, right at the border, the Chinese built a parallel railway. The Russian trains come right to the Chinese border where it meets the Chinese train and they transfer the load.
If we want to ship products to Japan and Asia from the port of Churchill, it is something that we should allow in our imagination. Usually, Canadians will not even look at it. We are so spoiled. Why do I need to worry about Churchill when I can just ship south of the border and make a good living? We need to face the reality that Canadians simply do not have the drive to use Churchill. Alternatively, let us look at the people who would have the drive. They are the Koreans, the Japanese, and the Chinese.
It is not the first time that the Chinese have thought about using the Arctic for navigation. When they talked about building the tar sands plant in Fort McMurray, Alberta, it was noted that there is a 200 kilometre gap in the railway line. The Chinese indicated they could not truck items into Fort McMurray and did an investigation of going up the Bering Strait by all the way to the mouth of the Mackenzie River with a ship and then transferring the shipment to a barge — two thousand tonnes per piece. They could come all the way down the Mackenzie River right to Fort McMurray. The Chinese are hungry; we are not. The Koreans are hungry; we are not.
Sometimes as much as I am a nationalist, I am also realistic to say I want the benefit. My company is one of the first recognized by the EDC as being able to move products from overseas into the U.S. market with zero Canadian content but generating substantial Canadian benefit that qualified me for EDC insurance. EDC made that change and I am one of those who helped to catalyze that change. We are here to make money; it does not need to be Canadian content. If we generate the value, that is where our prosperity will lie.
Senator Zimmer: I have had mixed responses over the last while about Churchill. You give me a new inspiration that it could be viable and I will continue to pursue it.
Senator Adams: You talked about barges having more ability to cut down traffic. Is there anyone who does not want to do that such as truckers who will lose some business especially in the Great Lakes or the Windsor-Detroit corridor to the U.S.? Has CN looked at that?
Someone wants to do it, and you say you have everything there, including black boxes. There is not much difference with the lakes. Are some companies interested? Even if CN says you cannot do it, are any other people looking at it?
Mr. Fung: Senator, I briefly introduced my business to you because the background is important sometimes in understanding why I make certain statements. Because I have a global business, I am not relying on a Canadian bank. I am not held hostage to a Canadian railway or to a Canadian trucker. I gave a presentation last week to the Ontario Trucking Association, and I said the same thing. Tomorrow I will be giving the keynote speech for the railway research association and I will say the same thing.
I believe that if we do the right thing, everyone will benefit in the process. If we allow vested interests to hold us hostage, it is the worst protectionism because it means that nobody needs to become more efficient and nobody needs to do better. It means that eventually we will be eliminated. We have seen that example in shipbuilding. Germany is the most expensive place you can ever think of having a ship built. Norway still has shipbuilding industries. Britain, which was the largest shipbuilding country after the Second World War, put in protectionism and John Brown was gone forever. Those are lessons we should learn.
We have to make these things happen. You say, "Well, would the truckers object to it?'' The truckers are complaining that they do not have enough truckers to drive long distance trucking, and I am giving them a solution whereby they can all go home at night. All they need to do is short distance trucking, but maybe more. I suggest we need to build the infrastructure to allow them to do that without a lot of congestion. Nobody needs to cross the Ambassador Bridge. I am sure the owner of the Ambassador Bridge wants to hire someone to get rid of me for making those suggestions. He has been able to monopolize that bridge for a long time and make lots of money out of it.
I think it is important for us to evaluate some of these concepts together. If Canadians do not do it, someone else will. My cousin is also Canadian, and we talk about barging. He has as much hands-on barging experience as anyone else, and he has drilled tunnels. The 270,000 Canadian passport holders in Hong Kong are all making money in Hong Kong without touching the product. When will we start to repatriate some of their expertise so they start making money for us and paying taxes in Canada rather than in Hong Kong?
The Chair: Thank you very much, Mr. Fung and Mr. Laurin. It was not only most interesting, but you have added a few concepts to our study. It is of great help to the study we are conducting now. We feel quite proud of having chosen such a good study.
Senator Dawson: I have a broken iPod at home that I now know is worth less than a dollar.
The Chair: Feel free to send us more information if you have more. We will happily distribute it to senators.
Mr. Fung: Do you need me to send you the copy from Dalhousie University?
The Chair: We will contact them.
The committee adjourned.